BlackRock Geir Espeskog on how ETFs can Build Asia’s Rising Tide of ‘Whole Portfolio’ Thinking

Geir Espeskog, Head of the BlackRock iShares Asia Pacific Distribution, is remarkably sporty, enjoying everything from running to skiing and mountain biking. He certainly needs plenty of energy to help manage the ETF distribution business across the region, with huge amounts of travel to meet clients, at least in more normalised times. He has also taken up yoga to help improve his balance for various sports and his well-being, and it is this striving for balance and stability that he focuses on with many institutional and wealth management clients as he promotes the world of BlackRock iShares ETFs. Hubbis met up with him by video call from his busy home in Hong Kong - replete with his family of four young children - and learned of the rising tide of interest in Asia for fixed income ETFs, which he reports have offered both liquidity and performance during the market stresses of Q1 2020. He also recounted how the world of sustainability is manifesting in rising demand for ESG ETFs, and explained why he anticipates growing penetration of discretionary and advisory mandates in the wealth management community, and as they increasingly advocate the ‘whole portfolio’ approach. ​​​​​​​

Espeskog opens the discussion by stating that the recent market events since the pandemic hit had really proven the value of ETFs in portfolios, especially when it comes to liquidity, and particularly when it comes to liquidity in fixed income. “Fixed income has been our biggest theme across this [Asia Pacific] region in the ETF space, and globally, over the last few years, and this crisis has validated that positioning,” he says.

He reports that his team found that existing investors had really benefitted from this additional liquidity through the worst of the volatility, as underlying bond markets became illiquid, especially in March. “We had many institutional clients seeing ETFs as the buying opportunity in the fixed income space, but instead of their traditional approach of buying single bonds, they went for ETFs due to the liquidity, speed of execution, and transparency,” he explains.

He adds that in the wealth management space, the firm is now having more and more discussions with private banks and asset managers in the region seeking to build a portfolio of fixed income ETFs for clients instead of individual bonds. “Fixed income ETFs are very useful for mitigation of the liquidity risk in the fixed income space,” he comments.

The ‘whole portfolio’ approach

Espeskog explains that the discussion that is increasingly prevalent, as investors and advisors emerge from this crisis is not about active or passive, but about taking a more comprehensive portfolio approach. “The whole portfolio approach for wealth management is really about co-constructing solid portfolios for wealth clients and institutional quality portfolios where there is analysis in advance of what the goals are, then the implementation of a relevant strategy,” he explains.

Such goals might be long-term savings, a liquidity buffer, steady yield, education planning and so forth. “Whatever the outcome you seek, asset allocation must be constructed efficiently,” he adds, “and ETFs help achieve that, aligned perhaps to active funds and also single-line securities. This is the approach, we believe, that will create a valid portfolio for the mission identified at the outset and is certainly a trend we are seeing today.”

The other trend for the wealth management community, Espeskog reports, is the traditional approach of building model portfolios for clients on a discretionary basis. “From a revenue perspective,” he comments, “this helps the banks and others achieve more predictable revenues, lessens reliance on transactional income, and if executed properly, achieves better outcomes for the end clients, as generally there is a less emotional approach to the portfolio, which tends to be better constructed to anticipate volatility.”

And the third key trend in the wealth space that Espeskog sees is around ESG. “We are certainly having more conversations, and seeing more interest in ESG and sustainability,” he reports.

Liquidity first

Taking each of these key trends one by one, he mines down further into the issue of liquidity, noting that some of BlackRock’s flagship fixed-income ETFs have become liquidity tools in themselves.

“Some fixed-income ETFs have effectively become liquidity instruments in that they trade very actively and easily in the secondary market, often without having to access the liquidity in the underlying assets, the individual bonds that help make up the holdings. In times of considerable stress, this means there is liquidity available, whereas, in the mutual fund space, the fund managers have to adjust to sales or buy orders by transacting the underlying bonds; if those bonds are not liquid, or they have a very wide spread at the time, that can really hurt.”

The result is that the additional liquidity offered by such ETFs, especially in times of stress, is a significant spike in ETF volumes. “Trading volumes in global bond ETFs spiked during the first quarter this year, particularly for US domiciled exposures and US credit markets where USD1.3 trillion traded, compared with USD2.6 trillion for the whole of 2019, so half a year’s volume in three months.”

And Espeskog points to European UCITS ETFs, typically those listed in London or Frankfurt or other European exchanges, volumes were more than double the 2019 levels in the same quarter.

“What we are seeing is therefore that fixed-income ETFs are truly modernising the bond markets, which are OTC and mainly conducted by phone calls, whereas the ETFs trade through the main exchanges, so they are liquid, transparent, accessible, fast, they offer volume and therefore have more traditional public market characteristics in terms of the ease of trading them.”

He offers a short anecdote of some new insurance sector clients coming to BlackRock to expedite some sizeable purchases of US fixed-income ETFs and high yield ETFs around the time of the March sell-off. “They said that they would normally buy single-line bonds, but the liquidity had evaporated,” he recounts. “They said the ETF route offers speed, liquidity and operational efficiency, as well as good pricing.”

DPM rising

Espeskog reiterates that trading activity is of course not the be-all and end-all of ETFs, as his fundamental view is that wealth management clients perform better if they build strategic portfolios, based on outcomes and risk appetite, and then adopt a long-term perspective, eschewing over-trading in favour of a total, holistic portfolio view of the years ahead. “This in turn,” he extrapolates, “should lead to more discretionary portfolio mandates at the banks and other advisors, as this drive to the vision of a professionally managed whole portfolio gains more traction.”

He points to the US and European wealth markets, where the trends towards discretionary and fee-based advice have become much more the established norm. “Regardless of market conditions,” he notes, “you clearly achieve a more stable revenue stream than transactional. And it is much more scalable, which ultimately is better for clients; as the more mandates the banks become more cost-efficient, this should create a win-win scenario for all parties.”

ESG in focus

Shifting his attention to the world of ESG, Espeskog reports that the trend is now accelerating. “We see the private banks and family offices increasingly interested in ESG as their underlying clients seek more sustainable exposures, so the flows into ESG strategies have been incredibly strong this year, albeit from a low base.”

He reports that there was roughly USD10 billion inflow to iShares sustainable ETFs globally during Q1 this year, and that has grown to USD26 billion roughly at the time of the interview. “Ok, the base is very low indeed, but this type of growth is remarkable and a sign of things to come,” he comments. “Actually, I would say that we have not seen that kind of growth in any other successful category previously. We now expect the evolution to follow the recent year trend in fixed income ETFs.”

He also notes that their performance has been very encouraging in the first quarter. “Both the flows and how sustainable performance have delivered value for investors have been positive,” he reports. “That is further reinforcing confidence, as people increasingly see that sustainability can be allied to equivalent or even outperformance, as we certainly saw some ESG-inclusive portfolios do better than non-ESG portfolios in some cases in Q1. It is a natural for the wealth management community to build in this space.”

He adds that the pandemic has reinforced these trends.

“Social responsibility, the environment, the planet, governance, sustainability, these are all central topics at this time,” he observes, “so it is not surprising that corporations have been further shifting towards these goals, these ideals, and investors increasingly realise the power they have to help drive this evolution through their choices.”

The big picture

He also explains that as a result of the pandemic, there is already considerably greater focus on whole portfolio thinking. “There are lots of ongoing discussions about risk management and portfolio construction and general simplification, as well as sustainability. In all such discussions, ETFs feature as providing modern-day solutions, including balancing portfolios and enhancing liquidity, especially in times of stress. As the evidence of Q1 this year is so strong, the trends towards more DPM, more advisory and greater use of ETFs will continue.”

Moreover, he adds that the discussion on active or passive is already morphing more to building models that differentiate. “I think you are going to see less and less individual building block focus, such as ‘here you are, this is the greatest fund’, and more of the approach of ‘I have devised an excellent portfolio that is highly suitable for you as a client, with the right risk profile for your objectives’, and this will help clients to secure their wealth planning at an efficient cost, with diversity, and ETFs will certainly play a major role in this type of approach.”

Key Priorities

As to how BlackRock is adapting and prioritising, Espeskog says the firm is always trying to be ahead of the trends. “Our CEO has stated earlier this year that we are expanding our range and enhancing our distribution effort, he highlighted sustainability as a key trend, with plans to up our ESG ETFs offering to 150 over the next few years. We are also focusing on continuing education of the marketplace, another vital element in our success.”

In the Asia region, he adds that the fixed income ETF proposition is perhaps his biggest priority, followed by the whole drive towards ESG strategies as well. “And of course,” he says, “client education is a central ongoing mission, with a focus on the whole portfolio thinking and model portfolios and how to structure ETFs into those portfolios. We continue to move rapidly and energetically in all these three areas.”

A time of change

His final word is to reiterate his optimism over the institutionalisation of fixed income ETFs within professional portfolio construction.”Q1 was cathartic in some ways,” he comments, “as we now have a number of new institutional clients coming to us and wanting to discuss how to build sleeves of fixed income ETFs into their overall bond strategies, and as we saw rising interest in ESG. The institutional market generally moves ahead of the private banking arena, so we expect the wealth management sector to follow, and indeed that is already taking place. We see some interesting times ahead.”

Getting Personal with Geir Espeskog

Geir Espeskog is Norwegian and hails from a small city called Bergen on the west coast of Norway, which he says has a reputation for being the rainiest city in Europe. He has come a long way from that small city in northern Europe to his role as Hong Kong-based Managing Director and Head of BlackRock iShares Asia Pacific Distribution.

In this role, he is responsible for driving the growth of Exchange Traded Funds (ETFs) and for guiding clients in the institutional, asset management, and wealth spaces on how best to utilise ETFs in their investment portfolios.

He has been at BlackRock for nearly a decade, and enjoyed an impressive career before that since starting out as an associate at Goldman Sachs in 2001, where he stayed for almost four years before joining Merrill Lynch for a further four years, and then taking up a role at Barclays Capital where he was responsible for building a Scandinavian and Dutch derivatives flow business. He has extensive equity derivatives knowledge, having looked after clients who were amongst the largest pension funds, mutual funds and insurers in Scandinavia and Holland.

He joined BlackRock in 2010 as Head of BlackRock’s iShares Nordics business in London. He moved to Copenhagen in 2011 when the firm opened a local office there. In 2015, he transferred to Hong Kong to head up the APAC distribution. Before launching his career, he received his MSc in finance and computer science from the Norwegian University of Science and Technology in 2000. He completed part of his degree at Erasmus University in Rotterdam.

He thoroughly enjoys his personal and working life in Asia, having relocated with BlackRock in 2015.”It’s a very exciting role here,” he reports, “and very fulfilling in many ways, especially during more normal times when we can conduct business in the usual ways.”

Married and with four children aged between 12 and 6 years old, as well as two cats and a dog in the family, Espeskog is understandably a busy fellow, even when relaxing at home. “Sport and exercise are my outlets,” he reports, “both on my own and with the children, who are also into sports such as rugby, netball, running and swimming. And as I get a bit older, I have also got into yoga to keep my flexibility, to give balance to my running, and for my general well-being. And then we also love skiing, wakeboarding and mountain biking, rock climbing, the list goes on.”

For ski trips, Japan has been a favourite destination in recent years, and the family also enjoyed a great trip to Whistler in Canada. “The whole ski experience and spending time with family, the meals, the intimacy and warmth, the fresh air in the daytimes and the exercise, the sport, these are wonderful family holidays to remember,” he says.