iShares, the exchange-traded funds platform of BlackRock, projects that “ETF investment strategists” will emerge as a new industry sector, which upon gaining momentum could comprise $120 billion in ETFs by 2015.

In light of its recent research findings, iShares has singled out a "rigorous focus" on increasing client satisfaction and relatively greater use of ETFs as key drivers of success for a “new breed” of advisors and asset managers, according to a statement from the firm. 

iShares uses the term ETF investment strategists to refer to registered investment advisors or asset managers using ETFs at the core of an outsourced investment solutions business.

“The movement toward specialised ETF investment management represents a true sea change for the ETF market, as advisors increasingly recognise that ETF investment strategists can help decrease time spent on portfolio issues, create more time for building client relationships, and yield distinctive advisory value via their delivery of model ETF portfolios,” said Sue Thompson, head of the iShares registered investment advisor/asset management group at BlackRock.

iShares currently tracks over 200 ETF strategies from over 100 managers representing $46 billion in assets under management – an almost 800 per cent increase in market size since 2008, the firm said. 

The research was conducted from 27 March until 20 April and involved quantitative and qualitative interviews with 130 randomly selected firms.

Key Drivers of Success: Focus on increasing client satisfaction

Almost 80 per cent of successful ETF investment strategists deemed client satisfaction as a “fundamental aspect of success.” Moreover, one third of respondents with exceeding expectations for their business have a “formal written target” for increasing client satisfaction - nearly twice as many as less successful managers.

“Assets under management, revenue growth and portfolio growth are key, but our research suggests that firms who focus only on these metrics are unlikely to exceed their expectations for their outsourcing business,” said Katharine Earhart, head of the iShares Connect Programme at BlackRock.

Greater use of ETFs offers “differentiating attribute”

Nearly seven out of of ten (68 per cent) of the strategists surveyed use ETFs in all of their outsourced portfolio strategies. Meanwhile, three quarters of the managers who considered their businesses a success held at least 50 per cent of their total assets in ETFs, and those with at least 80 per cent of total assets in ETF outsourced investment management were twice as likely to exceed their expectations for their business, according to the findings. 

“The research suggests that some strategists are struggling with identifying the appropriate mix of asset strategies. Firms can achieve asset growth through the proliferation of new products, but it is not a success driver identified by the iShares research,” the firm said.

The findings do, however, suggest that the most successful firms have from four to six strategies available via two to three product structures – most of which are separately managed accounts and unified managed accounts.

“ETF investment strategists should resist the urge to develop new products simply in order to diversify the strategies they offer,” Earhart said. "More products don't necessarily result in more assets or greater success. Instead, innovation should deliver a concise, coherent suite of strategies in different structures or across distribution channels.”

“Strategic focus” spurs growth

“There is strong evidence that many ETF investment strategists are just not dedicating enough time to developing a long-term strategic focus,” according to Earhart.

Earhart points to the fact that 25 per cent of firms have no formal written targets, while a third of respondents do not know their operating margins. “At a minimum, firms should have put in place a strategic plan for product development, distribution and marketing,” she said.

For example, 57 per cent of firms that exceeded expectations are using an external wholesaler sales force, and 86 per cent said that marketing and distribution were a “significant challenge”.

“Above all, a clear and consistent message is paramount,” Earhart recommend. “Successful firms have not only communicated their investment philosophies - a critical differentiator for the EIS - but also emphasised valuable attributes such as flexibility to react to the markets, client service, proprietary research and, not least, use of ETFs.”

“Discrete market segments provide opportunity for the ETF investment strategist”

iShares cites research by McKinsey & Company, which found that over the next five years, the 401(k) market is expected to cumulatively grow by 35 per cent, reaching close to $5.5 trillion in AuM. Meanwhile, it is anticipated that indexed-based products will account for up to a quarter of all 401(k) assets by 2015.

One final factor to consider, Earhart said, is that few ETF investment strategists have spilled into international markets, due to local market complexities and barriers to entry. “ETF investment strategists can't ignore the huge opportunity to penetrate market niches internationally with innovative products” she said.