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Charles Schwab Corp.'s move into active ETF management with the acquisition of Windward Investment Management Inc., which was announced today, didn't come as a surprise to advisers, who gave it high marks.
Windward allocates its $4 billion in client investments among ETFs based on perceived mispricings in 42 global asset classes.
“It's not a surprising move” by Schwab, said Derek Holman, managing director of Enright Premier Wealth Advisors Inc., with $900 million under management and a customer of Schwab's custody unit, Schwab Advisor Services.
“Schwab, like most investment companies, is looking to gather a larger share of the wallet,” Mr. Holman said. “A lot of advisers are going to an ETF strategy” and a proprietary managed ETF product “is a natural progression.”
“I think it's a great move for Schwab,” agreed Tom Lydon, president of Global Trends Investments, which manages $85 million in ETFs and holds its clients' assets in custody at Schwab.
“There will be more demand for managers that have effective [ETF] strategies,” he said. “I think the timing is right.”
“It's our first acquisition of a money manager,” said Bernie Clark, executive vice president and head of Schwab Advisor Services. “It's very complementary” to Schwab's own offerings of ETFs, he said.
The deal, which is worth $150 million in cash and stock, is expected to close in the fourth quarter.
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Charles Schwab Investment Management unit runs about $200 billion in proprietary mutual funds, using both active and passive strategies.
Windward's three separate account strategies will be available to both Schwab advisers and to individual customers at Schwab's discount brokerage.
The fee schedule for Windward's offerings have yet to be determined, Mr. Clark said, adding that the company will be eliminating transaction costs for Windward portfolios.
Windward's most aggressive strategy produced a cumulative return of 109.2% from January 2002 through July 2010, compared with just 13.4% for the S&P 500 total return index, according to Windward's website.
“We say the markets are micro-efficient and macro-inefficient,” said Stephen Cucchiaro, Windward's founder and chief investment officer.
While it's very hard for a manager to beat a particular index, “across [global] asset classes, markets are incredibly inefficient — very prone to swings in investor behavior,” he said.
Windward is now overweight emerging-markets debt, gold and U.S. stocks with a history of increasing dividends, he said.
Mr. Cucchiaro said selling his company to Schwab, where he has held assets in custody since 1994, will allow him to focus on investment research rather than running the firm.
“For me, it's an opportunity to go to the next level,” he said.
Mr. Cucchiaro and his investment team will remain with the firm.
