The investment firm led by Ken Fisher — which has seen some $3.9 billion in assets exit due to his recent crude remarks — now controls over 25% of the $22 billion market in exchange-traded notes, according to a report from Bloomberg.
Fisher Investments has worked with Barclays, Credit Suisse and other banks to issue some 20 ETNs, which are unsecured debt products used to track underlying indexes and leverage positions.
The firm is the biggest shareholder of five of the six largest ETNs, the report said. Roughly 5% of Fisher Investments’ $115 billion in assets is held in these products.
For instance, 70% of assets in Goldman Sachs’ ETN business and some 50% of assets in UBS’ ETNs are tied to Fisher’s firm.
(Take our brief Survey on Fisher’s Crude Remarks & the Industry’s Gender Issues)
Asked about the wisdom on investing in ETNs, Buckingham Strategic Wealth Chief Research Officer Larry Swedroe told Bloomberg: “These things are meant to be sold but never bought. You’re not getting compensated for the credit risk of the issuer, and you can be sure they are not taking the risk embedded in these ETNs.”
But, according to John Dillard, a Fisher senior vice president, said client redemptions are not likely to impact its ETNs because the firm has continued to grow. Also, fees paid for the ETNs go to the banking issuing the notes and not to Fisher Investments.
“We have been pleased with the performance and structure of the ETNs we designed in concert with our well-capitalized counter-parties,” Dillard said in a statement. “For the time we’ve utilized them, they have broadly added value to client portfolios.”
Some of Fisher’s ETNs involved charges of at least 4%, according to two bankers who spoke with Bloomberg.
‘Hail Mary’ Strategy
The Bloomberg report says Fisher has focused on large-cap growth companies that he felt would do well in the later stage of a bull market, and ETNs were used to support this strategy — which one employee characterized as a “Hail Mary” approach to boost the firm’s track record.
Still, the Fisher Global Total Return strategy for individual investors has underperformed its benchmark each year during more than half of the 2013-2018 time period, Bloomberg said.
About $69 billion of Fisher’s overall assets are held in investor’s 65,000-plus separate accounts. As a result, the firm can’t easily boost returns via borrowed money, like hedge funds do, Bloomberg reported.
Sources who spoke with the news group say some of Fisher’s investment counselors were informed that they could refer to the ETNs as “enhanced” rather than “leveraged” products.
This practice, though, is denied by Dillard, who said the ETNs’ “[broad] diversification mitigates daily volatility compared to less-diversified equity investments; in our view, holding the ETNs doesn’t materially change the portfolios’ risk profile.”
For more details, see our Timeline on the Fisher Controversy.