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Exchange-Traded Funds - January 18, 2007

Interview with Lindsay Tomlinson

In this month's interview we speak to Lindsay Tomlinson, Vice-Chairman of Barclays Global Investors, Europe, and a member of the EDHEC Risk and Asset Management Research Centre's international advisory board, about the EDHEC European ETF Survey 2006, the partnership between Barclays Global Investors and EDHEC and the future for exchange-traded funds.

Lindsay Tomlinson

Barclays Global Investors has developed a position as global leader in numerous segments of the asset management industry. What do you attribute this success to?

Lindsay Tomlinson: Our basic philosophy is that investment management is a scientific discipline. This has led us to take concepts developed in an academic environment and to apply them in the real world. This quantitative approach has meant that BGI has been very well placed as the investment world has professionalised. Against that background there have been three major factors underpinning BGI’s growth:

Our people: Investment management is a people business. We believe our investment professionals are the best in the industry. Our research team alone numbers over 130 investment professionals (including over 50 PhDs) who conduct ongoing research of international markets and evaluate new sources of data and potential investment themes to incorporate into our strategies.

Client focus: We put clients at the centre of all our activity. Recognising the diverse financial needs and goals of our investors, BGI provides a comprehensive range of investment strategies. We seek to provide best in class service and products for our clients and they have rewarded us with ongoing business.

Innovation: In keeping with our scientific approach we have fostered a culture of innovation. Markets are highly competitive and efficient and anomalies can quickly be arbitraged away. BGI has a long and consistent track record of innovation. We pioneered indexation in the 1970s, introduced risk-controlled active management almost 30 years ago, have become the top provider of exchange-traded funds and a recognised leader in liability-driven solutions.

Barclays Global Investors has been providing considerable support for the activities of the EDHEC Risk and Asset Management Research Centre. On a personal level, could you tell us why you decided to join the EDHEC Risk and Asset Management Research Centre's international advisory board?

Lindsay Tomlinson: The BGI philosophy, to which I am totally committed, is to take ideas developed in academic environments and to apply them to real world investing. Obviously, this means that we are very interested in the research work undertaken by universities. There seems to me to be quite a major divide between the academics and the investment practitioners on this side of the Atlantic. EDHEC is one of the very few academic institutions which has successfully bridged that gap and made itself relevant to both sides of this divide and I have been very impressed with the way it has done so. I also like the people.

I was therefore very happy to be invited to join the international advisory board and membership has proved to be a good experience. It is an interesting and diverse group of people and having the opportunity of interacting with such people with a common purpose of helping EDHEC has been an education in itself.

Finally I have to admit that I did not feel that the occasional meeting on the French Riviera would represent a hardship posting!

What are the key developments you foresee in the Exchange Traded Fund space? How does this contribute to reshaping the global asset management industry?

Lindsay Tomlinson: Although ETFs have existed in Europe for more than five years, it is taking some time for them to break into the retail market. This is because they were originally targeted at institutional investors and financial advisers have been unaware of the products and their capabilities. However, the momentum in the market is really starting to grow, with the European ETF business growing 70% over the last year. This compares with 38% growth in the US where the concept is already well-established. We believe there is considerable room for growth for several years yet. Growth will be boosted by the UCITS III Directive and by increasing familiarity with ETFs amongst a much wider group of investors. We also expect to see continued consolidation in the European ETF and Asset Management market. The trends towards core-satellite investing and alpha-beta separation plays directly to ETF strengths. In turn, the existence of ETFs will itself support these global asset management industry trends.

What is Barclays Global Investors' current strategic focus for Europe and what are your main plans for 2007?

Lindsay Tomlinson: We have a diverse range of products and services to offer in the European marketplaces. Firstly, we have significant business serving pension and other institutional funds in a number of markets around Europe. Here we continue to offer both indexation and active strategies. The trends amongst these funds have been towards risk budgeting, alpha- beta separation, and core-satellite investing. This suits the way that our strategies operate and we see continuing growth across our product range. Additionally, there is quite a strong move towards asset-liability management and Liability Driven Investing. We have a market leading LDI business and expect this to continue to attract attention amongst European pension funds.

Secondly, we are really pushing forward with our ETF product range, across the key markets in Europe. We think there is tremendous potential and are very excited about the growth prospects.

Thirdly we see continuing demand and opportunities for alpha generating strategies to be made available through a whole variety of distribution channels. And there are lots of other opportunities and challenges to address, over and above the three areas I highlighted above.

Through iShares, BGI has supported EDHEC's international conferences, and will notably be involved in the upcoming EDHEC Asset Management Days in Geneva and the EDHEC/iShares European Seminars on Advances in ETF Investment. Could you tell us something about the reasons for BGI's support of EDHEC's conferences and why you think the roadshow will be of interest?

Lindsay Tomlinson: EDHEC’s work on educating financial professionals is excellent and completely aligns with our goal of providing financial professionals with the information and tools to help them do their job. The ideas behind core-satellite investing and alpha-beta separation are key parts of our educational focus. This again aligns with EDHEC’s thoughts. The roadshow is the natural progression of this - EDHEC and iShares working together to further education on ETFs, with a specific focus on fixed income ETFs.

In the EDHEC European ETF Survey 2006, which was sponsored by iShares, a majority of European investment management professionals felt that usage of ETFs would increase in the future, while responses on the use of futures, traditional index funds and total return swaps were less optimistic. What do you think are the reasons for this?

Lindsay Tomlinson: Our research also supports the view that ETF usage will continue to increase in the future. The reasons investors give for this include:

  1. ETFs allow access to a wider range of markets than other instruments eg there are no futures on the Turkish market.
  2. The ease of use and access of ETF compares favourably with other instruments.
  3. The transparency of ETFs is seen as a huge benefit. In a nutshell, ETFs are modern investment vehicles which offer transparency, simplicity and easy access to the whole investment community.

About Lindsay Tomlinson

Lindsay Tomlinson is Vice-Chairman of Barclays Global Investors Europe, and is a member of BGI's Executive Committee. He is a Cambridge University mathematics graduate and has a post graduate qualification in mathematical statistics.

After leaving university he worked as a pensions actuary and is a Fellow of the Institute of Actuaries. He moved into the investment world in 1981, joined BGI in 1987 and has been a senior executive of the company since 1991.

Outside of BGI Lindsay has contributed to the development of the financial services industry through membership of a range of relevant industry bodies. He is currently a member of the Financial Reporting Council, and of the NAPF Investment Council. Additionally he is Chairman of the Code Committee of the Takeover Panel, and of the Actuaries' Professional Affairs Board.

Lindsay was awarded the OBE for services to the fund management industry in the 2005 Queen's Birthday Honours List.