Grail Advisors LLC of San Francisco intends to enter the defined contribution market by offering actively managed, transparent equity exchange traded funds, said William Thomas, chief executive of the firm.
"We're setting to take a leadership role in the active ETF marketplace," he said of the firm, which is partly owned by merchant bank Grail Partners of New York.
Since April, Invesco PowerShares Capital Management LLC of Wheaton, Ill., has offered four actively managed ETFs — three equity and one fixed income — according to information on the company's website. WisdomTree Investments Inc. of New York offers eight actively managed ETFs, all currency-based, launched in May.
Grail has been waiting since September 2007 for the SEC to approve its request for an exemption from certain provisions in the Investment Company Act of 1940 so that it can offer actively managed, transparent equity ETFs. Mr. Thomas expects the Securities and Exchange Commission to grant the exemption; he said it is now in the comment phase.
"I can't give a time frame ... It is entirely up to the SEC to decide," he said.
John Heine, a spokesman at the SEC, confirmed that Grail Advisors' application is pending, but declined to comment further.
The move into the defined contribution space seems logical, Mr. Thomas said, noting the broad acceptance of ETFs in the retail market and the growth potential on the institutional side. According to market data provider Financial Research Corp. of Boston, the broad ETF market is expected to grow 20.5% between 2008 and 2013.
While he declined to be specific, Mr. Thomas said Grail plans to work with banks and other financial institutions to create and market customized, transparent actively managed ETFs.
He said the first ETFs will be large-cap- and mid-cap-growth and large-cap and mid-cap-value funds; international equities, small-cap stocks and fixed income might be introduced later.
"Daily transparency is one of the major components to our strategy," Mr. Thomas said. "Institutional investors are more comfortable getting this level of transparency, and this is where we see the marketplace moving."
By logging into the Grail Advisors website, an investor can see the ETF's underlying stocks.
Ed McRedmond, senior vice president of portfolio strategies at Invesco PowerShares, said the firm's ETFs are fully transparent.
A spokeswoman at WisdomTree Investments Inc. said its actively managed currency ETFs are fully transparent; its equity-based ETF products are passively managed.
Another way Grail Advisors wants to set itself apart from other firms is to offer products driven more by fundamental and quantitative analysis, as opposed to index or enhanced index ETFs.
"The market is looking to the next step in ETF evolution — actively managed ETFs — as the index side looks saturated," said Mr. Thomas.
"Our distribution team is already on board, and the rest of the group is in the process to be hired," he said. "The distribution side will be very targeted, with initial staffing be-tween four to six individuals."
Grail Advisors has hired Chet Chappell, a former colleague of Mr. Thomas' at Charles Schwab & Co. Inc. of San Francisco. Mr. Chappell was national sales manager for Schwab Funds. Mr. Thomas was senior vice president and head of distribution at
Charles Schwab Investment Management Inc.
John D'Antona Jr. is a reporter for sister publication Pensions & Investments.
