“We’ve created an active management vehicle that can compete with passive managers,” McCabe says.
Investor Demand?
The push by Precidian and others seeking to roll out structures enabling actively managed ETFs with limited transparency is predicated on the belief that investors want active management in the ETF space. Indeed, the growing preference for passive management has fueled the ETF industry’s massive growth during the past quarter century, and it remains to be seen whether ETF investors are itching to invest in strategies employed by active mutual funds given the perception—some of it warranted, depending on the asset class—that active managers have had a hard time beating their bogeys.
“I did a quick data poll shortly after Precidian got approval for the ActiveShares structure, and if you look at flows across funds currently managed by Precidian licensees that in theory would be able to be delivered through the ActiveShares format, we’ve seen billions of dollars in cumulative outflows from these funds,” says Morningstar’s Ben Johnson.
In other words, investment managers worried about asset flight from their mutual funds hope that packaging their active strategies into semi- or less-transparent ETF platforms created by Precidian and others will stanch the losses and bring assets back to the fold.
Perceived—or real—underperformance by active investment managers, combined with higher fees found in mutual funds, have played into the hands of the ETF space. At the very least, asset managers will save money by putting their strategies into ETFs because these products have cheaper administrative costs than mutual funds, which should result in lower-cost products versus comparable mutual funds. But they will still need to pay for research teams and portfolio managers to pick securities, which costs more than licensing an index to track.
This summer, fintech firm Broadridge teamed up with Q8 Research to survey 200 financial advisors across various channels who have at least $10 million in assets under management to see how potentially receptive they are to the ActiveShares structure. At the time, there wasn’t a strong awareness about the platform among respondents. Nonetheless, 64% of advisors said they’re likely to use an ActiveShares product only after it’s available for 12 months, while 22% said they’re likely to use them within the first 12 months. Fifteen percent said they likely won’t use them at all.
Perhaps more telling, 63% of advisors said they would most likely draw assets away from mutual funds if they invested in ActiveShares ETFs.
And as far as existing semi-transparent ETP formats go, investors haven’t warmed up to the exchange-traded managed funds structure licensed by NextShares Solutions LLC, a unit of Eaton Vance Corp. NextShares funds are actively managed products that report their holdings quarterly and trade during the day relative to their end-of-day net asset value. These products first launched in 2016 and on the whole haven’t been embraced by investors, in part because they have poor distribution.
The other existing exchange-traded product structure that doesn’t have daily portfolio disclosures belongs to Vanguard, the second-largest ETF issuer, whose index-based ETFs disclose their portfolio holdings monthly with a 15-day lag. The lack of daily portfolio transparency clearly hasn’t hurt Vanguard’s ability to gather assets.
Regarding Precidian’s ActiveShares structure, the firm had to revise its initial filing with the SEC seven times before it was finally approved this spring. It was a long, hard slog for Precidian, but now its creation is ready for prime time.
“We didn’t think it would take this long, but we didn’t think we were going to give up, either, because we sincerely thought this was the right answer,” McCabe says. “So it was worth the battle.”