Active fund managers have been in retreat in recent decades, assailed by the advancing forces of cheap, benchmark-tracking passive funds, except for one corner where they are gaining market share: the once passive stronghold of exchange traded funds.
ETFs have been on a tear of late, with global assets tripling since the end of 2018 to $14.4tn, according to consultancy ETFGI, as opinions grow that they are simply better than more traditional mutual funds.
Actively managed ETFs have outshone this rate, albeit from a low base, particularly in the US where they have risen 700 per cent since 2019 to $806bn at the end of October, data from Morningstar shows. They now account for 8.1 per cent of money held in US ETFs, while their share of inflows hit a record 27.9 per cent in the first 10 months of this year.
The trend is less advanced in Europe but is starting to pick up. Assets have risen to $52bn, almost quadrupling since 2019. While this is only 2.4 per cent of the continent’s total ETF assets, active funds have gobbled up 7.1 per cent of flows this year, some $15.8bn, Morningstar data show.
This growth appears to be spurring a sugar rush among some: Janus Henderson, which launched its first European-domiciled active fund in October, has predicted that the European market will balloon to $1tn by 2030.
Cathie Wood’s Ark Invest, BNP Paribas Asset Management, Eurizon SLJ Capital and Robeco are among others to have unveiled their first active ETFs in Europe this year, while BlackRock’s iShares debuted its first active equity ETFs. Jupiter Asset Management is among a seemingly long list of those poised to follow suit.
“We are speaking to a lot of asset managers [that] are coming to the table and talking to us about launching products,” says Andrea Murray, European business development manager for ETFs at investment bank Brown Brothers Harriman.
Large US managers with only domestic ETFs are showing interest, as are those running mutual funds in Europe that are yet to dip their toes into the market. “There are outflows from traditional mutual funds and one way to not let these flows go to a competitor is to go into active ETFs,” she adds.
Many managers who five years ago were adamant they would not launch ETFs have returned to take “another look”, says Killian Lonergan, who heads distribution intelligence at Brown Brothers Harriman.
Andrew Jamieson, global head of ETF product at Citi — which in October launched a platform to host active, European-domiciled ETFs — says there is almost universal agreement that mutual funds are “in terminal decline, with a huge number of firms scrambling to think ‘What does that mean for us? How do we create an ETF solution?’”
Launching ETFs allows fund managers to tap into the digital savings platforms that are proliferating across Europe, especially Germany, which typically do not encompass mutual funds.
Active ETFs however are not making headway across the board, tending to be of lower risk rather than the traditional high octane stockpicking kind.
The world’s largest active ETF, the $36bn JPMorgan Equity Premium Income ETF, is among a popular class of “covered call” funds that use derivatives to reduce market risk, as do the almost-as-popular “buffered” ETFs.
JPMorgan dominates the European market, with 52.6 per cent of current assets, and is number two in the US, where it is outstripped by Dimensional Fund Advisors, which takes a measured, quantitative approach to reweighting the underlying indices.
“I call the [current breed of active ETFs] shy active,” says Jose Garcia-Zarate, associate director of passive strategies at Morningstar. “They are not aggressive. They target very tight tracking errors and the alpha [excess returns] generation is going to be minimal.”
He attributes this to a strategy of creating stripped down active approaches that fit more easily with the low prices many investors expect of ETFs. “If you have a super aggressive ETF you can’t really sell that at 10 basis points,” says Garcia-Zarate.
More broadly, one of the attractions of ETFs, alongside their low cost and high liquidity, is their transparency. Unlike mutual funds, ETFs have traditionally had to reveal their full portfolios every day.
This stipulation deterred many stockpickers who believe they had a “secret sauce” that they did not want to publish every day, fearing their trades would be “front run” by others.
The US has permitted more opaque semi- and non- transparent structures, however. Although these have not really taken off, Ireland, Europe’s largest ETF hub, is now exploring the possibility of following suit.
If enacted, this could encourage more stockpickers to launch ETFs. Lonergan at Brown Brothers Harriman however believes another Irish proposal — which would allow mutual fund managers to launch an ETF share class of a fund without having to rename the entire structure as an ETF, as number two hub Luxembourg has done — would help more.
“I think it will make a difference,” says Lonergan. “We have had managers who never want to be known as an ETF manager and the concept of having to rename their entire fund, they didn’t want that.
“If this allows them to test the waters that’s a good thing. There was a buzz of anticipation and excitement [when it was announced].”
Despite the mooted rule changes, Murray believes active ETFs would never be as big a concept in Europe as in the US, due to the latter’s stronger investment culture and tax advantages for ETFs.
Even there, though, they may just be scratching the surface.
“We are in the early stages of growth,” says Todd Rosenbluth, head of research at consultancy TMX VettaFi. “The ETF industry is going to continue to grow and active ETFs are going to continue to grow at a faster pace because they are newer.
“We have some active [mutual fund] managers that are putting their best and brightest into the field and they are putting their marketing efforts into meeting investors where they are, which is the ETF space.”
https://www.ft.com/content/2420dd85-015c-4420-b207-342442fba157
