In a parallel universe Morgan Stanley might be Europe’s pre-eminent exchange traded fund provider. In this one it is the wet-behind-the-ears newbie, beaten to the punch by the more than 400 issuers globally that have already entered the ETF fray.
Despite its tardiness Morgan Stanley, the 18th-largest manager in the world with assets of $1.3tn, and the biggest without ETFs, has ambitious plans.
Six ETFs were unveiled in the US earlier this month, with many more in the pipeline. Europe is also on the radar, although the first launches are unlikely before 2024.
“[Our platform] will be multi-asset class, multi brand and multi jurisdiction,” said Anthony Rochte, global head of ETFs at Morgan Stanley Investment Management. “We are in the initial steps of building out a global ETF platform.
“There is client demand for both mutual funds and demand for ETFs. We are going to where our clients are.”
If it were not for a series U-turns, Morgan Stanley might already be established where its clients increasingly are: the fast-growing $9.8tn ETF market.
As far back as 1996 the bank developed a family of World Equity Benchmark Series (WEBS) ETFs in conjunction with Barclays Global Investors. Just four years later Morgan Stanley sold the business to BGI, which rebranded the funds as iShares.
The rest is history, with BlackRock buying iShares in 2009 and building it into a $3tn juggernaut, the biggest ETF shop in the world.
Deborah Fuhr, then head of the investment strategies group at Morgan Stanley and now managing partner of consultancy ETFGI, believed the bank missed a golden opportunity to dominate the industry in Europe.
“Having been there in 2000 when we planned to launch ETFs in Europe, when we would have been the first in Europe, we had a compelling proposition. It was disappointing the firm decided not to enter,” said Fuhr.
“Being first to market is always a difficult decision, [but] had we been the first I think we had the right strategies and would today be the largest in Europe.”
Even earlier still, in 1993, Morgan Stanley had developed ETF-like Opals — Optimised Portfolios As Listed Securities — on the Luxembourg exchange.
“They wanted to convert Opals to ETFs, but that didn’t happen,” said Fuhr, and the Opals were killed off, although a similar product does still exist in Japan.
Then in 2009, Source, a London-based ETF provider, was founded by a group of Morgan Stanley and Goldman Sachs alumni, with MS a shareholder alongside Bank of America, Goldman Sachs, JPMorgan and Nomura. That venture was sold to Invesco in 2017.
“Every time you look at a list of managers by AUM and whether they have a US or European ETF offering, [Morgan Stanley] have stood out as resisting the trend,” one former MS alum and ETF industry figure said.
He believed the bank’s failure to follow through and commit to ETFs was due to a lack of enthusiasm at MSIM, vis-à-vis the more entrepreneurial investment bank.
“Now [ETFs] are so big it’s staring them in the face that they should be in the ETF market.”
Morgan Stanley’s first six ETFs are all under the Calvert brand, its environmental, social and governance-based investment arm, which Rochte views as “one of our premiere capabilities”. Other launches, including funds under the imprints of MSIM and Eaton Vance, a house it bought in 2021, are to come.
Two of the six are actively managed and, in contrast to MSIM’s belated adoption of ETFs in general, Rochte said “we still think we are early in the active ETF space”.
“In the US, [active ETFs] are about 5 per cent of the $7tn AUM but 15 per cent of flows [last year]. We are very focused on active management.”
It is the growing interest in active ETFs that has lured a clutch of heavyweight managers to the ETF market of late, with Neuberger Berman, SEI, AllianceBernstein. Dimensional Fund Advisors, T Rowe Price, Federated Hermes and Matthews Asia among those to have debuted with active ETFs in the past year or two.
“In the last 12 months the holdouts have been rolling over,” the MS alum said.
Flows are heading in the same direction: US-domiciled mutual funds suffered net outflows of $1.1tn in 2022 even as US-listed ETFs took in $610bn, according to Investment Company Institute data.
The alum believed Morgan Stanley would need to work hard to carve out a meaningful niche in the ETF industry.
“Large asset managers can make the mistake of thinking that because their overall business is successful each new thing they do will be successful,” he said.
“You need a degree of energy and focus on distribution, market making and product selection”, with the ETF venture treated as “not just another fund launch but a new business launch”.
Fuhr was more upbeat, however.
“I don’t think it’s too late — there are always new people popping up offering hedge funds or mutual funds for the first time — if you have a unique and compelling proposition and you have a client base and the right products and you promote it properly to your existing investors and maybe new ones,” she said.
Nate Geraci, president of The ETF Store, was even more optimistic. “Morgan Stanley has something most new ETF issuers don’t: distribution,” via its “army” of financial advisers and E*Trade brokerage platform.
“Their wealth management division has something like $5tn in client assets and another $1.3tn resides in their investment management division. Morgan also has billions of dollars invested in other issuers’ ETFs,” he said.
“Add this all up and Morgan has huge ‘bring your own assets’ potential. Distribution is king and it doesn’t matter that Morgan is showing up late to the ETF party.”
Morgan Stanley declined to comment on its distribution strength.