Barclays Global Investors Case Study

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Parsons also played an important role in the sales team for the early development. He hired high quality sales people and ran the team efficiently. He split the sales team into three groups focusing on different advisors and he had a good awareness of the market segments.

Despite the slow growth at the beginning, the iShares funds gradually attracted assets and became worldwide. BGI made use of its scale, experience and its early mover advantage to stay competitive. The key points of BGI’s development strategy are listed as follows:

- Educational programs

BGI developed the idea of Kranefuss to invest in extensive educational programs and materials for financial advisors. The team sent out “ETF kits” explaining the product and identifying situations in which ETFs would be appropriate and sponsored in-person educational seminars. It also developed a website with comprehensive information and functions on it. They believed that the market had to be educated before they could sell their products. At the same time, they also did direct marketing with online. Print and TV advertising.

- Maintenance of relationship with advisors and specialist

The sales group worked closely with the marketing organization. In addition to increasing its focus on advisors, the sales team also focused more on institutional channels. Parsons encouraged the team to develop long-term relationship with advisors and institutions so that they were always informed about BGI’s products. As ETFs started gaining popularity, the sales team expanded to cover countries around the world.

- Pricing strategy

As the fund is getting bigger, it’s getting more profitable. BGI shared the economy of scale with its investors. It reduced some expense ratios to make the products more attractive.

- Decisions and Discussions

- BGI should expand in Europe and Asia-Pacific more aggressively.

The US market is getting more and more competitive. As mentioned in the case, there is generally an obvious first-entry advantage owing to tax on capital gain and redemption fees when a client redeem and change to another fund in the industry. Therefore, BGI must cease the opportunity to have this advantage not only in the US, but also in other countries.

As for Europe, during the period in the case, there were just some relatively small amounts of ETFs in Europe ($89.7 billion) compare with that in the US ($306.8 billion). Nevertheless, as mentioned by Parsons, head of sales, “Europe has demonstrated a faster growth rate than the U.S. The institutional interest in Europe has been particularly strong”, which, to some extent, must be related to the tax efficient nature, as well as the variety of usages in portfolios. These are obviously big attractions for a developed market such as Europe. As a result, with the INDEXCHANGE acquisition, and Barclays PLC’s retail banks network, if BGI expand in Europe more aggressively, it could attract more both of institutional clients and savvy individual investors and thus enjoy more the first-entry advantage.

As for Asia-Pacific area, it even shows more promising future for ETFs. For Japan, Singapore, Australia and Hong Kong, the case will be similar to that in Europe. On top of that, Asia-Pacific market had even less ETFs scale, BGI could enjoy more first-entry advantage there. And a lot of other countries in this area are emerging markets. Those countries do not have a mature welfare system or the pension for retirement is relatively low, and plus the economy is growing fast, more and more individual investors are considering low-risk investments self-driven. As a result, ETFs in Asia-Pacific market can even gain more attentions.

For example, in China,

“China’s economic output has grown ten-fold over the last 20 years. Hundreds of millions of Chinese are now middle income earners and millions are wealthy. The asset management industry has grown along with the economy, but not as fast as might be expected. The bulk of China’s RMB 145 TN of financial assets are held in deposits. Only 3% are held in mutual funds. The Chinese remain savers rather than investors, ... We expect assets under management (AuM) to grow from RMB 4 TN today to RMB 24 TN by 2020. This will present a massive opportunity for Chinese fund management companies (FMCs) and, potentially, for foreign asset managers too.”[1]

As for the solution of permission from some of the Asian markets, emerging market in particular, BGI could expand by establishing joint-ventures with local investments, or by acquisition, as they did in Europe. The regulation may be even more different and difficult, and sometimes not even well developed in some Asian countries, concerning both in legal and accounting aspects. BGI need more experienced company to help to perform well in these markets.

Generally speaking, ETFs experienced a very high increase (63.3%). In addition, the 20-day average ETF trading volume increased by 51.2% (from $16.2 billion in 2005 to $24.5 billion). All those information strongly suggest a very big opportunity for expansion, while Europe and Asia-Pacific markets reveal more benefits for ETFs expansion. However, US market was still the best performing place for the moment. BGI also could not take any casual attitude in the development in US market.

- BGI should pursue 401(k) with its ETF products.

In US, the existence of 401 (k) counts for a large part of the asset management market, which generally requires secure and low-risk products. As people are living longer and longer, and the whole society is aging, 401(k) is more and more important for retirement. (By the time of the case, June 2007, the total 401(k) had been increasing. And even after the crisis, which is beyond the scope of the case, people are more cautious to invest, which means lower risk and costs are essential for retirement plans.)

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The ETF products have the following significant advantages for 401(k):

- Lower costs - so that people won’t feel that their savings are eaten up by the banks;

- Flexibility - no matter people are young or senior, they could start to investing in ETFs as they want;

- Well-diversified portfolio, which means lower risk and easier to use in general;

- Tax advantages, which