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More U.S. Institutional Investors are Adopting ETFs, While Smart Beta Rises

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New research out of Deutsche Bank indicates that exchange-traded funds (ETFs) are primarily funded by U.S. institutional investors, accounting for US$ 2 trillion of the US$ 3.3 trillion total allocated to the funds. This is a 40 % increase from the numbers just two years ago, in 2016. Deutsche Bank strategist Chin Okoro notes, “Institutions are increasingly using ETFs as vehicles for more sophisticated portfolio solutions.”

The SPDR S&P 500 ETF (SPY) is the most popular, with US$ 185 billion of its investment coming from institutional investors. Other in-demand ETFs include the iShares Core S&P 500 ETF (IVV), iShares MSCI EAFE ETF (EFA), Vanguard FTSE Developed Markets ETF (VEA), and Vanguard FTSE Emerging Markets ETF (VWO). Smart beta funds are also gaining ground as the ETF universe matures.

Smart Beta Continues to Rise

Smart beta funds or factor-based ETFs, a type of fund that uses alternative index construction rules instead of the typical market cap-weighted index strategy, are also gaining adoption by pensions, sovereign wealth funds and insurance companies. At the end of 2017, smart beta funds had surpassed US$ 1 trillion in assets for the first time. The low cost of managing the funds makes them especially attractive for investors. A smart beta fund’s offering of intentionally-chosen, diversified holdings could spell trouble for active managers. Recently, Janus Henderson CEO Richard “Dick” Weil suggested as much on Bloomberg TV, and he vowed to make the case that actively managed funds could still provide a higher return than passive funds. Goldman Sachs, State Street, Franklin Templeton, and Fidelity International have all launched smart beta funds in recent years.

SWFI First Read, September 21, 2018

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U.S. Public Becomes More Aware that Gmail Scans Emails

Alphabet is a major stock holding for sovereign wealth funds and large pensions. Search giant Google is under fire for allowing third-party partners and companies, like Return Path Inc and other advertisers, to share data from Gmail accounts. Many experts and tech observers already knew this, but more people in the public are becoming aware of Google’s practices when it comes to privacy. Google disclosed in a letter to U.S. lawmakers this finding. The Wall Street Journal reported that in some instances, app companies were able to read people’s emails in order to improve their algorithms. In 2017, Google said they would stop scanning all of one’s Gmail messages for the goal of personalized ads.

GPIF Infrastructure Exposure Almost Reached 200 Billion Yen in March 2018

Japan Government Pension Investment Fund’s (GPIF) exposure to infrastructure real estate was 196.8 billion JPY at the end of March 2018. At that period, 57% of the exposure was to the UK, 15% was to Australia, 15% to Sweden, 10% to Spain and 3% to Finland. 21% of GPIF’s infrastructure portfolio was linked to airports versus 27% to ports.

AIMCo-backed sPower Closes $498.7 Million Bond Deal

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Iceland Contemplates a Sovereign Wealth Fund

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The Government of Iceland is looking to possibly form a sovereign wealth fund to stabilize the country from unforeseen shocks to the national economy. The Iceland government released a statement saying, “The state’s contributions to the Fund will be equivalent to new revenues from publicly owned power production companies which are expected to accrue in the coming years.”

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CBRE Global Wins First GPIF Global Real Estate Mandate

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Japan Government Pension Investment Fund (GPIF) awarded its first global real estate mandate by hiring CBRE Global Investment Partners Limited. This is a global core real estate fund-of-funds separate account. Overseeing this mandate as a gatekeeper is Asset Management One Co., Ltd., which is a unit of Mizuho Financial Group. This RFP was launched in April 2017.

CBRE Global Investment Partners is the multi-manager arm of CBRE Global Investors.

In addition, on August 8, 2018, GPIF hired two custodians for short-term investments. These custodians are Trust & Custody Services Bank, Ltd and The Master Trust Bank of Japan, Ltd.

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