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Active Mutual Fund Managers Clamoring to Offer ETFs: Cerulli

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It would seem that many mutual fund managers are suffering from FOMO: A fear of missing out on the rapid growth of exchange-traded fund assets.

According to the January issue of The Cerulli Edge — U.S. Monthly Product Trends, asset managers are seeking a variety of approaches to offer ETF products.

“With the U.S. ETF market breaching the $2 trillion mark in December 2014, nearly double the asset size from four years ago, it comes as no surprise that mutual fund managers are exploring ETFs,” the report states.

The Cerulli data shows that firms are actively pursuing ways to enhance their product vehicle lineups with ETFs — with nearly 62% of ETF sponsors stating that they are currently looking to develop active ETF funds and almost 54% stating they are in the process of developing strategic beta ETFs.

To do this, some managers are using their firm’s existing infrastructure capabilities to offer similar strategies in an ETF while others are acquiring an existing ETF boutique that has the distribution already in place.

“Methods managers are taking include seeking approval from the [Securities and Exchange Commission] on nontransparent active ETF structures, launching active ETFs that mirror existing mutual fund strategies, or developing new strategic beta ETFs to enhance existing product offerings,” the report states. “It is clear that no firm wants to be left behind in the product shift to the rapidly growing vehicle.”

The report points to American Funds — which Cerrulli calls “the poster-child active mutual fund manager” — as a prime example of this. In late July, the firm filed an exemptive relief filing with the SEC for both active and non-transparent active ETFs using Precidian Investments’ blind-trust structure, which shows that even the largest of active managers are no longer sitting on the sidelines.

Other firms, like J.P. Morgan Asset Management, are taking a different approach to ETFs — through passive “strategic beta” strategies.

The two ETFs J.P. Morgan launched in 2014, which are not a clone of any of J.P. Morgan’s active strategies, accumulated close to $60 million in assets by year end, Cerulli says.

“J.P.Morgan may be the first in a trend of asset managers to launch multi-factor passive strategies to complement their existing active mutual fund business,” Cerulli states.

Cerulli suggests that strategic beta will progress as more active managers launch ETFs in an attempt to “stake their claim in this new ‘hybrid strategy’ territory.”

“Managers are optimistic about this shift as client demand has revealed true interest exists,” Cerulli states. “Managers can still justify a fee as an active portfolio management component is applicable. The fee may be lower than what they may have previously charged for active mutual funds, but it is better than losing assets to cap-weighted passive strategies.” Meanwhile, some firms — like Eaton Vance, who received the green light from the SEC to launch exchange-traded mutual funds in 4Q 2014 — are tackling exchange-traded products through the nontransparent route.

Eaton Vance will be offering 18 funds called NextShares that will primarily replicate existing mutual fund strategies. Precidian Investments is taking a second pass at SEC approval for its nontransparent active ETF structure.

The nontransparent route, as the Cerulli report states, allows managers to “appeal to a variety of different investors by having the same or similar product in multiple vehicles.”

Even so, some asset managers aren’t sure there’s a demand for nontransparent active ETFs. A recent Cerulli poll showed that 31% of asset managers felt that “investors will continue to use the current fund structure and will have no interest in exchange-traded mutual funds.”

Another option for ETF-seeking mutual fund managers is acquiring ETF firms, which Cerulli says may make the most sense from a cost perspective because those ETF firms already have an infrastructure in place.

Recent acquisitions of ETF firms include Janus’ purchase of VelocityShares, an ETF firm that focused much of its attention on the institutional market; New York Life’s purchase of ETF firm IndexIQ; and Victory Capital’s purchase of strategic beta manager Compass Efficient Model Portfolios.

“The proliferation of the ETF industry has forced many asset managers to get off the sidelines and get into the game,” the report states. “Firms are quickly recognizing the investor shift to the ETF vehicle and are actively exploring and implementing a variety of options as they try to stake claim to their share of the assets in the space.”

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