Actively managed exchange traded funds may finally start to take off as mutual fund companies look to differentiate themselves in a tough market, according to some industry experts.
On Jan. 15, Grail Advisors of San Francisco filed a registration statement for two active ETFs: the Grail American Beacon International Equity ETF and the Grail American Beacon Large Cap Value ETF.
The subadvisor for the new funds will be American Beacon Advisors Inc. of Fort Worth, Texas, a manager of managers.
Grail Advisors is an affiliate of Grail Partners LLC, a Boston-based merchant banking firm that invests and advises in asset management and related financial technology businesses.
American Beacon expects to manage the two Grail ETFs in a similar fashion to the $1.13 billion American Beacon International Equity Fund (AAIEX) and the $5.33 billion American Beacon Large Cap Value Fund (AAGPX).
'OUT IN FRONT'
"We're delighted to be out in front of the investment industry with Grail Advisors," William F. Quinn, chairman of American Beacon Advisors, said in a statement.
The expense ratios for the funds — which are expected to be launched in March — are being finalized.
Other fund companies are likely to follow American Beacon's lead, said Tom Lydon, president of Global Trends Investments, a Newport Beach, Calif.-based firm that manages $75 million in assets. "Fund companies today looking to attract assets have to be as competitive as possible," he said.
MORE COMPETITIVE
Managing active ETFs elevates their exposure, making them more competitive, Mr. Lydon said.
Active managers, however, have been slow to embrace ETFs, because they require managers to divulge their holdings on a daily basis. That isn't something that they have been willing to do out of fear that market timers may glean what they are buying or selling and jump in front of trades.
The only actively managed equity ETFs are offered by
Invesco PowerShares Capital Management LLC of Wheaton, Ill. In order to get around the issue of transparency, its active equity ETFs — the first of which were launched in April 2008 — strictly limit the amount of active management.
Grail Advisors has chosen a different strategy. The firm hopes to employ managers such as American Beacon that don't view transparency as a hindrance, said William M. Thomas, Grail's chief executive.
"The cracking of the code ... is finding those investment management firms comfortable with complete transparency," he said.
Finding such managers has been made easier due to the volatile market because investors want to know whether their funds own stock in companies such as the now bankrupt Lehman Brothers Holdings Inc. of New York.
"I couldn't think of a time where there is a need for greater transparency then now," Mr. Thomas said.
Transparency is a good selling point, but it isn't necessarily something that investors or financial advisers are screaming for, said Howard Schneider, president of Practical Perspectives, an industry consulting firm in Boxford, Mass.
"The more transparent, the better," he said. "But ultimately, you're not buying the transparency, you're buying the performance."
As a result, Mr. Schneider predicted, investors will take a wait-and-see approach before jumping into actively managed ETFs, and most active managers will do the same. Some managers, however, don't want to wait.
"The reality is, the investment management industry, from a product standpoint, is very much an industry where there are fast followers," Mr. Schneider said. "Others will jump in and do the same thing."
Those others will likely be small to midsize fund companies looking to remain relevant in an industry increasingly dominated by the likes of
Fidelity Investments and The
Capital Group Cos. Inc. of Los Angeles, adviser to the American Funds.
"For a fund group that has not built distribution and appears to have strong performance, the ETF route is a very attractive one," said Burton Greenwald, a Philadelphia-based mutual fund consultant.
But for fund groups that already have a good distribution network, ETFs make little sense.
ETFs are generally cheaper than traditional funds and would likely provide competition to existing funds, Mr. Greenwald said.
E-mail David Hoffman at [email protected].
