Happy New Year

ETF… Behind these three letters meaning “Exchange-Traded Funds” hide the funds whose aim is to replicate as faithfully as possible the performance of an index or a commodity. If an investor would like to buy gold, instead of hiding it under their mattress, they can buy a fund (an ETF which is famous for speculators under the GLD code), which will reproduce the price of gold at just a small cost. Given that a large number of investors believe that gold is a refuge stock (why? that is another story), this fund is expanding and buying gold, lots of gold, as subscriptions flood in. Today, managers of the famous GLD fund own $60bn in gold (around 1,500 tonnes), or more than half of the Bank of France’s reserves!

The fad for GLD is merely a reflection of investor hunger for the yellow metal but volume growth in ETFs is not limited to this commodity alone. Overall, these products represent almost a trillion (or 1000 billion) dollars, or around 13%* of global listed non-monetary fund assets. Growth in these financial products has been heady whereas just 10 years ago it was still very marginal. A trillion dollars in inflows over a decade is not just a fad, it’s a referendum!

Because what exists in gold exists in an even more developed manner on equity markets. Whereas for 25 years already, an ETF duplicating the performance of the flagship US market Standard & Poor’s can be bought or sold, these products now enable investors to act in a number of other markets such as China (of course), as well as the US pharma sector, the CAC and even the double CAC (twice the performance of the CAC both upwards and downwards).

ETF creators have no end of imagination and ever day the range gets bigger. This development has clearly influenced our universe and the same financial asset management vocabulary now designates two radically different businesses: index industrialists (producers of ETFs) and specialists in equity investments.  The first promise above all to not perform worse than their neighbours while the second try to do ever better. Robot managers seconded by powerful systems for duplicating indices in one way or another, vs. human skills seeking the freedom to extract themselves from the herd-like behaviour of financial markets.

Via their size and their management rules, the ETFs have become fairly unmanoeuvrable juggernauts neglecting less-well frequented shortcuts. This is excellent news for our specialist businesses given that we can make the most of the upheaval caused by index management and above all act in areas that it does not know exist.

While 2010 will have been a sluggish year for a number of indices and ETFs, it will have enabled players to collect their thoughts. The massive outperformance by traditional fund managers relative to their indices enables us to reiterate our credo that the indices are above all there to be beaten and not duplicated!

If we review the past decade together, we could say that while it was lost for savers who focused on the CAC40, it was clearly won for those who favoured active management: Agressor has gained 28% since the start of the year (compared with a stable CAC40) and 97% since 2000 compared with a 25% plunge on the CAC. Let us continue to not do what everyone else is doing, a good theme for the next 10 years!

* Source: Barron’s


                                                                                                                        With the participation of Marc CRAQUELIN