iShares Active? Big Deal

June 18, 2010

What’s the world come to when a bastion of academic finance decides to go full-on stock picker? Maybe business as usual.

It’s not often that I read headlines on our own Web site and my heart skips a beat. But that’s exactly what happened when I read about iShares filing for a new series of actively managed ETFs.

To the outside observer, this may not be a big deal, but I feel some personal sense of the world changing. Some 16 years ago, I was a managing director at the predecessor company of iShares, Wells Fargo Nikko Investment Advisors. WFNIA, as it was known back then, was at the front end of nerdy investment management. Blake Grossman, now counting his huge stacks of money from the BlackRock acquisition of BGI, was the quintessential “smartest guy in the room,” a protege of Bill Sharpe, and an advocate of academic investment theory.

But, once I got my heart started again, I put myself back in those 20-something shoes from the early ‘90s, and recalled the countless debates over quantitative-active strategies that occurred nearly daily in the halls of WFNIA and, post-acquisition, Barclays Global Investors. Even then, while the bulk of BGI’s assets were in the form of super-low-margin index products, a substantial portion of the firm’s revenue came from quantitative strategies—then called “tilts and timing” strategies—which would have to be considered active by any rational observer.

And while most of the public continues to think of the surviving BlackRock group as a passive manager, Grossman and Co. were quietly building the quant side of the house into a bigger and bigger business.

To date, iShares has launched just one product based on this academic legacy, the iShares Diversified Alternatives Trust (NYSEArca: ALT). Like those other active strategies that BlackRock, nee WFNIA, has had under the covers, it charges a lot more than the passive stuff—95 basis points to be precise. At the moment, that expense drag has represented pretty much all of the returns of the fund since its inception last year—it’s down about 30 basis points since it launched in November of last year.

These new filings are very light on specifics, but it seems clear to me where they’re headed. I don’t expect BlackRock to start filling smoky rooms with stock pickers and value hunters. Instead, I expect them to roll their core, high-margin strategies out to the market in tightly controlled packages like ALT.

Why now? Because active ETFs may finally have arrived. For reference, here’s the current state of the SEC-defined active universe; that is, those funds that disclose their portfolio every morning to reflect yesterday’s trading activity.

[Editor's Note: The original table was missing a few active ETFs, and has been updated.]

AUM 6/18/10
Ticker Name Net Flows ($MM)
MINT Pimco Enhanced Short Maturity Strategy 799.76 774.24
CYB WisdomTree Dreyfus Chinese Yuan 308.22 761.16
CEW WisdomTree Dreyfus Emerging Currency 91.28 417.77
BZF WisdomTree Dreyfus Brazilian Real -20.92 145.99
ALT iShares Diversified Alternatives 44.76 55.47
MUNI Pimco Intermediate Municipal Bond Strategy 50.26 38.44
ICN WisdomTree Dreyfus Indian Rupee 2.59 27.72
DENT AdvisorShares Dent Tactical 0.91 22.40
PQY PowerShares Active AlphaQ 16.33 21.04
BNZ WisdomTree Dreyfus New Zealand Dollar 17.12
SMMU Pimco Short Term Municipal Bond 17.98 13.02
EU WisdomTree Dreyfus Euro -4.47 12.45
JYF WisdomTree Dreyfus Japanese Yen 11.51
PSR PowerShares Active U.S. Real Estate -0.17 10.14
SZR WisdomTree Dreyfus South African Rand -2.69 8.38
PLK PowerShares Active Low Duration 1.27 7.60
RWG Grail RP Focused Large Cap Growth 4.27 6.53
RPX Grail RP Growth 1.39 4.03
PMA PowerShares Active Mega Cap 3.27
RPQ Grail RP Technology 0.09 2.79
GMMB Grail McDonnell Intermediate Municipal Bond 2.48 2.54
RFF Grail RP Financials -0.01 2.54
GMTB Grail McDonnell Core Taxable Bond 2.49 2.53
PQZ PowerShares Active Alpha Multi Cap -1.84 2.48
ONEF U.S. One Trust One Fund 2.63 2.37
GVT Grail American Beacon Large Cap Value -1.51 1.55
Total 2375.07

Blame it all on MINT. Pimco’s breakout success, the Pimco Enhanced Short Maturity Strategy (NYSEArca: MINT), which we’ve talked about recently, has proven that investors will pile into an active ETF if the timing and the product are right. In Pimco’s case, the fact that it’s fixed income likely helps—the portfolio broadcasts a yield, which is nearly a promise of performance when you’re dealing with the short end of the duration curve. Similarly, the currency products are technically actively managed, but the performance of the products is relatively easy to predict, at least in terms of relative performance to their benchmarks.

ALT, while definitely still a niche product, with just over $55 million under management, has experienced steady growth in assets, despite fairly mundane performance numbers.

It’s too early to call it a movement, but the filing from iShares could definitely be writing on the wall.

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