This month, our Co-founder Mr. Guillaume Subias sat down for an exclusive interview with Christopher Gannatti, Head of Research, Europe at WisdomTree, an investment management company specializing in Exchange Traded Products (ETPs) and Exchange Traded Funds (ETFs).
Quantilia [Guillaume Subias]: I remember the first time I visited your London office, 2 years ago, we discussed the fact that WisdomTree was one of the few ETF players using its own proprietary strategies. Can you tell us more about it and what makes your approach different from others?
WisdomTree [Christopher Gannatti]: WisdomTree was founded in 2006 with a passion for creating better ways to index, innovate and invest. WisdomTree created a different business model using proprietary methodologies to create unique fundamentally-weighted strategies. In 2006, WisdomTree was the first asset manager to weight by cash dividends and in 2009 WisdomTree created the first currency-hedged ETFs in the US. Since then our business has grown in terms of our product set and assets under management, with approximately $58bn worldwide. When we at WisdomTree consider new strategies, there has to be reasonable belief that :
- We are doing something new and have the potential to be the first mover in an asset class.
- We have the chance to develop something that corrects a flaw in the status quo of investment strategies. Status quo bias is an important force within the investment industry, but if you can pry investors loose from this, it can be powerful.
- We are doing something that solves a specific problem that clients have alerted us to—something that we believe has a strong market potential.
As such, WisdomTree thrives on providing investment solutions that are first, better or different.
Quantilia: Being innovative in the ETF industry is very much linked to being able to offer strong investment themes. Looking through the wide range of WisdomTree products, I noticed a CoCo Bond UCITS ETF. Can you explain what a Coco Bond is? What kind of investors are targeted through this strategy?
WisdomTree: We agree. We are constantly speaking with our clients and looking at trends to identify the themes that are key for investors. For us it was clear there was a gap in the fixed income market to provide ETF access to the Additional Tier 1 (AT1) Contingent Convertible (CoCo) bond market, which is worth around $200 billion in Europe. We were the first, globally, to bring such an ETF product to market and we offered market access at a lower fee than what is seen from large active managers. CoCos are a form of hybrid debt, issued usually by large investment banks or insurers, that are intended to convert into equity or have their principal written down to absorb the issuer’s capital losses upon the occurrence of certain triggers, such as the issuer falling below a specified liquidity ratio. They began their significant proliferation in late 2013 and exist due to Basel regulatory requirements to help banks buffer their capital positions. If investors are curious as to the key reason to look at CoCo bonds, the single word that leaps to mind is “yield.” If we consider the European landscape today, yields are quite low and it is hard to imagine a scenario where they rise significantly from current levels. So, while Coco bonds are certainly on the riskier end of the spectrum, they also have much higher yields than traditional fixed income assets, such as government or corporate bonds. From there, investors also appreciate what has been seen to be lower correlation to these traditional fixed income asset classes. So, a higher income potential with the capability to diversify existing fixed income portfolios could represent a powerful combination.
Quantilia: Another recurring theme nowadays is AI. Is AI just another investment theme for you? Or is it something your quant teams use in the construction of new investment processes and new products?
WisdomTree: We believe that Artificial Intelligence potentially represents one of the biggest single trends that will impact global markets for decades to come. The market for AI products and services is expected to more than triple over the next three years and will drive further economic growth and create new areas of opportunity – we don’t believe investors can ignore this theme. Therefore, we partnered with Nasdaq and and the Consumer Technology Association, who are experts in the AI and technology markets, to create an ETF that provides investors with liquid and cost-effective access to this exponential technology megatrend. In our view, AI is only going to become more and more interesting with time. Breakthroughs have occurred such that it is becoming more and more possible for AI to use natural language processing to read all sorts of publicly available text and monitor all sorts of real-time sentiment data, like twitter posts. We believe that AI will transform how people invest and how people research the markets, but, as yet, we don’t see AI completely replacing human judgement. Absent significant further breakthroughs, AI still needs to be trained and still needs to be “told” good results from bad results in order to continually evolve and refine algorithms going forward. AI will impact how we process data more and more, but currently we don’t envision AI creating investment strategies completely, end-to-end with no human intervention at all at this stage.
Quantilia: WisdomTree recently acquired ETF Securities, taking part in the consolidation process of the ETF industry. What trend do you see in for the next years in terms of Exchange Traded products and markets?
WisdomTree: That’s correct. In 2018, WisdomTree completed the acquisition of ETF Securities’ ETP business which offered the firm immediate scale, profitability and faster growth here in Europe. Integration is complete, and we are moving forward with a business that is even stronger, tougher and more competitive than ever before. Looking to the future, further growth across the ETF industry is expected and global assets in ETPs reached over $5.32 trillion in February 2019 (Source: ETFGI). We believe WisdomTree is poised to compete across a number of key areas of growth for the future, including:
- Fixed Income: Fixed-income ETFs are widely viewed as offering one of the best growth opportunities, According to EY, fixed income ETF assets are expected to reach $1.6trillion by 2020. We mentioned Coco bonds already, but this isn’t the only area where WisdomTree has placed a strong focus in fixed income. We are pushing the envelope in core fixed income, trying to tilt weight away from merely the biggest bond issuers to attempt to squeeze more income out of traditional bond universes. We’ve also just launched the first US Floating Rate Treasury ETF in Europe.
- Industrial Metals: The auto industry is at a turning point. As the Internal Combustion Engine (ICE) age slowly gives way to the next generation of automobiles, we expect to see a material impact on the demand for new metals utilised in batteries of electric vehicles (EV). As the battery technology story evolves, clients are keen to speak with us about exposure to metals, like Nickel and Copper, that could be in greater demand should these trends materialize.
- Artificial Intelligence: As discussed, we believe AI to be one of the most compelling investment trends today, with potential contribution to the global economy by 2030 expected to be $15.7 trillion (Source: PWC). For WisdomTree AI represents our first thematic strategy. It is exciting to engage with clients on thematic strategies because it is a very different discussion than when one is trying to predict what could happen in the markets more generally.
Quantilia: WisdomTree was one of the first ETFs providers to join Quantilia platform, allowing our users to browse through your products and eventually include them in the portfolio construction tool that Quantilia developed. What convinced you to invest resources on a young start up like Quantilia?
WisdomTree: We believe in using technology to enhance investor outcomes and we felt that Quantilia was on the same page in this regard. As an independent platform, you allow investors and prospects to better assess their existing and potential investments and how these may be optimised and that is a value add for us, ensuring we are reaching a key audience.
WisdomTree is an exchange traded fund (“ETF”) and exchange traded product (“ETP”) sponsor, offering products covering equities, fixed income, currencies, commodities and alternative strategies. Through WisdomTree UK Limited, it sponsors WisdomTree UCITS ETFs and ETPs from ETF Securities and Boost, in a wide range of asset classes, including short and leveraged ETPs. WisdomTree currently has approximately $58.7 billion (as of 26 March 2019) in assets under management globally. For more information, please visit www.wisdomtree.com.
About Christopher Gannatti
Christopher Gannatti joined WisdomTree as a Research Analyst in December 2010. In January of 2014, he was promoted to Associate Director of Research and in February of 2018, Christopher was promoted to Head of Research, Europe, based in WisdomTree’s London office. He is responsible for the full WisdomTree research effort within the European market as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.