Chief Investment Officer
[Editor's note: In our May ETF Report, "Behind The Curtain," we profile four firms, which you may or may not have heard of, that have deep roots in the industry, sometimes through multiple business lines. These are the lawyers, the index providers, the custodians, the liquidity providers and the market makers that keep the gears of the ETF industry spinning. See "The Guiding-Hand Firm For ETF Issuers," "Dechert Paves Way For Improved Regulations," "The Biggest Firm You Still Haven't Heard Of." Although Penserra subadvised the PureFunds ETFs at the time the article was written, by the time of publication the firm no longer subadvised that fund family.]
In the ETF world, subadvisors are unsung heroes. They sweat it out behind the scenes, handling the daily grind of fund operations, accounting and portfolio management. Yet their labors often go unseen, unnoticed. They are invisible.
That’s just fine by Dustin Lewellyn.
“Most [sponsors and advisors] don’t want to worry about the day-to-day,” said Lewellyn, chief investment officer at Penserra, a financial services provider based in Orinda, California. “It’s just easier for them to farm it out to someone like us.”
Offload Management Work
Running an ETF is no simple task. Subadvisors like Penserra shoulder the heavy lifting, so that larger asset management firms are free to focus on big-picture tasks, like distribution, marketing, sales—and, of course—strategy.
“People don’t come to us for our own proprietary investment methodology,” said Lewellyn. “They come to us because we’re good at figuring out the most efficient way to implement their strategies.”
Currently, Penserra subadvises 21 active and passive ETFs, together worth over $1 billion in assets. By far, its most successful fund is the $970 million PureFunds ISE Cyber Security ETF (HACK).
But Penserra actually touches the ETF industry in several different ways.
For starters, the firm’s broker-dealer arm, Penserra Securities, helps execute trades with a focus on all-ETF portfolios and large-block ETF trades. It specializes in tricky risk or cash management situations, such as rebalancing many ETFs at once, and often works with big-name clients looking to protect their anonymity as they research potential trades. “A smaller shop like ours can offer more stealth in managing that information flow,” Lewellyn noted.
Penserra also offers consulting services to help big fund managers identify and capitalize on opportunities in the ETF space. Lewellyn personally drives this effort, acting as a sort of ‘ETF whisperer’ to clients by analyzing how they launch, manage and operate their funds, as well as educate them on best practices.
Then there’s Penserra’s asset management business, Penserra Capital. That’s where Lewellyn spends most of his days, and it’s where the firm’s subadvisory service lies.
Here’s how it works: When an advisor or sponsor comes up with an idea for an ETF, it comes to Penserra to bring its index methodology to life.
Penserra helps with the setup work behind launching an ETF, partnering with accountants, custodians and distributors to ensure a smooth process flow on day 1. Sometimes it’ll even help tweak the ETF’s index for better tradability or liquidity. But it’s not Penserra’s job, says Lewellyn, to take a view on strategy, beyond his firm’s ability to implement it.
“Strategy doesn’t matter for us,” he says. “We focus more on how to best make that strategy work in an ETF wrapper.”
Once the ETF launches, Penserra takes over the daily operational duties. That means juggling portfolio management, cash management and reconciliation, daily risk checks against the benchmark, and creation/redemption activity. It also stays on the lookout for when the portfolio needs rebalancing or ad hoc changes due to corporate actions.
In an industry dominated by big players, subadvisors like Penserra make it possible for smaller asset managers to throw their hat into the ETF ring, too. Launching and operating a single ETF can run $500,000 (or more). But with Penserra, that cost is closer to $20-30K per fund per year.
“We already have the infrastructure and technology in place. So for a smaller client, it’s just plain economics,” explained Lewellyn. “It’s more efficient to rent than to buy, so to speak.”
Penserra makes money either way, he notes: “Our model assumes that one out of every 10 ETFs we subadvise will be a home run, with a couple of singles or doubles.”
Capitalizing On Thematic Plays
Though it subadvises a broad range of equity ETFs—running the gamut from U.S. sectors to emerging markets to factors—Penserra is something of a specialty shop. Many of the funds it subadvises are extremely narrow thematic plays: The PureFunds Video Game Tech ETF (GAMR), for example, tracks a basket of gaming developers and virtual reality firms; while the PureFunds Drone Economy Strategy ETF (IFLY) tracks manufacturers and suppliers to the drone industry.
Lewellyn thinks the ETF industry will only continue to get more and more thematic. “We keep seeing narrower and
narrower, niche-y products,” he said.
Another big trend on the horizon: impact investing. “We’re seeing a lot of ESG-related [environmental, social and governance], ideas right now; some focus more on the E, S or G individually, while others are looking at combinations of the three.”
For all its hard work, however, Penserra has little interest in launching its own ETFs. “It’s expensive, and it’s hard,” said Lewellyn. “Plus we don’t want to compete with our clients. If a problem arises, we never want it to become a question of whose problems we should deal with first.”
Diversity Is 'Healthy'
Penserra’s pedigree is notable, with several key executives hailing from BGI/BlackRock, Northern Trust and Charles Schwab. Founder and CEO George Madrigal spent decades at BGI/BlackRock, before launching Penserra’s broker-dealer vertical in 2007. And Lewellyn helped launch BlackRock’s iShares ETFs, as well as Northern Trust’s and Charles Schwab’s ETF businesses.
Notably, Penserra is a minority-owned business enterprise; a majority of executives at the firm are minorities, and Madrigal himself is Hispanic. Indeed, 42% of the firm’s staff hails from diverse groups—double the prevailing industry rate.
Even the firm’s name, Penserra, is itself multicultural: It comes from the combination of two Spanish words: “pensar” (to think) and “tierra” (world). “The two words [that make up Penserra] speak to a thoughtful approach of a broad landscape,” Lewellyn said. “We felt the name captures both the nature of our firm being majority-owned by minorities and our more institutional view.”
“Diversity makes for a better, more flourishing work environment,” he added. “It’s a healthy thing.”