ETF Magazine - February 2016

www.etf-magazine.com FEBRUARY 2016 ISSUE 02

A G u i d e t o E x c h a n g e Tr a d e d F u n d s

Weighing Up Risk

PASSIVE INVESTING MYTHS INEFFICIENT MARKETS, COSTS & RISKS

CURRENCY HEDGE RISK HAS IT PASSED?

10 SUPRISES

FOR JAPAN

FOR TODAY’S DISCERNING FINANCIAL AND INVESTMENT PROFESSIONAL / LATEST NEWS

Adviser’s Alpha (you make the difference)

At Vanguard we believe in the value of advice. Our research shows that you add about 3% a year in value to your clients’ returns.

To find out more about our Adviser’s Alpha research and how it can help you demonstrate your value to clients, visit: Vanguard.co.uk/AdvisersAlpha or call 0800 917 5508 for more information.

Vanguard - committed to advisers vanguard.co.uk

This information is directed at professional investors and should not be distributed to, or relied upon by retail investors. This information is designed for use by, and is directed only at persons resident in the UK. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. © 2015 Vanguard Asset Management, Limited. All rights reserved.

VAM-2015-01-05-2264

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04 Welcome The word is getting round, says Michael Wilson, Editor-in-Chief

Currency Hedging: Too Little Too Late?

Townsend Lansin, Head of Short/Leveraged/FX Platforms at ETF Securities, looks at whether currency hedge risk has finally passed

06 News Don’t Get Emotional P10

A monthly round-up of ETF news from ETF Securities and Roubini Global Economics

08 Myths and Misconceptions of Passive Investing

Todd Schlanger, Investment Strategist at Vanguard Europe, talks inefficient markets, costs and risk.

16 Robots: Your Automated Friend and Investment Opportunity?

Frank Tobe, Editor of the The Robot Report and Co-Founder of ROBO Global, which runs the ROBO Global Robotics and Automation ETF, sets out the opportunities for robotics

10 Surprises for Japan P19

19 2016: 10 Surprises for Japan Jesper Koll, Chief Executive of WisdomTree Japan, explains the investment outlook for the Land of the Rising Sun

10 Don’t Get Emotional Duncan Glassey, Founder of financial planning firm Wealthflow, tells ETF Magazine how he uses passive investments to reduce both the financial and emotional risk of investing

ETF Magazine is published by IFA Magazine Publications Limited, The Tobacco Factory, Loft 3, Bristol BS3 1TF

ETF Magazine is for professional advisors only. Full subscription details and eligibility criteria are available at www.etf-magazine.com +44 (0)117 9089 686 ©2016. All rights reserved.

22 Featured ETFs We pick a selection of ETFs from around the world to highlight some available funds

Editor-in-Chief: Michael Wilson editor@ifamagazine.com City Editor: Neil Martin neilmartin@ifamagazine.com Commissioning Editor: Michelle McGagh Publishing Director: Alex Sullivan alex.sullivan@ifamagazine.com Design: Fanatic www.fanaticdesign.co.uk ETF Directory: To place an ETF directory lisitng please contact: richard.morris@ifamagazine.com simon.broch@ifamagazine.com

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No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies, independent research and where necesary legal advice should be sought before acting on any information contained in this publication.

February 2016 · www.etf-magazine.com 3

ED’S WELCOME

Actions Speak Louder Than Words A Few Words From Michael Wilson, Editor-in-Chief

We’ll probably still be arguing in six months’ time about exactly what it was that caused the markets’ bumpy start to 2016? Was it the China retrenchment, or the dwindling optimism about US growth, or the prospect of $20 oil, or the flagging Japanese recovery, or all of those things? Then again, was it simply that cyclical valuation multiples were overdue for a cooling off period before the next growth phase can begin?

Our clients probably have no more clue than the best economic commentators, who are also scratching their heads. What they’re noticing, however, is that volatility is generally increasing, and that - apart from the stricken mining sector, of course – the last year’s decoupling of asset classes seems to have gone into reverse.

A Record Year for Sales

They don’t exactly put it in those terms, of course.

But, faced with a market that seems to defy detailed fundamental analysis, the enormous surge in passive instrument sales probably speaks for itself. According to recent research from ETFGI, a colossal $372 billion of net new assets hit the global ETF/ETP market - a 10% increase over the prior record from 2014. And the growth in Europe and Japan appear to have been outpacing all other markets.

In Europe, says ETFGI, net inflows rose by a colossal 45% to reach $82 billion. (Of which $9.3 billion happened in an anxious December alone.) Japan saw a 142% annual improvement on the prior record set in 2013, to stand at $39.5 billion. Conversely, although net new assets in the United States reached a mighty $239.8 billion, that was less than the 2014 record of $244.3 billion.

It certainly sounds that way, to judge from comments by Deborah Fuhr, Managing Partner of ETFGI. “The robust level of asset gathering in 2015 shows that more investors are using ETFs/ETPs in more ways due to the market turmoil,” she says. “Retail is using more ETFs through robo-advisors; institutions are using ETFs as alternatives to futures; and financial advisors are using more ETFs especially in multiasset portfolios.”

So far, the bulk of the money is going into equity products.

In America, equity ETFs/ETPs accounted for a huge 94.5% of net inflows last year, with fixed income struggling for 3.4%. In Europe, the ratios were more balanced at 61.3% and 32.9% respectively, while commodity ETF and ETP assets gained a tiny amount in Europe but lost it in America.

What does that tell us? Probably, that our clients are more switched-on than we think. And better able to decide how to ride out difficult situations. The rest is up to advisers. Long term, the growth trend for ETPs seems irreversible.

Sincerely Michael Wilson, Editor-in-Chief

Responding to Risk Perceptions

Can it be a coincidence that ETF/ETP markets are surging during those periods, and in those national markets, where equities are uncertain? And less so when equity markets are looking healthier? Are the clients, as well as the institutions, using passives such as ETPs as a convenient way of broadening their market exposure and generally sleeping better at night?

Sept 2015 · www.etfmagazine.com 4

Intelligent access to cyber security Europe’s first cyber security ETF Cyber crime is growing, threatening all governments, companies and individuals as they do more online. In response, the global cyber security industry is estimated to grow from $106 to $170 billion* over the next 5 years.

ETF Securities, together with ISE ETF Ventures, now provides investors with an intelligently designed, efficient and convenient way to invest in leading cyber security companies.

etfsecurities.com/cyber

* Source: Cyber Security Market by Solution - Global Forecast to 2020 published by marketsandmarkets.com This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited which is authorised and regulated by the United Kingdom Financial Conduct Authority.

The fund discussed in this communication is issued by GO UCITS ETF Solutions Plc (the “Company”). The Company is an open-ended investment company with variable capital having segregated liability between its sub-funds and is organised under the laws of Ireland.

The Company is regulated, and has been authorised as a UCITS by the Central Bank of Ireland pursuant to the European Communities (Undertaking for Collective Investment in Transferable Securities) Regulations, 2003 and is structured as an umbrella company with multiple sub-funds.

licitation, purchase or sale would be unlawful under the securities law of such jurisdiction. This communication should not be used as the basis for any investment decision. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance.

The information contained in this communication is neither an offer for sale nor a solicitation of an offer to buy securities nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, so-

The ETFS ISE Cyber Security GO UCITS ETF (the “Fund”) is not sponsored, promoted, sold or supported in any other manner by International Securities Exchange, LLC (the “Index Provider”) nor does the Index Provider offer any express or implicit guarantee or assurance either with regard to the results of using the ISE Cyber Security® UCITS Index Net Total Return (the

“Index”) and/or Index trademark or the Index price at any time or in any other respect. The Index is calculated and published by the Index Provider. The Index Provider uses its best efforts to ensure that the Index is calculated correctly. The Index Provider has no obligation to point out errors in the Index to third parties including, but not limited to, investors and/or financial intermediaries of the Fund. Neither publication of the Index nor the licensing of the Index or Index trademark for the purpose of use in connection with the Fund constitutes a recommendation by the Index Provider to invest capital in the Fund nor does it in any way represent an assurance or opinion of the Index Parties with regard to any investment in the Fund.

News

ETF

A Round Up of The Latest Industry News Buxton Becomes CFO at Source Gary Buxton has been appointed the Chief Financial Officer at Source.

Buxton, who also is Chief Operating Officer and a member of the firm’s management committee, has been with Source since it was founded.

Source Chairman Lee Kranefuss said: “In undertaking the search for a CFO, we wanted someone who could combine financial and tax expertise with the ability to think strategically and understand not only the specifics of the ETF industry but also the unique aspects of Source.

Fortunately for us, we had the ideal candidate already here.

Gary comes from an accountancy background and, since joining Source, has been heavily involved with almost every function within the business.

“In fact, Gary was the very first person employed by Source.

When a company is going through a growth phase, as Source is now, it helps to have a certain amount of continuity, which Gary brings. The qualities he brings to the role of CFO also illustrate the depth of expertise we have available to us at the firm.”

As well as being CFO, Buxton continues with his responsibilities in the Investment Management Group and Capital Markets, including overseeing new product execution, trading, risk management and operations.

Buxton, a chartered accountant, began his career at Deloitte & Touche.

Source ETF Offered On Fidelity FundsNetwork Fidelity FundsNetwork (FFN) is now offering the PIMCO Sterling Short Maturity Source UCITS ETF on its online investment platform.

The fund is actively managed, is worth £121m and distributes income on a monthly basis.

Head of UK IFA at Source, Dominic Clabby, said: “We are delighted that FFN has expanded the range of ETFs now available on its platform and, in particular, including its first actively managed ETF. The PIMCO Sterling Short Maturity Source UCITS ETF, or QUID as it is commonly called, offers investors an alternative to cash, which may be attractive in today’s very low interest rate environment.

The fund’s manager invests in a diversified portfolio of short-term securities, with the aim of generating income while maintaining a focus on security and liquidity. The fixed income space has been one of the areas where active management has delivered some good results for investors.”

ETF Securities Expands its Short and Leveraged LSE Offering ETF Securities has listed 18 new 3x short and leveraged commodity ETPs and six new 5x short and leveraged currency ETPs on the London Stock Exchange.

ETF Securities Group is one of the world’s leading independent providers of ETPs and was the first provider to list European currency ETPs in 2010 and is now the first provider to list 5x short and leveraged currency ETPs on the London Stock Exchange. It has already launched 3x short and leveraged commodity and 5x short and leveraged currency products in Italy and Germany earlier this year.

The firm believes that this year has seen increased volatility across currencies and commodities and investors globally have demonstrated an increased interest in short and leveraged ETPs. Its own platform has experienced US$135mn of inflows for the year to date.

Townsend Lansing, Executive Director, Head of Short/

6 February 2016 · etfmagazine

Leveraged & FX Platforms at ETF Securities, said: “We are listing these new short and leveraged products on the London Stock Exchange in response to a strong demand from investors. We have seen tremendous growth in our short and leveraged platform across Europe over the last few years.

“The launch of our 3x short and leveraged commodity products and 5xshort and leveraged currency products is a natural extension to our existing unleveraged range and offers a greater choice to investors.”

“2015 was a year of heightened currency volatility. We believe the additional leverage will first and foremost allow investors to use the currency products to hedge currency risk as well provide additional opportunities to trade on a short term basis with a competitive total cost of ownership.”

Source To Launch Physical ETF Platform Source is to launch a new physical fund platform called Source Markets II Plc. It has appointed Legal & General Investment Management (LGIM) as the investment manager for the new platform. It is also appointing Northern Trust, Source’s current service provider, as the platform’s administrator and custodian.

Source says that the new platform will expand its capacity to launch a wider range of physically replicated products, adding to its current range of 15 physical products, including fixed income ETFs, precious metal ETPs and a China A-shares equity ETF. They say that the platform will be complementary to its existing range of ETPs. It made it clear that it has no plans to convert any of its existing exchange traded products from its multicounterparty swap model. Indeed, it says, they continue to see strong investor demand for ETFs that use this next generation platform to reduce tracking error.

Chairman of Source Lee Kranefuss said: “The new platform is all about increasing investor choice. We want to enable our investors to select the structure they prefer and are most comfortable with. Furthermore, having capabilities to launch more physical products will also allow us to target a wider investor base. Over 75% of investor flow since January 2014 has been into physical ETFs, so there is clearly strong demand for this type of replication method, and we intend to offer all of our investors the choice they deserve.

“We have a wide variety of investment ideas in the pipeline for 2016, some of which may be more suitable for physical replication and others for alternative methods.

The increased flexibility provided by the new platform allows us to further provide what is appropriate for – and demanded by – our investors, and we will do this on a product-by-product basis.”

PIMCO and Source Launch GBP Hedged ETF The PIMCO Short-Term High Yield Corporate Bond Index Source UCITS ETF – GBP-Hedged Income has been launched.

It comes from the houses of Pimco and Source and will be listed on the London Stock Exchange.

They say that with over US$ 1.2 billion of assets under management, the ETF provides investors the opportunity to generate a comparable yield to the broad US high yield index, while this new GBP-Hedged share class aims to remove the US dollar currency exposure and will distribute income to investors on a monthly basis.

It is a “smart passive” solution and uses a risk factorbased approach to optimise the replication of the Bank of America Merrill Lynch US High Yield 0-5 Year Index.

What’s more, to minimise the impact of exchange rate fluctuations between the USD and GBP, the GBP-Hedged share class enters into currency forward contracts.

Head of Product Management at PIMCO Europe Mike Trovato said: “Investors who want to enhance the yield in their portfolio may wish to consider the short-term high yield segment, as it offers a similar level of yield as the broader high yield market. In addition, with the probability of tightening by the US Federal Reserve, it may also be worth focusing on bonds with shorter maturities, as it reduces the portfolio’s sensitivity to rising interest rates. This ETF combines both of these elements.”

Chief Marketing Officer of Source James Polisson said: “This new share class responds to investor demand we have seen on two fronts. First, it meets the needs of those investors in the UK interested in investing in the underlying US high-yield bond market, but who prefer to not have any currency exposure outside Sterling. Secondly, it meets the needs of income-seeking investors wanting not only higher yields but also more frequent distributions.”

Wide Moat ETF Gets Swiss Listing The Market Vectors Morningstar US Wide Moat UCITS ETF has been cross-listed on the SIX Swiss Exchange by Van Eck Global Investments.

The ETF tracks the equally weighted Morningstar Wide Moat Focus IndexTM developed by Morningstar. It invests in the 20 most attractively priced companies that have the potential for long-term above average returns according to Morningstar’s moat analysis. The wide moat concept, says Van Eck Global, traces back to Warren Buffett’s theory about companies with sustainable competitive advantages.

CEO of Van Eck Global (Europe) Lars Hamich said: “MOAT is a unique addition to the European ETF market which is in need of innovation and product differentiation. With MOAT, we wanted to give investors interested in exposure to US equity a true alternative to mainstream benchmark index strategies.

“MOAT seeks to leverage Morningstar’s proprietary economic moat rating and valuation research. It is this combination that we believe makes the index strategy successful. Since its inception in 2007, the ETF benchmark has outperformed the US equity market with a cumulative performance of 130.58 percent while that of the S&P 500 Index was 72.69% The ETF offers 100% exposure to US-based and US-traded companies. It has a total expense ratio of 0.49 percent and mirrors the strategy of its successful US counterpart that currently has approximately USD 790 million in assets invested. It is now listed on the London Stock Exchange, Deutsche Börse and SIX Swiss Exchange. It can be traded in US Dollars, Euro and Swiss Francs.

February 2016 · www.etf-magazine.com 7

Myths and Misconceptions of Passive Investing Todd Schlanger, Investment Strategist at Vanguard Europe, Talks Inefficient Markets, Costs and Risk.

Passively managed funds in the UK, as a proportion of the total, have nearly doubled over the past five years. This increase represents an indication of the appetite among UK investors for solutions that are, in general, simple, lower cost, and more transparent.

However, there remain a number of common myths and misconceptions around passive investing and their benefits may not be fully understood.

The theory for passive investing is rooted in the zero sum game. In every market, half of the assets will outperform the market average (or index) and half will underperform.

Once costs are taken into account, however, more than 50% of the assets in any market will underperform the market average (or index). Since active investors and passive investors must earn the same return before costs and passive funds are generally lower cost than active funds, then based on simple rules of arithmetic, the average passive fund should outperform the average active fund after fees.

Here are some common myths perpetuated around passive investments:

1. The inefficient markets myth

Let’s look first at the myth of inefficient markets. It is often said that in less efficient markets, such as emerging market equities, high yield bonds, or small-cap equities, there are more opportunities for active managers to add value.

While intuitively this seems right, the evidence seems to suggest the opposite.

Using Morningstar data, we analysed active funds available for sale in the UK over the 15-year period ending 31 December 2014 in 11 investment categories and measured the 8 February 2016 · etfmagazine

managers’ performance relative to the benchmark they had specified in their prospectus.

What we found was that more managers tended to underperform their benchmark in these ‘inefficient markets’ than areas of the market that are thought to be more efficient, such as large-cap US equities.

For example, in two large and developed markets, the UK and US, 65% and 82% of active equity managers underperformed their benchmarks net of fees and after accounting for survivorship bias. In emerging market equities, that number increased to 85%. We subsequently found similar findings in two additional categories - small-cap and high yield bonds - where 65% and 95% of managers trailed their benchmarks net of fees and after accounting for survivorship bias, respectively.

The average passive fund should outperform the average active fund after fees.

While these results may be surprising, there is a logical explanation. If we think back to the zero sum game, the case for passive investing does not rely on assumptions regarding market efficiency. Since before costs the assets in these areas of the market must still be distributed 50/50 and costs tend to be higher in less efficient markets, then the headwinds for active managers would be higher and more passive funds would be expected to trail their benchmarks relative to more efficient areas of the market where costs tend to be lower.

2. Active managers outperform in bull or bear market cycles Another commonly held belief is that active funds stand a better chance at outperforming their benchmark in a bull or bear market cycle. The theory goes that in a bull market, managers can overweight higher beta stocks, whereas in a bear market they can be more defensive or go to cash. The challenge is that to succeed, an active manager would not only have to time the point in the market cycle, which is notoriously difficult to do, but do so at a cost that was less than the benefit provided.

To investigate this point, we used the same dataset as described above and analysed the percentage of active funds that underperformed relative to their respective benchmarks over the last five bull and bear market cycles.

The results of this analysis revealed that there is no systematic tendency for active managers to do better at any particular stage of the cycle. In the July 1998 – August 2000 bull market, around 55% of active managers outperformed their benchmarks.

In subsequent bull markets, March 2003 – October 2007 and March 2009 – December 2014, the results were similar, 42% and 37% respectively.

In the intervening bear markets, September 2000 – February 2003 and November 2007 – February 2009, the proportion of active managers outperforming lay in a similar range, 40% and 53%.

3. Are returns more important than costs to performance?

It is often said that costs are only an issue in the absence of value. In other words, if something is of higher value, it should cost more.

We can find countless examples in

our everyday life to support this logic, from Swiss watches to German cars or luxury hotels. When translated to the investment world, however, higher costs tend to be indicative of lower quality and weaker performance.

The reason behind this is quite simple. Unlike in other areas, with investments, costs reduce performance pound for pound and higher costs represent a greater headwind to performance.

The evidence was striking. We analysed all the Morningstar funds available in the UK, both active and passive, sorting them into quartiles ranked by their expense ratios. Looking at returns for the 10-years ending 31 December 2014, we found that the low-cost quartile outperformed the high-cost in 10 of 11 investment categories, suggesting costs are a critical driver of net returns.

4. The myth of the average fund When analysing the performance of active funds relative to their benchmark, the average or median fund is often used as an example.

Critics of passive investing will often say that if an investor were to

select a high performing fund, any conclusions drawn from the average fund would be irrelevant.

On the surface, this may seem logical, except that the high turnover with respect to fund performance makes selecting high performing funds very difficult.

To illustrate this challenge, we analysed the performace of active equity funds over the past 10-years ending 31 December 2014. We then separated the analysis period into two separate 5-year periods (ending 31 December 2009 and 31 December 2014) and divided the funds into quintiles (five equal-sized buckets).

The results of this analysis were again striking. Of the active managers in the top quintile (top 20%) of performance relative to their benchmarks in the period ending 2009, only a quarter were still in the top quintile in the following five years.

This suggests a 5% chance of selecting a fund with high relative performance in consectutive periods. Given such high turnover in fund performance, the return path of the average/median fund represents a most likely outcome for investors.

5. Active managers can better manage risks in a portfolio Another common criticism of passive management is the indiscriminate buying and selling of assets to track the index. It is often argued that an individual active manager can better access the potential risks of assets and steer the portfolio away from potentially overvalued or risky securities. To test this assumption, we plotted the annualised volatility (as the most commom measure of risk) for UK and global equities and bonds over the past 15-years. In every category, the median active fund produced a higher annual volatility than the passive index. Therefore, the collective wisdom of market participants seems to be more effective than individual active managers at managing risk.

What this means

There is a large body of work to suggest that actively managed funds have tended, on average, to underperform their benchmarks and to underperform relative to low-cost passive funds targeting the same benchmarks. However, a number of myths and misconceptions of passive investing remain. They evolve, fade away, and resurface as market environments change. Yet a review of the historical evidence and the empirical research dispel these commonly held beliefs.

February 2016 路 www.etf-magazine.com 9

Don’t Get Emotional Duncan Glassey, Founder of Financial Planning Firm Wealthflow, Tells ETF Magazine How He Uses Passive Investments to Reduce Both the Financial and Emotional Risk of Investing

Our investment philosophy is simple and different. We believe that investment decisions should be guided by the wealth of academic and empirical evidence available to us. On review, it provides a number of clear pointers as to where we should focus our energies to deliver our clients with a successful investment experience.

We define a successful experience as one where our clients can sleep soundly at night, have a strong chance of achieving their future lifestyle goals, and both understand and believe in the investment journey they are taking. It is probably quite different to investment approaches that many clients have experienced in the past.

In essence, our philosophy comprises three core beliefs and three important practical principles:

Belief 1: Capitalism and markets work effectively

We believe that markets work well.

The market mechanism for pricing financial assets does so in a broadly efficient and fair manner, based on supply and demand, as in any market.

We expect the price of a company’s shares should closely reflect all of the information known about it, at any point in time. In the short-term, therefore, share prices move randomly on the release of new information.

10 February 2016 · etfmagazine

The empirical evidence reveals that professional fund managers, who can outsmart the markets on a consistent basis, are exceptionally rare and hard to identify in advance; we believe that trying to do so is a fool’s errand.

Capturing the return of the market becomes the key goal.

Belief 2: Risk and reward go hand in hand

If a client needs a higher rate of return to achieve their financial goals, they will, inescapably, need to take on a higher level of risk in their portfolio.

Risk can be viewed in a number of different ways; the volatility of returns (the bumpiness of the investment journey) and the chances of loss are two commonly used descriptions for risk. Many other risks exist that need to be identified and managed appropriately. If an investment looks too good to be true, it probably is.

Belief 3: Diversification is a useful tool

Not putting all of your eggs in one basket is an intuitive and valuable concept. Different types of investments (e.g. equities, property and bonds), with return paths that are different, can help to make the investment journey smoother, without necessarily giving up returns. We use diversification broadly in client

portfolios spreading risks across individual securities (equities and bonds), geography and by investment type. It is the key tool that we have against the uncertainty of the future.

Wealthflow’s beliefs are then used to build three key investment principles.

Principle 1: Focus on the structuring of a client’s portfolio A client’s long-term portfolio structure will dominate their investment journey: building the right portfolio structure for a client is the central focus of our process.

Successful investing is about taking on ‘good’ risks that deliver a positive contribution to a client’s portfolio – these are predominantly carefully selected market risks associated with ownership and lending. It avoids taking on ‘bad’ risks, such as illiquidity, manager risks associated with trying to beat the markets, and opaque and complex product structures.

Our role is to fully understand the risks that we are happy for our clients to take and to combine them in a way that delivers them with a strong

PATIENCE

DISCIPLINE

BELIEF

February 2016 路 www.etf-magazine.com 11

chance of achieving their investment goals. In brief, we create an equityoriented mix of assets (developed and emerging market equities, commercial property) that is highly diversified by security, geography and asset class and balance it, where necessary, with a highly defensive mix of high quality bonds (gilts, corporates and index linked gilts).

A portfolio must be suitable for the client and their circumstances: considerable effort is focused on ensuring that the portfolio structure is suitable in terms of a client’s willingness, capacity for and need to take on investment risk. The balance between ownership and lending is the most important decision. Our financial planning analysis and use of a robust risk profiling tool provide useful inputs into the broad portfolio structure discussion with our clients.

Principle 2: Manage costs effectively

Costs are insidious: small differences in returns, due to costs, compound into large differences over extended periods of time, which can materially affect future lifestyle choices. Costs come in two forms – financial and emotional.

From a financial perspective, the evidence indicates that investment industry costs are high, particularly those related to active management i.e. managers attempting to outsmart the market.

12 February 2016 · etfmagazine

Minimising investment product and transactional costs (buying and selling) is a keen focus of our approach. In our view, the use of low-cost, passive funds that deliver the bulk of the market returns that we seek to gather, are a rational and valuable tool for building robust client portfolios.

From an emotional perspective, the behavioural finance literature tells us that investors suffer a number of psychological biases, driving them to make poor decisions,

If the right risks are taken, the right returns should follow.

including ‘buying high’ at the top of the market and ‘selling low’ at the bottom of the market, needlessly destroying wealth. Our disciplined approach to the ongoing management of client portfolios, along with ongoing expectation management and education, helps to reduce the emotional costs of weak and poorlytimed emotional decisions.

Principle 3: Manage risk tightly

Our approach to investing positions us as risk managers, rather than performance managers as advisers have traditionally been. Risk management can be divided into three key areas: • Rebalancing: Having set the right long-term portfolio structure, it

is important that the portfolio does not begin to stray too far from this mix, which it will do if left unattended over time. The solution is to rebalance the portfolio back to its original mix of risks on a biennial basis. This discipline forces the unemotional sale of assets that have done well and reinvestment in assets that have done less well, which can, but is not guaranteed to, result in a beneficial ‘rebalancing’ return.

• Product due diligence: Deep insight into each of the ‘best-in-class’ products that we recommend to clients comes from the detailed and methodical due diligence review that is undertaken before any product is recommended and on an ongoing basis. Product surprises are simply not acceptable to us or our clients.

• Investing is about managing risk tightly, eliminating risks we do not wish to take, and managing those that remain with diligence, insight and discipline. If the right risks are taken, the right returns should follow.

Our approach to investing is simple, yet highly effective. We cannot control the returns that the markets deliver, but we can select and manage closely the risks that our clients take in their portfolios. We can help them to obtain the bulk of the returns delivered by the markets, by minimising both financial and emotional costs, and helping them to stay the course.

Belief, patience and discipline are the key to a successful investment experience.

Invest from a new perspective – BMO ETFs

BMO Global Asset Management ETFs Bringing a new perspective to investing with our nine strong suite of solution orientated ETFs designed to provide investors with high quality portfolio components.

For more information about our ETFs please contact our sales team at: client.service@bmogam.com, call us on: +44 (0) 20 7011 4444 or visit us at: bmogam.com/etfs

For professional investors only. Š 2016 BMO Global Asset Management. All rights reserved. Issued and approved by BMO Global Asset Management, a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM07698 (01/16)

Currency Hedging: Too Little Too Late?

Townsend Lansin, Head of Short/Leveraged/FX Platforms at ETF Securities, Looks At Whether Currency Hedge Risk Has Finally Passed

Managing currency exposure formed a key investment theme of 2015 and large, persistent moves in foreign exchange markets have forced international asset managers to take greater notice of the indirect impact of currencies on overseas investments.

The ETF industry has been one of the key beneficiaries of the latest shift, witnessing over $50 billion (£33 billion) of inflows into currency hedged ETPs since 2014.

However, now that the currency majors have experienced double digit moves, the question becomes, has the time to hedge currency risk passed?

The answer to that question depends on a variety of factors.

What is more certain is that the factors driving volatility in foreign exchange markets are unlikely to moderate in 2016.

The current financial landscape is dominated by the actions of central bankers. Led by the US Federal Reserve, global authorities have taken an increasingly active role to meet their economic objectives. Across asset classes, actual or expected changes in monetary stimulus by key policymakers have driven performance, particularly in currency markets. Programmes promoting near zero interest rates and rapid balance sheet expansion have been a common theme, but differences in timing and size have generated some of the largest and most dramatic exchange rate moves in recent years. As a result, currency market volatility has soared and portfolio managers have witnessed the investment profile of their overseas allocations distorted by a factor that was previously deemed a secondary consideration.

14 February 2016 · etfmagazine

The decision to hedge currency risk can either be motivated by a desire to insulate a portfolio from exchange rate fluctuations or to express a view that the underlying currency will move in an adverse direction.

For example, the DAX 30 Index has returned approximately 11% yearto-date in local terms (euros) but for an unhedged US dollar denominated investor it has fallen approximately 1% due to the 11% plunge in the EUR/USD currency pair over the same period (year-to-date 7 December 2-15). Thus, the issue of currency hedging has gained growing levels of attention and has prompted an influx of assets into the currency hedged segment of the ETP market.

Rise of currency hedged ETPs The flexibility of ETPs has allowed the industry to rapidly respond to the increasing preference for currency hedged passive exposure over the unhedged alternative. ETPs are a popular medium for making currency hedged investments as the operational complications of mitigating currency risk are removed. Providers have responded to the surge of demand with an expanding suite of ETPs on offer, with the number of products having swollen from approximately 267 in 2014 to over 320 in 2015.

Options for investors have increased substantially, raising the issue of how to differentiate between funds.

Currency hedged ETPs essentially combine an investment in an underlying benchmark with an in built FX overlay; and investors need to consider some important factors.

Firstly, a currency hedge is not free and investors need to consider the cost. In addition, the currency hedge is typically rebalanced periodically (daily or monthly) and rebalancing frequency plays an important role in its performance. While a higher rebalancing frequency ensures a more accurate currency hedge, it also increase the product’s cost, so investors need to determine which option is most effective.

Too late to hedge?

Currency exposure can work for or against a portfolio. The decision to hedge currency risk can either be motivated by a desire to insulate a portfolio from exchange rate fluctuations or to express a view that the underlying currency will move in an adverse direction.

A significant portion of the 2015 inflows held in currency hedged ETPs comes from US managers protecting US dollar investments in international equities. This strategy has proven wise, with the US dollar up 10% year-to-date against the euro and 9% on a trade weighted basis.

However, with the US dollar trading at multi-year highs, the question is whether to continue with currency hedged positions. The answer depends on the nature of the investor’s hedging program, their tolerance for currency volatility and their view on the future movements of currency markets.

Indeed for a US manager with euro exposure, an existing tactical currency hedge and a negative view on the US dollar, the time to hedge may have come to an end. For a European investor with US dollar denominated investments however, the timing for a hedge may be ripe. And for the broader investor base, the question extends beyond the potential future path of a single currency pair and involves expectations of broader currency market volatility. Investors have to look at the drivers of volatility and assess whether these are likely to remain prevalent in 2016.

What does 2016 have in store?

The key drivers of currency volatility from the past year can be categorised into three broad themes: 1) market expectations of central bank policy, 2) geopolitical factors and 3) commodity market volatility. Below we explore why these dynamics are likely to remain in 2016 and how they will ensure currency volatility remains at elevated levels.

1. In the wake of the financial crisis, global policymakers have relied heavily on active monetary policy to meet economic goals. Central bank activity has emerged as a key driver of returns across financial markets. Accordingly, market participants have increasingly tried to pre-empt the intentions of central bankers, closely scrutinizing

speeches, periodic forecasts and leading economic indicators. This dynamic has generated volatility, particularly in currency markets. This has been well reflected in the volatility of the EUR/USD currency pair, where investors’ attempts to anticipate the movements of the European Central Bank (ECB) and the Fed have seen considerable market shifts day to day.

Indeed at the time of writing, the EUR/ USD exchange rate has soared over 3% intraday as a result of the subpar outcome from the ECB’s monetary policy statement.

By aggressively loosening monetary policy, central banks worldwide have ensured their actions will continue

Investors have to look at the drivers of volatility and assess whether these are likely to remain prevalent

to ripple through currency markets in years to come. Loose monetary conditions will at some point have to be followed with a tightening cycle. As a result active policy will undoubtedly remain a persistent market theme and none more so than next year following

the Fed’s decision to raise US interest rates from 0.25% to 0.50%.

This context will continue to leave currency markets susceptible to large swings.

2. Since volatility is a symptom of uncertainty, and geopolitical factors often have uncertain implications for financial markets, they can be responsible for considerable market gyrations. Looking to 2016, the US presidential election, the growing risk of a “Brexit” scenario, the European refugee crisis, concerns around China’s growth and military intervention in the Middle East will likely have significant implications for two of the most widely traded currencies worldwide.

3. Finally, commodity prices continue to fall and a large number of countries have suffered as a result of the slide in the commodity complex.

Key commodity exporting nations, such as Australia, Canada, New Zealand and Norway have all witnessed their respective national currencies weaken (fallen on average by 14% in 2015) as falling prices weigh on their economic prospects. Looking ahead to 2016, commodity linked currencies are unlikely to stabilise as markets continue to assess the ultimate impact of a slowdown in Chinese growth on demand and the impact of highly publicised capital expenditure cuts on supply. In addition, currency markets will attempt to price in the secondary impacts of this year’s slide on respective business sectors and domestic labour markets.

In conclusion, for some investors the time to currency hedge may have passed, but for the majority, currency market volatility will remain an important issue in the year ahead.

Factors that have promoted the use of currency hedged ETPs are unlikely to abate, which should see this class of securities continue to grow in size and sophistication as investors seek to mitigate a risk factor that has grown in importance.

February 2016 · www.etf-magazine.com 15

Robots: Your Automated Friend and Investment Opportunity?

Frank Tobe, Editor of The Robot Report and Co-Founder of ROBO Global, Which Runs the ROBO Global Robotics and Automation ETF, Sets Out the Opportunities for Robotics.

Robots have been in existence for many years, mostly for use in manufacturing, but only now are they starting to fundamentally transform the everyday lives of consumers. For advisers and their clients, the opportunity is huge with the popularity of consumer robots expected to quadruple in the next five years.

It is early days for the overall robotics and automation industry but only early days in terms of how big, how broad and how quickly this megatrend will continue to grow. It is well documented and accepted that the industrial and manufacturing robot market will continue to enjoy rapid growth and also expand into new areas of manufacturing, goods handling, packaging, palletising and loading.

Wintergreen Research expects the worldwide industrial robot market will grow at 11.5% annually and reach $48.9 billion (£32.8 billion) by 2021. Beyond the industrial and manufacturing sector another area of robotics that is growing at an even faster rate relates to consumer and service robots.

16 February 2016 · etfmagazine

These non-manufacturing robots have a broad and expanding range of applications that already include healthcare, security, agriculture, logistics, medical, personal, entertainment and household.

This booming sector of the global robotics industry is why people actually like robots. They can see, touch and interact with these robots and many people today already have their own ‘how a robot helped me’ story to share with friends.

Rise of the ‘co-bot’

According to market intelligence firm Tractica, ‘the next five years will set the stage for how robots could fundamentally transform our homes and daily lives’ with consumer robots, a category that includes robotic vacuums, lawn mowers and pool cleaners, is set to increase from 6.6 million units in 2015 to 31.2 million units worldwide by 2020.

Although robot vacuums will remain the largest segment of the market over the next several years, the fastest growth will occur in robotic personal assistants, a category that is nascent today.

These new robots, and the proliferation of mobile robot butlers, guides and kiosks, promise to recognise your voice and face and help you plan your calendar, provide reminders, take pictures of special moments, text, call and videoconference, order fast food, keep watch on your house or

office, read recipes, play games, read emotions and interact accordingly, and the list goes on. They are attempting to be analogous to a sharp administrative assistant that knows your schedule, contacts and interests and engages with you about them, helping you stay informed, connected and active.

Softbank, a company that entered into a billion dollar venture with Alibaba and Foxconn, has developed a consumer robot called Pepper which is currently selling at 1,000 units a month. Jibo, similarly, has raised a significant $16 million as it prepares to deliver in excess of 7,500 units in the first quarter of 2016 – these are just two examples of the rapidly expanding range of personal robots coming to the market.

As social and companion products come to market, they incorporate artificial intelligence (AI) from one-to-five years past. Yet almost every day there are breakthroughs in learning systems that will soon be commercialised and incorporated into future personal devices.

Consequently, today’s social robots are transition devices for early adopters to scrutinise, play with, suggest improvements to, and talk about which is why 2016 is a pivotal year.

It’s the time when companies will sell enough units to learn whether their bots provide a real and lasting service or are just a passing fancy.

Improving productivity

In a recent 300-page research report, Robot Revolution – Global Robot & AI Primer, Bank of America Merrill Lynch (BoAML) projects that the total global market for robots and artificial intelligence will reach $152.7 billion by 2020, and estimates that the adoption of these technologies

By 2025, 25% of all ‘automatable tasks’ will be automated through robotics, driving 16% in global labour-cost savings.

could improve productivity by 30% in some industries.

This ‘revolution’ could leave up to 35% of all workers in the UK, and 47% of those in the US, at risk of being displaced by technology over the next 20 years, according to an Oxford University study cited in the BoAML report.

Advances in healthcare

Demand for robotics in healthcare, especially surgical procedures, is increasing. Safety, better clinical outcomes, and reduced labour costs are leading to an exponential growth in demand not only for robotic-assisted surgery, but in many other segments of healthcare such as sanitation, sterilisation, lab processing and materials handling. Systems like the Da Vinci Surgical Robot from Intuitive Surgical are performing and assisting in routine surgeries, simplifying incisions and speeding up the process, reducing recovery time and ultimately

allowing doctors to spend more time on complex operations. Robotic assistance is currently used in 80% of prostate surgeries in the USA and is becoming a common sight in operating rooms across the developed world.

Another interesting player in this space is Titan Medical which is close to receiving approval by the USA Food and Drug Administration for its Single Port Orifice Robotic Technology Surgical System. This will be similar to the Da Vinci System, but will have a much lower unit cost of about US$600,000.

Robotic developments in the medical world will also help doctors to keep up with the influx of elderly people by quickly and efficiently solving medical issues as our world moves towards an inevitable, yet often overlooked, obstacle – a drastically aging demographic. It’s estimated that by 2050, there will be almost 1.5 billion people over the age of 65, according to the Population Reference Bureau.

Greater life expectancy is also set to compound the issue. From healthcare to home assistance and even a touch of humour, robotics will shape the way we care for ourselves.

An agricultural revolution Robotics and automation can play a significant role towards meeting 2050 agricultural production needs.

For six decades robots have played a fundamental role in increasing the efficiency and reducing the cost of industrial production and products.

In the past 20 years, a similar trend has started to take place in agriculture, with GPS and vision-based self-guided tractors and harvesters already being available commercially.

More recently, farmers have started to experiment with autonomous systems that automate or augment operations such as pruning, thinning, and harvesting, as well as mowing,

February 2016 · www.etf-magazine.com 17

spraying, and weed removal.

In the fruit tree industry, for example, workers riding robotic platforms have shown to be twice as efficient as workers using ladders. Advances in sensors and control systems allow for optimal resource and integrated pest and disease management.

This is just the beginning of what will be a revolution in the way that food is grown, tended, and harvested.

Agricultural robots today include driverless tractors, unmanned aerial vehicles, material management, field crops and forest management, soil management, dairy management, and animal management for precision agriculture.

Tractica in its Agriculture Report anticipate the overall agricultural robot market will reach $3 billion by the end of 2015 and maintain a healthy growth rate reaching $16.8 billion by the end of 2020.

John Deere has been selling selfdriving kits for their tractors for over 15 years. Its latest version, called AutoTrac, allows the self-driving tractor to follow pre-programmed routes. True, the technology in AutoTrac is less complex than for example those used by Google, but

John Deere has been selling self driving kits for their tractors for over 15 years.

18 February 2016 · etfmagazine

it does the job as advertised and has been doing it successfully for years.

When paired with a GPS RTK receiver and display, the AutoTrac kit can automatically steer the tractor. The kit is tied directly into the steering system on the tractor and provides up to 2” accuracy. More than 60% of new John Deere tractors are fitted with the AutoTrac software and kit (or other self-guidance technology) and can be found operating in more than 100 countries around the world.

Steam, power, now robots

During the 18th and 19th centuries, the Industrial Revolution drove new manufacturing technology fueling global economic growth and a new standard of living. Steam power, machines of all types, interchangeable parts, and innumerable other advancements offered manufacturers unparalleled levels of productivity and profitability.

Today, this sector is driven by the rise of automation, ubiquity of computing power and access to accumulated data.

There are three factors at play here: 1. The Internet of Things and cyberphysical systems such as sensors have the ability to collect data that can be used by manufacturers, producers and consumers.

2. Advancements in big data and powerful analytics means that systems can process huge amounts of data and produce immediate insights and responses.

3. The communications infrastructure backing this up is secure.

At the heart of the industrial sector’s development will be smart factories with much higher levels of both automation and digitisation. Robots will use self-optimisation, selfconfiguration and even AI to complete complex tasks in

order to deliver vastly superior quality and often customised goods or services to consumers at lower prices.

Central servers will connect the actions of robots to complete tasks intelligently, with minimal human input. Materials will be transported across the factory floor via autonomous mobile robots (AMRs), avoiding obstacles, coordinating with fleetmates, and identifying where pickups and drop-offs are needed in real-time.

Conclusion

Many investors are still busy digesting the impact of robotics and automation within the industrial and manufacturing sector, but the new age of robots described here – those that work with and for people in the workplace and at home – marks a change in the opportunities available for investors to benefit.

The difference between these robots and their industrial counterparts is that they are small, safe, inexpensive and are already all around us.

A number of enabling technologies are driving this next generation of robots forward. Firstly, a greater range and sophistication of sensors for vision recognition, sound, movement detection and force resistance sensing.

Secondly, an increasing amount of processing power at a lower cost.

Thirdly, increased on-board processing as well as machine learning, code sharing and a dedicated robot operating system.

More powerful technology and processing at lower costs coupled with general public demand and acceptance mean something interesting is happening in the world of people and robots.

2016: 10 Surprises for Japan Jesper Koll, Chief Executive of WisdomTree Japan, Explains the Investment Outlook for Japan and Why He’s Rooting for a Young Japanese Sprinter in the Rio Olympics.

It is the time of year when economists and strategists present their forecasts and base-line scenarios for the year ahead, 2016.

Quantitative forecasts are based on de-facto probability models; and qualitative scenarios are based on, well, a combination of experience and common sense. Either way, most methodologies leave little room for a discussion of true outliers and true surprises.

This list is trying to address this deficiency.

Here are the ‘out of consensus’ scenarios that I am worried about as possible inflection points for Japan investment strategy. By definition, they currently carry probabilities that may be one or two standard deviations away from the market’s baseline assumptions; but however improbable today, any movement towards their far-out targets may well trigger major inflections in Japanese markets.

1) 4% nominal Gross Domestic Product (GDP) growth

Nobody expects high growth in Japan. Most forecasters doubt Prime Minister Abe’s target to push-up GDP from the current Y500 trillion to Y600 trillion can be achieved in the foreseeable future. Abe benchmarks around 3% nominal GDP growth per

annum, but by the end of 2015, the consensus forecasts not even half that rate of growth for 2016. So a growth spurt with nominal GDP surging to a

4% run-rate by mid-2016 would come as a real surprise.

Possible? I would not rule it out.

Take the combination of added fiscal boost, a sling-shot start on capital investment, plus pent-up demand from retail consumers, and you could quickly end-up with a domestic economy firing on all cylinders in early 2016. True, in 2015 neither tight labour markets nor record corporate cash balances ended up feeding demand; but in turn, the austerity and cash-hording of 2015 may very well have increased the de-facto purchasing power for a 2016 demand surge.

For equity markets, a Japan growth spurt would be a positive surprise, with neither domestic nor global investor positioned for it, in our view. Yet the real surprise may come from the Japanese government bond market: it is unlikely that 4% nominal GDP growth can work together with 10-year bond yields stable below 0.5%....that would be a really surprising consequence of a Japan growth spurt surprise.

2) Japan’s current account deficit returns

2015 brought the return of trade and current account surpluses to Japan. With energy prices low, some nuclear reactors back on line and exports stable-to-modestly growing, the consensus appears to expect a further positive expansion of this trend. A drop-back into a balance of payments deficit would come as a surprise, with possibly big implication for a weaker Yen. Possible? Exports are driven by global growth in general, US car sales in particular. Here, not only is the US car cycle already at a very late stage; but the relative market-share gains for Japanese makers at the end of

2015 appear largely due to a dropoff in sales from the major German competitor. This may well turn-out to be just a temporary plus for exports: no doubt, the Germans will fight

back in 2016 and the euro currency weakness is poised to translate into powerful ammunition to create price competition advantages for German makers before long.

Meanwhile, Japan’s import bill could also be under more upward pressure than expected: if domestic demand starts to increase, the decade-long structural shift towards offshore production for many Japanese capital and consumer goods companies should trigger much faster import demand pull than observed during previous cycles. Japan’s aggressive offshoring is poised to have raised the import elasticity substantially, which in turn raises the probability of higher imports forcing trade- and current account deficits as domestic demand recovers. Add to this the growing possibility of a reversal in the termsof-trade as the 2015 drop in energyand commodity prices begins to fade from year-over-year comparisons.

If a Japan trade or current account deficit comes back into sight, the case for yen depreciation is poised to get stronger, with or without added stimulus from the Bank of Japan (BoJ).

3) Japanese financial companies merger wave Japanese finance is under pressure to develop a fundamentally new

February 2016 · www.etf-magazine.com 19

business model. Pressure is building from all sides the unwinding of crossshareholding directly undermines the traditional main-bank relationships; the demographic destiny of regional economies is eroding future business development for regional financial services providers; there is increasing competition from the privatisation of Japan Post; and on the macro-side, the shift from deflation to inflation is bound to drive a shift away from deposit-based finance towards direct finance. Many forward-looking dynamics suggest that Japan’s financial system is over-banked, over-brokered, and over-insured.

A real surprise would be if 2016 marks the start of a broad-based and deep-rooted wave of consolidation – not just amongst regional banks, but cutting all-the-way into megabanks, major investment banks, asset managers and insurers.

Possible? I am convinced that a consolidation wave will come sooner or later, but one key force delaying it maybe the current lack of clarity on the future global regulatory framework for universal banks and integrated financial services providers. Still, even with this lingering uncertainty, a roll-up merger wave amongst regional banks is most likely to accelerate and, in my personal view, I would not be surprised to see some of the megabanks beginning to increase their nationwide reach by buying more local players.

If the visibility of a financial services consolidation wave rises in Japan, the market implication could be that Japan’s financial sector moves towards becoming a top-performing sector for 2016.

4) A Japanese “hacker” breaks the global cyber-terror networks

The war in cyberspace is real, with cyber-attacks on corporate, private and public networks now up top as the biggest ‘known unknown’ challenge for 20 February 2016 · etfmagazine

risk managers and leaders everywhere.

So far, Japan appears as a relative late-comer to cyber-war prevention and cyber-war countermeasure development; but this started changing in 2015 with both public policy and private initiatives beginning to focus on the problem. A real surprise would be if a Japanese team of cyber hackers cracks a key code of cyber-terror and develops a credible early warning system that can predict or even stifle future attacks.

Possible? While few engineers or investors doubt Japan’s prominence in robotics, the real-world reputation of Japanese software developers and hackers is much in need of a big show-case win. A global breakthrough coming from Japan would be a real surprise. It would, however, almost certainly raise the ambition and popularity of Japanese youth to pursue more software and IT-related careers.

5) Prime minister Abe calls double elections and wins a big landslide

In July 2016, one-half of Japan’s upper house of parliament is due to stand for election. Unlike the fixedcycle election rule for the upper house, Japan’s lower house election cycle rests de-facto in the hands of the Prime Minister.

He can call an election whenever he deems most opportune. Abe just won a big landslide two-thirds majority at the end of 2014. For 2016, a big surprise would be if Abe dissolves the lower house and calls a ‘double election’. Conventional wisdom argues against taking this risk and Abe himself recently suggested he is not, currently, thinking this way. What would change his mind?

Tactically, the more the economy recovers and creates a real ‘feel good factor’, the more likely a snap election becomes. Key indicator could be a surge back towards 60% in Abe’s popularity (currently around 45-50%).

Note here that Japan will host the 2016 G7 Summit meeting in May which could well boost Abe’s popularity and reputation as a global leader in the eyes of the Japanese people.

Strategically, Abe may be tempted to go for a ‘double’ because the opposition parties remain in disarray and without funding. He may also want to get the election out of the way before the next hike in the consumption tax, slated for April 2017.

In our view, a ‘double election’ would be a surprise, but if it happens it would probably be good news for markets.

We think so because we are convinced that Team Abe will only call an election if the probability of a major landslide victory in both the lower and upper house is very high indeed.

6) MoF and BoJ agree to restructure Japan government bond (JGBs) into “zero coupon perpetual bonds”

The BoJ is mopping-up government debt like few other central banks have done in history. Is there an exit? What is the endgame? Over coming months, the Federal Reserve first concrete moves away from quantitative easing may prove valuable lessons for what the BoJ will have to face eventually.

A real surprise would be if Japanese technocrats decided to pre-empt this debate and propose a more pro-active course for Japan. If both MoF and BoJ agree to re-structure the BoJ-owned JGB’s into “zero-coupon perpetual bonds”, the Japan fiscal-monetary nexus could keep running without markets having to worry about the eventual exit.

Possible? Surely a very radical step with little historic precedent.

However, if, against expectations, the Fed’s balance sheet ‘normalisation’ causes greater-than-expected financial

disturbances, a more pragmatic co-operation approach between the treasury and the central bank could well become possible in Japan.

If so, the implications for the bond market may be less significant than the possible impact on the currency: yen currency devaluation risks would rise significantly.

7) ‘Abenomics’ wins the Nobel Prize for applied economics

This, of course, is literally an incredible surprise. There simply is no such thing as a Nobel Prize for applied economics. Academics get rewarded, not practitioners. Still, my point is that, at the end of 2015, few commentators and strategists believe Abenomics will be successful.

For 2016, a surprise would be a reversal of this. In media commentary, this would be reflected in increasingly positive commentary on how Abenomics is working and how it could become a model for other countries’ leaders of economic policy. Could the G7 Summit hosted by Japan in May become the launch-pad for such a campaign?

In Japan’s equity markets, this would be reflected in the development of an ‘Abenomics Premium’, i.e. P/E multiple expansion.

Possible? In our view, the probusiness policy drive and expert coordination of all levers of policy – monetary, fiscal and regulatory – is still very much underappreciated by global opinion leaders; and both global- and domestic investors are still structurally underweight Japanese risk assets.

Add to this the increasing credibility of Abe-led private and public sector partnership, and you end up with a strong case that, yes, Abenomics may very well turn out to be the most impactful and far-reaching structural growth policy program in place in any of the advanced industrial economies in today’s real-world free-market parliamentary capitalism.

8) US - China policy co-ordination The US dollar remains the global anchor currency and, as the Federal Reserve begins to hike US interest rates, the de-facto impact will be a tightening of financial conditions for many emerging market economies.

The risks of US rate hikes deflating global growth are of significant concern for many forecasters, including the IMF and World Bank.

Nobody is forecasting an off-setting counter policy response. So it would come as a real surprise if the Peoples Republic of China were to step-in and present a sizable fiscal expansion program. In many ways, a China fiscal demand boost would be a most credible global insurance policy against the negative impact of higher US rates. Almost certainly, it would translate quickly into higher demand for many of the emerging economies exports.

Possible? During the ‘Lehman Shock’ crisis, China did indeed answer the need for global demand stimulus with a massive Keynesian-style stimulus that very much helped turn the crisis-induced downturn into the next upturn. Whether, at this point in the cycle, China could be counted upon is not clear. However, 2015 brought the China-led establishment of the Asian

Infrastructure Investment Bank. It is highly probable that 2016 will bring first concrete positive demand-pull projects coordinated by this new progrowth institution. So even without open US-China policy coordination, the de-facto policy drive led by China could lead to positive growth surprises in 2016/17, particularly for Asian emerging markets.

9) Trans Pacific Partnership (TPP) gets blocked by US political infighting

The impact of the TPP free-trade agreement on Japan’s economy is broad-based and deep. It ranges from tariff cuts on agriculture, to intellectual

property protection and protection against unfair competition from stateowned enterprises.

Full implementation is, in our view, one of the important change-agents towards greater productivity and a higher potential growth for Japan.

A surprise, if not a shock, would be if US lawmakers block the TPP from coming into law. On top of the potential negative impact on Japan, the bigger negative surprise would be possibly irreparable damage to America’s leadership credentials in Asia Pacific.

10) A Japanese medal in the 100m or 200m Olympic sprint

2016 will bring the next summer Olympics. Japan has plenty of sports talents but has never done well in track and field events in general, short-distance sprinting in particular.

However, change is afoot. A real surprise could be Japan’s youth sprinting sensation Sani-Brownsan winning a medal in Rio. Born in Fukuoka to a Japanese mother and a Ghanian father, 16-year-old Sani Brown-san broke Usain Bolt’s longstanding world-youth record over 200 metres in 2015.

Possible? This upcoming Olympics is definitely an aggressive call for a 17-year old boy to become the world’s fastest man. However, I am very confident all this means is that my prediction is just a little too early. At the Tokyo Olympics in 2020, Japan’s sprint-ace Sani-Brown-san will be right up there in the centre of the medal podium; and that is a forecast, not a surprise.

February 2016 · www.etf-magazine.com 21

Featured ETFs We Pick a Selection of ETFs From Around the World to Highlight Some Available Funds

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ETFS Longer Dated All Commodities GO UCITS ETF Commodities are increasingly becoming a core asset class for many investors. A low correlation with other major asset classes, strong long-term fundamentals, inflation hedge properties and the development of financial instruments that ease market access have been key factors behind the rise in commodity investing.

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Fund Top 10 Holdings

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ETFS ISE Cyber Security GO UCITS ETF Cyber security has become a crucial issue in the 21st century. Cyber attacks threaten governments, companies and individuals with financial, reputational and societal damages every minute of every day. Cyber threat vulnerability is only increasing as more data, systems and people connect digitally. Since 2009 cyber attacks have increased at an annual compounded growth rate of over 66% and it is estimated that the cost of cyber crime to the global economy each year is as high as $400 billion.* The increasing demand for cyber security technology has prompted a number of high profile mergers and acquisitions, further driving the stock price performance. Negative cyber attack headlines have been bullish for cyber security stock price in the short term and business growth in the long term.

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Fund Summary Data Issuer

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February 2016 · www.etf-magazine.com 23

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ROBO Global® Robotics and Automation GO UCITS ETF The age of robotics and automation is upon us. The last 30 years is called the age of computer, internet and mobile. The next 30 years will be marked as the age of robotics and automation. Robots no longer just perform the repetitive dull, dangerous and dirty tasks of welding, painting and cleaning within the automobile factories. Today’s robots are equipped with advanced sensing, processing and performance capabilities that will continue to reshape every aspect of our business landscape and domestic lives. They assist surgeons, farmers and our military. They build and drive cars, explore space, package food, automate warehouses, entertain our children and perform rescue missions.

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0.92%

Country: United Kingdom www.ubs.com

The UBS ETF – EURO STOXX 50 UCITS ETF sub-fund is an exchange traded fund incorporated in Luxembourg. The objective of the fund is to deliver the performance of the EURO STOXX 50® Net Return and allow intraday trading.

Fund description • The fund generally invests in all equities included in the EURO STOXX 50® Index. The relative weightings of the companies correspond to their weightings in the index.

• The investment objective is to replicate the price and return performance of the EURO STOXX 50® Index net of fees. The stock exchange price may differ from the net asset value.

Fund Top 10 Holdings Total S.A.

6.2% Bayer AG

3.4%

Sanofi

5.5% Eni

3.3%

Siemens AG

4.6% Anheuser-Busch InBev

3.3%

BASF AG

4.2% Unilever N.V. CVA

3.2%

SAP AG

3.5% Banco Santander S.A.

3.2%

T: +44 (0) 0207 567 8000 24 February 2016 · etfmagazine

Fund Summary Data Inception Date

29/10/2001

Legal Structure

UCITS

Expense Ratio

0.15%

Assets Under Management

$160.3 M

Vanguard ETFs FTSE 100 UCITS ETF Income This Fund seeks to track the performance of the Index, a widely recognised UK benchmark of the UK market’s most highly capitalised blue chip companies.

Investment approach • This fund seeks to track the performance of the index, a widely recognised UK benchmark of the 100 most highly capitalised blue chip companies, representing approximately 83% of the UK market.

• The fund employs a “passive management” or indexing investment approach, through physical acquisition of securities, designed to track the performance of the index, a free-float-adjusted market-capitalisation-weighted index.

• In tracking the performance of the index, the fund attempts to replicate the index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Country: United Kingdom www.vanguard.co.uk

Fund Summary Data Inception Date

22/05/2012

Legal Structure

UCITS

Assets Under Management

£1775.6 M

Fund Top 10 Holdings

HSBC Holdings PLC (UK Reg)

6.3% Vodafone Group

3.7%

Royal Dutch Shell A

4.1% AstraZeneca

3.2%

BP

4.1% Lloyds Banking Group

2.8%

GlaxoSmithKline

4.0% Barclays

2.7%

British American Tobacco

4.0% Diageo

2.7%

T: +44 (0) 800 917 5508 Country: United Kingdom Sector: Cash Alternative www.sourceETF.com

PIMCO Sterling Short Maturity Source UCITS ETF PIMCO and Source have teamed up to deliver the PIMCO Sterling Short Maturity Source UCITS ETF, which seeks to maximise current income consistent with the preservation of capital and a high degree of liquidity. As such, it may appeal to investors who are looking for the potential to enhance returns for their cash holdings. The ETF invests primarily in short-term investment grade debt denominated in GBP. The majority of these holdings are in investment grade corporate and government bonds, but may also include certain other types of fixed income, such as mortgage-backed securities, which are intended to capture additional yield without compromising the ETF’s safety, liquidity and volatility.

The ETF is actively managed by PIMCO, one of the world’s largest fixed income investment houses. The portfolio manager is Mike Amey.

Fund Top 10 Holdings

Fund Summary Data Issuer Inception Date

15/06/2011

Legal Structure

UCITS Open ended fund

Italy Government

4.1% Land Nordrhein-Westfalen

1.9%

SNCF Reseau

2.5% UK GILT

1.9%

Expense Ratio

UK GILT

2.3% Lloyds Bank

1.9%

Nedar Waterschapsbank

2.2% Dexia Credit

1.8%

Assets Under Management

Japan Treasury

1.9% Landerskreditbank

1.8%

T: 020 3370 1144 | E: UKinfo@SourceETF.com

PIMCO Fixed Income Source

Average Daily $ Volume Average Spread (%)

0.35% £84.98 M US $91,918 0.04%

February 2016 · www.etf-magazine.com 25

Source Goldman Sachs Equity Factor Index World UCITS ETF This ETF should appeal to investors wanting a core holding in global equities, as it offers broad diversification covering 22 developed market countries. The fund aims to outperform traditional benchmarks on both an absolute and a riskadjusted basis, while seeking to control country and regional risk compared to relevant market cap weighted indices. The fund emphasises five well-known and academically supported factors: low beta, size, quality, value and momentum.

Research shows that each factor has delivered outperformance versus the market cap weighted indices over the long term. Unlike other multi-factor funds on the market, this fund weights the five factors so that each factor contributes an equal amount of risk, taking into account the correlation between them. The objective is a portfolio that is more diversified and more efficient than one that simply aggregates individual factor strategies.

Source Goldman Sachs Equity Factor Index Europe UCITS ETF is also available.

Fund Top 10 Holdings

Country: United Kingdom Sector: Global Equities www.sourceETF.com

Fund Summary Data Issuer

Source Markets plc

Inception Date

08/01/2014

Legal Structure

UCITS Open ended fund

Reynolds American

0.48% Johnson & Johnson

0.45%

Estee Lauder

0.46% Foot Locker

0.45%

Expense Ratio

Nestle

0.46% Swiss Re

0.45%

Ultra Salon Cosmetics

0.45% PNC Financial Services

0.45%

Assets Under Management

Goodyear Tire & Rubber

0.45% National Oilwell Varco

0.44%

Average Daily $ Volume

0.65% $587.27 M $670,000

Average Spread (%)

T: 020 3370 1144 | E: UKinfo@SourceETF.com

iShares Emerging Markets Local Government Bond UCITS ETF Income

0.21%

Country: United Kingdom www.ishares.co.uk

The Fund aims to achieve a return on your investment, through a combination of capital growth and income on the Fund’s assets, which reflects the return of the Barclays Emerging Markets Local Currency Core Government Bond Index, the Fund’s benchmark index (Index).

Shares are exchange traded funds (ETFs) managed by Blackrock and are listed on the London Stock Exchange. That means you can buy an iShare through a broker as you would buy any ordinary share. ETFs are a simple and cost-effective way to gain exposure to the market you need. Using ETFs as building blocks, you can spread the risk of individual companies, entire sectors or even whole countries suffering losses. However, they will not mitigate all market risk, and you can still lose some, or all of your investment should the value of the underlying shares decrease.

Fund Top 10 Holdings

BRAZIL (FEDERATIVE REPUBLIC OF) 2.5% THAILAND (KINGDOM OF)

1.7%

BRAZIL (FEDERATIVE REPUBLIC OF)

2.1% THAILAND (KINGDOM OF)

1.5%

THAILAND (KINGDOM OF)

2.1% THAILAND (KINGDOM OF)

1.5%

BRAZIL (FEDERATIVE REPUBLIC OF)

1.9% BRAZIL (FEDERATIVE REPUBLIC OF) 1.3%

SOUTH AFRICA (REPUBLIC OF)

1.8% HUNGARY (REPUBLIC OF)

Fund Summary Data Inception Date

20/06/2011

Legal Structure

UCITS

Expense Ratio

0.50%

Assets Under Management

$1922.6 M

1.1%

T: +44 (0) 845 357 7000 | E: info@ishares.co.uk 26 February 2016 · etfmagazine

Information correct at time of press, as provided on Funds Library

I am currency hedged.

Access a range of well diversified, liquid and currency hedged investments.

UBS ETFs. With exchange traded funds (ETFs), you can add almost any index in the world to your portfolio. Exchange-rate fluctuations can reduce investment returns. It is comforting to know that you can hedge against foreign exchange risk: with currency-hedged UBS ETFs.

ubs.com/etf For marketing and information purposes by UBS. For Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances. This document has been issued by UBS AG, a company registered under the Laws of Switzerland. Issued in the UK by UBS Global Asset Management (UK) Ltd, authorised and regulated by the Financial Conduct Authority. This document is for distribution only under such circumstances as may be permitted by applicable law. The products or securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Source for all data and charts (if not indicated otherwise): UBS Global Asset Management. Š UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. E8

Innovation in ETFs Being independent allows us to collaborate with leading investment partners and bring fresh and innovative products to the Exchange Traded Fund market. Whether you’re looking to pick a new investment idea, or a better approach to an old one, try Source, the ETF innovators.

To find out how Source products could benefit your portfolio, speak to your adviser and visit www.sourceetf.co.uk

Source products place your capital at risk. Investors may not get back the original amount invested.

Please discuss all investments with your fi nancial adviser. Source ETFs are UCITS compliant and recognised under s.264 of the Financial Services and Markets Act 2000. You should refrain from entering into a transaction unless you have fully understood the associated risks and have independently determined that the transaction is appropriate for you. You should read all relevant prospectus information prior to investing.

The prospectus documentation describing the structure, risks and related costs of Source products is available for residents of countries where such products are authorised for sale at www.sourceetf.co.uk. Source products may not be sold to US persons. This advertisement has been issued by Source UK Services Limited, 110 Cannon Street, London EC4N 6EU, authorised and regulated by the Financial Conduct Authority.