Barclays Global Investors Case Study

1. Brief Summary

Barclays Global Investors (BGI) was created in 1995 by Barclays PLC, with the acquisition of Wells Fargo Nikko Investment Advisor, combining with Barclays’ asset management division. The firm had been grown rapidly and became one of the largest asset management company in the world.

The ETFs business of BGI all started from 17 WEBS. As more and more BGI professionals were using them, BGI realized the advantages of ETF and saw the potential market of it. But the growth latter was contributed not only by its mechanical advantages, the sales methods and advanced customer services, but also by investing in education of the benefits of ETFs. At first it grew slowly, but as investors were more and more educated, the business gained significant increase. As a result, the entire ETF asset class also developed. From 2001 to 2006, the ETF assets under management was even more than quadrupled in the US.

Combining some characteristics of both traditional open-end and close-end mutual funds, ETFs are not only publicly listed so that investors can trade them on exchange, but also had shares outstanding fluctuated based on demand. The advantage of ETFs were obviously:

1) they were frequently intraday priced, so investors were able to adopt more beneficial techniques on ETFs and develop diversified portfolios;

2) they were tax efficient since investors did not buy and sell directly from the fund but on an exchange, so the implicated tax was only on their activities;

3) they were highly transparent due to the daily disclosures of holdings by fund managers;

4) they generally had very low cost compared to other type of funds with good returns and acceptable risks.

However, with the advantages of and big future of ETFs, the competition level of this market also become more and more seriously. Major investment companies such as Vanguard all started to launch more and more different ETF products with their own attractions. By realizing the coming fierce competition, BGI had its growth strategy with iShares on launching new ETFs, creating iPath Exchange Traded Notes, exploring Channels such as 401(k) and trying some expansions geographically.

1. Key Points of Popularity of ETFs

Launched in the 1990s, Exchange traded funds became popular in the early 2000s for the following reasons:

1. ETFs’ most interesting characteristic may be the low expense ratios they imply: they have very low operational cost or research cost as they are tracking indices. Also, they benefit from low trading costs as managers do not have to balance inflows/outflows.

1. ETFs are traded on an exchange and therefore provide efficient pricing to investors: shares are listed and traded on an intraday basis while remaining shares vary relative to demand. Eventually, investors can adapt their portfolio allocation decisions on real-time, purchase on margin, take short positions, place stop-orders etc. which provides much more investments flexibility.

1. ETFs’ investors benefit from the diversity of these type of products: various country indices (for example, emerging countries), different types of underlying assets (Commo, FX etc.) and variety of industries (telecommunications, pharma etc.). Hence, ETFs offer great opportunities of portfolio diversification to different risk-sensitive investors.

1. ETFs offer a high level of transparency since it implies a certain number of disclosing obligations to asset managers. The ETF managers need to disclose the holdings daily, while traditional mutual funds are only required to do so on a quarterly basis.

1. ETFs have a nature of tax-efficiency in three dimensions. The first is that, most of the transactions are on exchange. Therefore, the exchange in the open market is not impacting the ETF fund itself. Secondly, as most of the ETFs are tracking indices, they are managed positively. Thus, they are less likely to realize the capital gains. Finally, for the authorized participants in particular, the creation and redemption of ETF shares are in-kind transactions, meaning ETF shares in exchange with stocks, which is not a taxable event.

1. The Features of Competition of Fund Industry

The competition of the industry has been very fierce during that period. Nevertheless, the market would probably become more and more competitive in the future. But the bright side is, when the economy is good, the whole fund industry is increasing in general, especially in geographic scope and in terms of the market for new products. Although some big players, such as Vanguard and BGI occupied most of the market, because of the total market scale expanded rapidly and also many new products and new markets were created and penetrated, even small players can have good performance and increase. Generally speaking,

1. The entry level of fund industry is not very high. For example, in the US, the regulations are very clear such that many wealthy individuals or corporations can start up a new fund. As mentioned in the case, every week there were ten more fund launched.

1. The market sizes for mature products are relatively limited, and in the same time the regulations are getting stricter and stricter for mature products, to protect investors. Thus, for funds, it is very important to be innovative to find new markets to minimize the competition.

1. Although it is important to being innovative, it requires large initial investments to create new innovative products and to build up the new market for them. For example, the success of ETFs of iShares lies on the utterly high expense of educating and developing the entire market in the beginning.

1. A good relationship with financial advisors and specialists is crucial to be competitive in the industry. It is important to have a well-organized distribution and communication system.

1. Fund managers often benefit from an early mover advantage because the investors tend to avoid the capital gain taxes. This is particularly obvious in the ETF industry.

1. BGI Development Strategy in ETF Market

The early development of iShares should be attributed to Kranefuss and Parsons. At the very beginning, Kranefuss and his team found out that the BGI investment professionals were taking more interest in the 17 WEBS ETFs. He realized that ETFs were a better product than mutual funds. BGI would easily launch 40-50 more funds to start the ETF business. At the same time, he believed that multiple indices should be tracked and an educational program was needed for investors to have a better understanding of ETFs. As a result, a new brand “iShares” was created, new employees were hired for the team and large amount of money were spent on advertising.