Anatomy Of WBI’s Eye-Popping ETF Debut

September 23, 2014

To hear the firm’s founder tell the tale, many of WBI’s clients couldn’t wait to own ETFs.

Less than a month ago, WBI Investments made ETF-industry history with a 10-fund rollout that turned heads because of its instant success. Investors poured more than $1 billion into the Red Bank, N.J.-based money management firm’s new funds within a day.

To be sure, most of those investors were pre-existing clients of WBI, a firm with $3.1 billion in client assets whose actively managed strategies have been available in separately managed accounts as well as open-end mutual fund wrappers. That makes WBI the latest example of what we call “bespoken” ETFs—funds that have clients lined up even before they launch.

And because the firm’s clients are largely other financial advisors, WBI has become, in one quick turn of events, a successful ETF strategist that serves up model ETF portfolios for other advisors who are keen on outsourcing money management so they can focus on comprehensive financial planning.

But as WBI founder and Chief Executive Officer Don Schreiber told Managing Editor Olly Ludwig in a recent interview, it’s noteworthy that those WBI clients who now own ETFs were willing to brave any tax consequences coming their way after making the switch.

That speaks to one of the virtues of ETFs; namely, tax efficiency. But it also speaks to the lasting commitment Schreiber’s firm plans to bring to its foray into the rapidly growing world of ETFs. Was it a surprise to gather all those assets so quickly?

Schreiber: No. We had a lot of demand for our products in an ETF format. Because we're active managers, the ETF gives us more tax efficiency and allows us to enhance some of the tools we can use to mitigate risk and to participate in upside returns. I think advisors and their clients wanted to take advantage of that opportunity to use the same management system, the same strategy that we have had for 22 years, but in a more efficient, more powerful way through ETFs. Your clients are essentially other advisors, and you really don't service the end-investor population?

Schreiber: That is correct. We wholesale through advisors; predominantly that's our main market. What percentage of that was from existing clients who simply wanted to shift to that ETF wrapper?

Schreiber: The majority of the assets … and we had some direct ETFs flow that we had initially and we still have that on an ongoing basis. The ETFs give us advisors that we really weren't servicing before, selling to before. We use ETFs as a primary allocation tool instead of mutual funds as separately managed accounts. So you mean your universe of prospecting has increased because now you're looking at ETF-focused advisors in a whole different way?

Schreiber: Definitely. Have your overall assets under management gone up since the ETFs were launched?

Schreiber: We're up about $150 million since the time the ETFs launched. Shed some light on the tax consequences of moving from one wrapper to the other, even if the strategy is the same.

Schreiber: There is a tax effect, obviously, to move from one strategy to another. Essentially they have to liquidate the individual securities that we hold on their behalf to buy into the ETFs. We explained that for those clients who wanted to do that. And they were undeterred?

Schreiber: Yes. They considered the switch to ETFs to be a big opportunity to put themselves in better positions going forward. Also, as an active manager, with market volatility, we can have short-term capital gain capture. You mean you can either have capital gains taxes that you owe, or, for that matter, you could be doing tax-loss harvesting in connection with those kinds of shifts in asset allocation?

Schreiber: Right. As a matter of fact, I don't know that we've finished the calculation for investors who did make a switch, but I believe the overall tax impact was close to zero. We did have some losses and gains at the time of the shift, but I don't believe that there was a net tax impact. Are the ETFs you launched each around 100 basis points a year in terms of an annual expense ratio?

Schreiber: That's correct. How do you respond to views that these ETFs look pricey relative to competing ETFs? Maybe I'm being unfair, because the premise of my question is not only active ETFs, but also index ETFs.

Schreiber: I think it's just the opposite. The perception is about cost. We perceive everything to be about value. So what is the net value we can deliver? We're managing a long-only hedge-fund process in a 100-basis-point cost wrapper, and we're delivering that to mom-and-pop investors who really don't have the risk profile over the capital profile to invest in hedge funds directly. So we think this is the most attractive alternative solution on the marketplace potentially from a price and a value standpoint.

The other thing I would point out is, in the alternative space for ETFs or active space—either one or both—we are below the median or midpoint in terms of pricing at 100 basis points. I believe the average is about 125 basis points in that active space. And for alternates, it's higher; probably about 150 basis points. You're talking about the ETFs or mutual funds, or just active, per se?

Schreiber: I'm just talking about active ETFs or alternative ETFs. We did the analysis to see where our cost structure would fall, and we planned specifically to bring these to market at 100 basis points. We think that the institutional community will find these extremely attractively priced, compared to establishing exposure to an alternative management solution that is anything comparable to what we have. And the 10 ETFs were brought to market because they essentially allow you to replicate in an ETF wrapper the asset allocation approaches you already had in place using, for example, your SMAs, right?

Schreiber: That's correct. Essentially, it allows us to easily replicate any of the complete portfolio structures that we had on the SMA side and offer, we think, the key building blocks to creating a risk-managed exposure if you were doing fairly sophisticated risk-adjusted return analysis to build portfolios. So for institutional clients or sophisticated advisors, we think this will be a pretty attractive focus.

There's a lot more attention being paid to risk-adjusted returns than ever before, especially in the investor or advisory community. I agree with you regarding the intensifying focus on risk-adjusted returns, but what is the value proposition at WBI, downside protection?

Schreiber: It's all about protecting capital and allowing yourself through both bull and bear market cycles, good and bad market cycles, to be able to maintain your capital power, which gives you the compounding advantage that all of the low-cost indexing-type ETF exposure subjects you to because they have a symmetrical return profile. We've created an asymmetrical return profile, where we get good upmarket participation and we get very, very little of the downmarket loss. So where do you go from here? You alluded to now having your whole prospecting and business planning now open to ETF-focused advisors.

Schreiber: We actually have six more strategies defined and in the works that we're looking to bring to market, all with the same optimized-return approach to capital protection and risk management. They’re not yet in registration, but they will be very shortly. We believe they'll come to market late spring, because of the time it takes to get these things through the regulatory process.



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