Can ETFs plug the river of outflows at Columbia Funds?

Columbia Management Investment Advisers is one of the fund firms suffering the most from investors' shift from mutual funds to exchange-traded funds.

Now it is betting that active ETFs will help turn around the outflow woes.

Columbia, the asset management subsidiary of Ameriprise Financial Inc., unveiled the plans for its first actively managed ETFs last Monday in filings with the Securities and Exchange Commission.

Columbia proposed 17 active ETFs in total. Ten will be fixed-income-focused, including five target date municipal bond ETFs, while the other seven will be equity funds, including international, emerging- markets, and small- and midcap- focused products.

The ETFs will be similar to existing Columbia mutual funds and be run by the same portfolio managers, said spokesman Charlie Keller.

“We're looking for that group of investors who like ETFs,” he said. “This gives us the opportunity to reach them in the vehicle they want.”

GROWTH IN ASSETS

The group of investors who like ETFs certainly is growing. Assets in the predominantly passive investment vehicles, which allow investors to trade a basket of stocks or bonds intraday on an exchange, have increased to more than $1 trillion, from about $20 billion in 2003.

It remains to be seen whether actively managed ETFs, which make up less than 1% of all ETF assets, will attract the same interest, though.

The argument can be made that ETFs have flourished primarily because investors' confidence in actively managed strategies has withered. Those doubts are well-founded, too.

Barely a third of actively managed U.S. large-cap mutual fund managers have outperformed the S&P 500 over the five-year period ended June 30, according to Morningstar Inc. The past three years have been even worse, as less than 17% of actively managed funds outperformed.

Since 2007, nearly $220 billion has been invested in passive U.S. large-cap ETFs.

Over that same time period, more than $500 billion has been pulled from actively managed U.S. large-cap mutual funds, according to technology firm ConvergEx Group.

Columbia has been one of the firms hit hardest by the shift. It has registered outflows for more than four years, and total assets have decreased to $158 billion, a 20% drop from the 2007 peak of $196 billion, according to Morningstar.

Columbia isn't the only asset management firm betting on active ETFs. Household names such as Fidelity Investments, Franklin Templeton Investments and T. Rowe Price Group Inc. are in various stages of applying for exemptive relief from the SEC to launch actively managed ETFs. Columbia skipped the registration process with the regulator, thanks to its acquisition last year of Grail Advisors LLC, which already had permission to launch active ETFs.

One ray of hope for would-be active-ETF managers such as Columbia has been the acceptance of Pacific Investment Management Co. LLC's ETF version of the Total Return Fund, the largest mutual fund in the world. The Pimco Total Return ETF has grown to almost $2.5 billion since it opened March 1, thanks in large part to the star power of its manager, Bill Gross.

Columbia has no managers with the star power of Mr. Gross, but the simple fact that the Total Return ETF has attracted billions proves the appeal of ETFs isn't just about active versus passive management. The daily liquidity, transparency and lower relative expenses of ETFs are playing a role, too.

Columbia also is targeting less efficient areas of the market where managers can add value over an index. For example, more than 40% of actively managed emerging-markets funds and actively managed small-cap funds beat their index over the past three years, far outpacing the 17% of large-cap funds that did so, according to Morningstar.

Nevertheless, anytime a strategy is trying to beat a benchmark, the vehicle is secondary.

First, Columbia needs to prove that its managers can beat their benchmarks with the investment constraints of an ETF, which notably mean no derivatives. That is going to take time.

Some financial advisers won't even look at an actively managed fund until it has at least a three-year track record.

So even though Columbia looks poised to join Pimco as one of the pioneers in the actively managed ETF space, it could be years before it finds out if the experiment has worked.

But that doesn't bother Mr. Keller.

“We're trying to stay ahead of the trends in the industry,” he said. “We believe these are the right products for right now.”

[email protected] Twitter: @jasonkephart

Related Topics: Columbia Funds Distributors Inc.