Morgan Stanley’s closure of its remaining six smart beta ETFs on its FundLogic platform has left its European offering in limbo with currently no products in the market.
The US asset management giant shut its six regionally divided smart beta ETFs after bleeding over 90% assets across the range 2023, but has not officially shut up shop on the continent despite housing no products on the platform.
The ETF range were bespoke client solutions and closed after they pulled theirs assets.
Over in the US, Morgan Stanley has a 15-strong range of ETFs launched under three separate brands, Calvert, Eaton Vance and Parametric, with combined assets under management of $2.5bn, according to data from Bloomberg.
The range of Calvert ETFs was set to launch in Europe this year but has yet to emerge, with the firm’s global head of ETFs Anthony Rochte previously outlining plans to create a global ETF platform across asset classes and jurisdictions.
However, the closure of its smart beta range has instead thrown the future of its European business into question, underscoring the need for issuers to adopt a seamless distribution strategy to succeed in the European ETF market.
Distribution issues in the spotlight
Debbie Fuhr, managing partner and founder of ETFGI, agreed that Morgan Stanley’s downfall of its European ETF business lay in its lack of strategy surrounding distribution for its ETF business in the US and subsequently Europe.
Fuhr said Morgan Stanley’s ETF closures illustrate the “tale” of ETFs, which is that you need to have a very strong sales, marketing and distribution plan to succeed.
“The FundLogic platform does not have the recognition that Morgan Stanley does, therefore it does not come with established distribution, advisors and institutional investors that are using these type of products,” Fuhr said.
Henry Jim, ETF analyst, at Bloomberg Intelligence, said that the success of Morgan Stanley’s ETF lineup in the US is “mixed at best”, which points to struggles within their distribution efforts that need to be ironed out before they can focus on Europe.
Why did the ETFs close?
The closures may have hinged on institutional clients pulling large amounts of money from the ETFs after they failed to generate significant revenues, Jim said.
“It will be my guess they had a few institutional clients invested in these products and who may have changed their minds or their change mandates,” he added.
The ETF's poor revenue generation would have caused institutional investors to look elsewhere, according to Jim.
“They were generating under €1m euros a year, with the largest contributor being the US product at €400,000,” he said.
“With two portfolio managers, two associates and operational costs, the business was essentially breaking even. It was not bringing in much revenue or attracting many clients.
“From a business perspective it made sense to reconsider, and smart beta strategies, including scientific beta, have not delivered returns that justify the risks.”
What happens next?
Fuhr expects Morgan Stanley to launch UCITS ETFs to target more investors outside of the US, though added that this could be at any point within the next decade, however, the return is certain given the opportunities that come with the UCITS wrapper are too good to miss.
“UCITS ETFs are a lot more pass portable than 40 Act ETFs in the US, and the case is too compelling to miss out on,” Fuhr said.
Contrasting this, Jim said he does not see Morgan Stanley’s European ETF business coming back “anytime soon”.
“Not to hedge my bets, but Morgan Stanley still has a good roster of talented people and it is a big company,” he added.
“So, if they get their get their branding right and their strategy right in the US, then we see them coming to Europe pretty quickly.”
Morgan Stanley declined to comment.
