ActiveETFs | InFocus

Active ETFs | In Focus spoke in-person with Bill Thomas, who is the CEO of Grail Advisors. Grail currently has 7 actively-managed ETFs on the market and just recently announced a partnership with DoubleLine Capital, which is lead by the respected fixed-income manager – Jeffery Gundlach. Bill talks to us about their new partnership, Active ETF disclosure, prospects for mutual fund conversions.

Click here to see the full video interview. Alternatively, find the transcript of the interview below.

Shishir Nigam – ActiveETFs | InFocus: The Active ETF space in the US has seen lots of action since the last time we chatted. How do you think the prospects for this field are evolving?

Bill Thomas – CEO, Grail Advisors: I think we’re just in the forefront of this thing really taking off. There’s about a billion dollars in actively-managed ETFs and that all really started just over a year ago in May with the launch of the American Beacon product in partnership with us. And I think you’re seeing more and more firms get into it and we’re just at the beginning of the first innings, to use a baseball term, very very exciting.

Shishir: Do you think the continued stagnation of assets for most Active ETFs, other than those from PIMCO, is a sign of poor traction for these products?

Bill: I think it’s been a very difficult investing market, the market today was off significantly with the downfall. So I think it’s a challenging market to put any product up into the market, but what you’re seeing is that if you’ve got the right product and the right strategy, you’re able to gather assets. And PIMCO’s MINT is perfect example of that – you’re in a low yield environment, where investors are looking for a little extra return, willing to accept limited fluctuation of the net asset value and that they are starting to really focus on the fact that transparency, liquidity and tax efficiency are major investors points that are of interest.

Shishir: Is Grail’s partnership with DoubleLine, run by Jeffery Gundlach, a major step forward for the company?

Bill: It’s a huge win and especially that win with Jeffery Gundlach and his team that had come over from their previous employers, really just fantastic. They are the fastest growing money manger in the United States. They’ve just surpassed a billion dollars on their Total Return mutual fund, last they announced on Friday. There’s just tremendous amount of momentum and a tremendous amount of excitement about what they’re doing. So I think coupled with DoubleLine and the news that we had about a month ago about Western Asset Management, what we’re seeing truly the real brand players are coming into this space and doing so with utilizing the platform that we’ve built at Grail Advisors.

Shishir: How big of an issue are the daily disclosure requirements for prospective issuers when launching Active ETFs in the US?

Bill: It’s been interesting to see how different firms deal with this. And what I find is that this is a cultural decision of the investment management firm and you’ve got certain firms that really see this as a non-starter. If I need to be fully transparent, I’m not going to do it. And what you’re seeing is other firms have comfort in doing it and those firms probably participate in managed account programs and separate account wrap programs. They see the opportunity while other firms struggle with that decision to really get into the business and gather assets with the belief that eventually we’re all going to get there anyway. And that’s where I think the first mover advantage is significant.

Shishir: Are there ways in which the Active ETF structure could be improved?

Bill: I think that the SEC has done an incredible job getting us to this point, given everything and the creative ideas that get thrown in front of them on a daily basis. I think what’s neat is that we’ve got a wonderful structure that’s working today, has operated efficiently and it’s to the end of benefit of the shareholders – which is their job to protect and our job to deliver to – that transparency is truly a wonderful benefit for them.

Shishir: I guess the other side of that story would be, if because of the transparency, the manager’s end up losing some of their edge, then ultimately the shareholders at the end of the line also end up losing in some way?

Bill: I’ve never seen homework that actually said that having a fully transparent portfolio is to the disadvantage of shareholders. With that said, I’ve never seen research that said fully transparent is an advantage to the shareholders. That’s where I truly think it’s a cultural issue between the firms and I think that certain firms have made that leap into the managed account space or into the model programs so it’s a natural step to make that next step in actively-managed ETFs.

Shishir: Are you seeing greater openness to the idea of mutual fund conversion into actively-managed ETFs from providers as well as investors?

Bill: Yes, we’ll probably be announcing within a month a conversion of a separate account manager who’s going to convert their program into an ETF. You’ll probably see a closed-end fund do it as well. And then we’ve been working with several mutual funds that are looking to do it and they certainly want to get their first because they see the benefit of being the innovators. So we expect to get something done here probably some point in the third quarter.

Shishir: How can these products become a more integral part of advisor portfolios given the current incentives that financial advisors have to recommend mutual funds instead?

Bill: Well, I think the mutual fund industry has really moved away from selling their products with loads. If you look at the business in A-shares, probably 80%+ of A-shares are actually sold without a load at NSF value. And I think what you’re seeing everybody is moving to these fee-based wrap accounts where the broker is getting compensated on the overall portfolio, not on the product. Now, ETFs fit perfectly in that spot because it’s a low cost way to get access to those particular strategies, certainly on the passive side, now emerging on the active side. So I think that the model has changed and ETFs actually feed perfectly into the new model.

Shishir: What would you say are the main challenges for the Active ETF space in the next 2 years?

Bill: I think it’s to continue to educate investors and advisors. If I can rewind the clock 2 years ago from when we started Grail Advisors, I knew education was important but I thought given the resources that a lot of our other fellow firms in the ETF space had put into it, I thought the education they had done was superb and everybody would know what an ETF is, regardless whether it was active or passive. I’ve been surprised that that’s not the case. So I think we all need to continue to focus on education. Certainly, it’s a core issue for us, how do you trade ETFs, how do you utilize ETFs, and again that’s regardless of whether it’s active or passive.

Shishir: That’s fantastic, Bill. Thanks a lot for sharing your thoughts.

Bill: Thank you, thank you for having me.
 
Disclosure: No positions in above-mentioned names.

If you haven’t already subscribed to ActiveETFs | InFocus, do it here via Email or via RSS feed!
 
Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on EtfsHub is intended to endorse or promote any company or its products. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.