ETFs

Active managers get a seat at the ETF table

To the chagrin of some, a fast-growing industry comes to terms with active management.

As top money managers gather at the ETF.com conference this week, the invited guests include luminaries, from celebrity bond-picker Jeffrey Gundlach, to Merrill Lynch’s former investment strategist Richard Bernstein and Charles Schwab’s financial-markets expert Liz Ann Sonders.
What those individuals — and a number of others gathered at the Inside ETFs conference this week to promote the investment industry’s fastest-growing product — share in common is that they are anything but “passive.”
The ETF’s incredible growth is a fact that owes a tremendous debt to index investing, led by advisers and other investors who espouse the virtues of buying the whole market, on the cheap, and holding it for the long run.
But as the young industry crosses $2 trillion in assets in the United States, it is starting to make a seat at the table for active managers in ways it never did before — a more-welcoming embrace that is on display this week in Hollywood, Fla., at the industry’s largest-ever conference.
“Years ago, this was a buy-and-hold conference,” said David Mazza, vice president of State Street Global Advisors. “It used to be dogmatic; people fighting about it.”
About 1,900 people and most major ETF sponsors are at the conference, according to ETF.com. More than 1,000 are financial advisers.
DOUBLELINE WANTS IN
Mr. Gundlach, the DoubleLine Capital founder who will speak here Tuesday morning, is looking to launch an actively managed exchange-traded fund with State Street Corp. Ms. Sonders last year became the investment committee chair for Windhaven Investment Management Inc., owned by Schwab, which is among the largest adviser-sold money managers, known as ETF strategists, who specialize in trading, packaging and timing markets using ETFs. The managers meet the classic definition of active management yet draw on the popularity of ETFs as a vehicle for gaining exposure to slices of financial markets.
BlackRock Inc., the world’s largest money manager, even created a large booth at the center of the conference exhibit hall for a group of 15 of those managers, who are among the largest clients of its iShares ETFs.
Beyond those managers, guests at the conference included active managers who already offer ETFs, including Pacific Investment Management Co. Those products account for just 1% of the space today, but the activity of fund managers — dozens of proposals to launch the products are currently in front of securities regulators — appears to anticipate more demand in the future.
Executives from Eaton Vance Corp., the active mutual fund giant, also are attending the event. Eaton Vance is currently working to commit active managers to adopting its NextShares fund structure. Regulators approved that hybrid product, which has features similar to mutual funds and ETFs, last year.
“We’re in an active dialogue with the majority of the top 40 fund sponsors,” said Stephen Clarke, president of Navigate Fund Solutions, the Eaton Vance unit that licenses NextShares. “Pretty universally, the fund sponsors are interested in this space.”
CASTING DOUBT ON INDEXING
And even index-fund managers are starting to cast doubt on traditional index investing as the end-all, be-all.
“Smart beta, bridging traditional indexing as well as high-conviction alpha, that’s where the future’s going to move,” said Dan Draper, managing director of global ETFs at Invesco PowerShares, speaking on a panel at the conference.
Mr. Draper’s firm is one of many managers who have been racing to build or license exotic indexes to underpin new ETFs. That firm is among many that have launched and plan to launch more funds in that area, which Morningstar Inc. estimates attracts $1 of every $5 moving into ETFs.
While those funds generally track an index, many traditional investors see them as a form of “active” management because they rely upon proprietary strategies and deviate from benchmarks thought to represent the investible market.
“The lines are blurred,” said Joel M. Dickson, senior investment strategist at the Vanguard Group Inc., whose founder John C. Bogle is perhaps the world’s most famous advocate of index investing.
Not all investors are keeping an open mind about the idea of active management, particularly after a year in which a majority of those managers failed to beat their benchmarks.
One of the first speakers at the conference was Larry E. Swedroe, director of research for the BAM Alliance of independent financial advisers, who on Sunday compared investing in hedge funds — the ultimate in active management — to buying luxury goods, such as Rolex watches and Gucci handbags.
“It’s an ego trip,” said Mr. Swedroe, whose presentation dealt with what he sees as the dramatically dwindling opportunities for market out-performance. “They are symbols of status, sophistication, etc.”
“The competition, especially from Vanguard, is driving prices lower and lower,” he said. “That’s the good news.”