Hopes And Challenges
Fuhr reckons that star power and deep pockets—like Gross' and Pimco's—are going to be necessary to move the needle in an industry that has changed quite a bit since the glory days of stock-picking managers such as Peter Lynch. He ran the Fidelity Magellan Fund from 1977 to 1990, lifting it from unknown to poster child for the stunning success of active open-end mutual funds.
Active ETF rollouts have accelerated significantly in the past two years (Figure 3), and huge asset active managers such as J.P. Morgan are on the verge of joining the space in the ETF industry.
The presence of J.P. Morgan, with its considerable marketing capacity, might help validate claims of fund industry professionals who say investors are eager to embrace active ETFs. In addition, consultancies such as McKinsey & Co. predict assets in active ETFs will grow sharply in the coming years.
However, the next accelerant may lie in bold new plans to bring nontransparent active ETFs to market that won't require fund managers to disclose portfolio holdings every day, thereby protecting their best ideas.
That said, a number of sticking points stand in the way of active management that are likely to slow—if not halt—the more widespread adoption of active ETFs. Not least among those challenges is that many investors now question the value of active management, relative to cheap and transparent index ETFs.
Considerable buzz these days surrounds two efforts in the ETF industry to bring to investors so-called nontransparent ETFs that will only have to disclose portfolio holdings quarterly. But as of this writing, neither idea had yet been approved by the Securities and Exchange Commission.
Proponents of active investing see the preservation of a manager’s “secret sauce” as the holy grail of investing. Their argument is that active strategies that must disclose portfolio holdings daily are effectively allowing competitors to see their alpha-generating ideas each and every day, possibly exposing them to front-running and copycats.
One of the nontransparent efforts is being championed by Boston-based Eaton Vance. The firm plans to replicate its entire mutual fund lineup in a new vehicle it is calling the exchange-traded managed fund.
The “ETMF” will enable investors to trade intraday, but each trade wouldn’t settle—as is the case with mutual fund trades—until after the market close. If this makes the ETMF sounds like a mutual fund, it’s because it is like a mutual fund.
But it’s also like an ETF to the extent that all the fund trading will be done by authorized participants (APs) and not by Eaton Vance’s internal trading desk. There also won’t be any 12b(1) marketing fees attached to them. Those fees, which are part of the expense ratios investors pay on a given mutual fund—ETFs generally do not have them—are devoted to marketing particular strategies.
Eaton Vance says it will save investors 50 basis points, or $50 per $10,000 in management fees, each year—real money in a world characterized by falling costs.
However, nixing 12(b)1 fees is a “deeply disruptive” idea that could hurt the ETMF’s prospects, according to Nicholas Colas, chief market strategist for the New York-based brokerage firm ConvergEx Group.
“There’s a big part of the financial services industry that’s anchored around 12b(1) fees. By removing them, how do you compensate people for marketing one product versus another?” Colas asked, saying the question of 12(b)1 fees came up again and again after a recent Eaton Vance presentation on the ETMF to various Wall Street players.