Hamman: Active ETFs On Track To Blast Off

May 13, 2011

 

Ludwig: You didn’t talk about your ADR fund, the WCM/BNY Mellon Focused Growth ADR ETF (NYSEArca: AADR). Can you speak to that a moment?

Hamman: That one, I’ll be honest with you, is the one I’m probably by far the most frustrated about, in terms of our ability to gather assets. This is an institutional money management team. They manage around $100 billion. They’ve been running this strategy institutionally for the last six years with about 10 percent out-performance annualized over the MSCI EAFE Index. I think in the life of the product alone they’re probably only ahead of the EAFE by about 2 percent, but net of fees.

And so this is one of those examples where I think we’ve got an unbelievable management team; we’ve got a strategy that’s transparent and we’re clearly adding alpha. And we’ve not been able to get people to move assets from those existing EAFE products into this product. And that’s been frustrating from a sales and marketing perspective, for us.

I know that long term, as that track record hopefully continues, as it is, it will be a huge product for us. It will be a nice core product, and will have a lot of assets in it. But it’s probably a good example because no one knows who WCN is. It’s a good example of a product that I think will take off once it hits that three-year track record.

Ludwig: Do you ever worry about price? Obviously, you’re not Vanguard Group or Schwab. But on that basis alone, as John Bogle loves to say, the only thing you can control in this big, bad world of investment management is cost. Is that something that is negotiable for AdvisorShares, or am I putting the cart in front of the horse here?

Hamman: No, not at all. In fact, hopefully we’ve demonstrated that to people already with the Cambria Global Tactical ETF. I think they started off with a 1.35 percent expense-cap limitation. And then right when we passed $100 million, we brought that down to a 0.99 basis point expense-cap limitation. Each underlying subadvisor feels differently about pricing, but in general, we absolutely are looking forward to having enough assets to be able to reduce fees across the board.

But I will say that doesn’t subscribe to that lowest-price philosophy. I think when you do that in the Bogle kind of way, it means you see absolutely no value in any active management at all. The attitude of, “there’s no way I can beat the index, so why even try?” just doesn’t work for a lot of people.

Ludwig: In fairness, Vanguard’s strategy comes out in the wash. It’s now the No. 3 U.S. ETF company in assets; but in terms of revenue, I think they drop to like sixth or seventh place. So, low prices have consequences for the top and bottom lines.

Hamman: To me they’ve won the low-cost game. You need size to compete with that. I saw those FocusShares ETFs. I’m very interested to see how that goes. Some of those funds have to have assets of $1 billion each to even get close to breakeven. It’ll be interesting to see if they can truly steal assets based on the pricing game alone.

Ludwig: In the end, you’re kind of the grand connector, right? You put people in the saddle and slap the AdvisorShares brand on their expertise, and hopefully you’re off to the races, sort of thing?

Hamman: Yeah, absolutely. And then our life is very much predicated on performance. We quite simply know performance has to be there for us to make the strategy. We could charge 2 basis points on our products. And if they don’t perform well in an active strategy, it’s not worth 2 basis points.

 

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