Actively managed ETFs pique interest of big fund companies

The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies consider entering the business or expand their lineups.

The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies, including Putnam Investments, John Hancock Funds LLC, T. Rowe Price Group Inc. and Pacific Investment Management Co. LLC, consider entering the business or expand their lineups.

The number of actively managed ETFs is likely to rise from the current 15 to more than 40, while the number of providers offering such funds could go from seven to 15, according to Rob Ivanoff, an ETF analyst at Financial Research Corp.

“Every big fund company is looking at this,” said Cindy Zarker, director of research at Cerulli Associates Inc.

Many asset managers have held off launching actively managed ETFs because of concerns about the effect that daily disclosure of their holdings would have on the shareholders of mutual funds that the ETFs mimicked. Other asset managers, while now unsure of demand for actively managed ETFs, want to hedge their bets in case mutual fund 12(b)-1 fees are abolished and brokers are more willing to try the new product.

WAIT-AND-SEE ATTITUDE

For the most part, advisers have taken a wait-and-see attitude toward actively managed ETFs, intending to hold off until the products can post at least a one-year or three-year track record. But some say that reluctance may be ebbing.

Of advisers who use actively managed ETFs, 25% plan to in-crease their usage over the next 24 months, while 14% plan to decrease their usage, according to a recent survey by GDC Research and Practical Perspectives LLC.

“It appears that advisers are more interested in using actively managed ETFs at the expense of passively managed ETFs,” said Howard Schneider, president of the consulting firm Practical Perspectives.

Many investment management companies are discussing getting around the track record hurdle by converting their mutual funds to ETFs, said William M. Thomas, chief executive of Grail Advisors LLC, which has five actively managed ETFs.

“We are working with several mutual fund companies that are contemplating converting mutual funds to ETFs because they have solid, strong performance and are in a crowded marketplace where they are one of 250 large-cap-growth stock funds,” he said.

If companies come out with actively managed ETFs containing elements that aren’t available in traditional mutual funds, advisers may decide not to wait for a one- or three-year track record, said Tom Lydon, a registered investment adviser and president of Global Trends Investments.

“For example, a model that could incorporate alternatives could work really well because it’s speaking to the needs of an adviser,” Mr. Lydon said.

Star power can help a firm gain flows into actively managed ETFs, Mr. Lydon said. “Pimco has an unbelievably positive relationship with the adviser community,” he said. “But there are not many Bill Grosses out there.”

Pimco, which launched its first two actively managed ETFs last year, has registered to launch three more this year: the Pimco Government Limited Maturity Strategy Fund, the Pimco Prime Limited Maturity Strategy Fund and the Pimco Short Term Municipal Bond Strategy Fund.

The company also has had discussions about launching an ETF version of its giant Total Return Fund, said Don Suskind, a vice president and head of the ETF product management team.

“We are discussing what makes the most sense for ETF buyers,” Mr. Suskind said. Specifically, Pimco executives want to make sure that having total transparency in the portfolio’s holdings and trades, as ETFs do, wouldn’t hurt investors, he said. “If the disclosure doesn’t favor the investor, that’s something we have to think about carefully.”

Mr. Suskind said the firm has no timetable for a decision on launching an ETF version of the Total Return Fund.

Many asset managers have held off launching actively managed ETFs because of disclosure issues.

Although T. Rowe Price has filed with the Securities and Exchange Commission to launch actively managed ETFs, the firm has expressed such concerns.

“We want to explore ETFs for existing and prospective clients who may want to access our investment expertise through such a vehicle,” said Heather McDonold, a T. Rowe spokeswoman. “We will not launch an active-ETF version of our traditional active mutual funds if the daily disclosure of the portfolio holdings could be detrimental to existing shareholders.”

Putnam Investments is discussing launching actively managed exchange-traded funds. “As actively managed ETFs become a reality, we want to be part of it,” said Robert Reynolds, the firm’s president and CEO.

Putnam is having conversations about the pros and cons of offering active ETFs versus mutual funds, he said. “We need to do careful analysis of what the advantages and disadvantages are of ETFs,” Mr. Reynolds said. The firm doesn’t have a timetable for when it will make a decision.

Similarly, Hancock will file with the SEC in the next few weeks to launch actively managed exchange-traded funds, according to an official at the firm.

Specifically, it plans to file for an actively managed ETF that mirrors its lifestyle funds, said the official, who asked not to be identified.

Keith Hartstein, president and chief executive of the fund unit, confirmed that the firm is discussing launching actively managed ETFs, but declined to elaborate since Hancock hasn’t yet filed.

“There is nothing that leads me to believe that actively managed ETFs are going to be successful,” Mr. Hartstein said, noting that these funds are still very new to the market and haven’t garnered much in assets yet.

NEW REGS MAY HELP

But with the potential for increased regulation over the point-of-sale disclosure that firms have to make when selling mutual funds and the possibility that the Securities and Exchange Commission may scrap 12(b)-1 fees, actively managed ETFs may gain in favor since they don’t fall under these rules, Mr. Hartstein noted.

Hancock may be one of many fund companies filing to launch actively managed ETFs as a way of hedging their bets if 12(b)-1 fees on mutual funds go away, said Christian Magoon, president and senior managing director of Claymore Securities Inc., whose subsidiary, Claymore Advisors LLC, has filed to launch three actively managed ETFs.

“If 12(b)-1 fees go away, it would push more advisers to a fee-based business, and the actively managed ETFs greatly benefit these advisers,” he said.

E-mail Jessica Toonkel Marquez at [email protected].