Active ETFs: A Conversation with Noah Hamman

In February 2010, ActiveETFs | InFocus spoke with – Noah Hamman, CEO of AdvisorShares Investments LLC. AdvisorShares is the company behind the Dent Tactical ETF – the largest equity active ETF in the US to date. Noah shares with us his thoughts on the Active ETFs space, his plans for AdvisorShares and also the opportunities and challenges faced by actively-managed ETFs.

Shishir Nigam – Active ETFs | InFocus: Noah, welcome to ActiveETFs | InFocus and tell us a little bit more about yourself and how you got into the Active ETF space.

Noah Hamman, CEO – AdvisorShares: Thank you very much. My background is I’ve been working on ETFs for a while now, I worked at Rydex Investments and started their index-based ETF business and we launched their first ETF in 2003. So I’ve been working in and out of the ETF space since then, growing out that product line and transitioning to starting up AdvisorShares focusing on actively-managed ETFs.

Shishir: Where do you see the Active ETF space going in the next 5 years?

Noah: I see it growing a lot. You look at an ICI statistics that says 85% of the equity mutual funds assets are actively-managed and in an exchange traded structure, they haven’t had anything that really competes with those assets in that structure and so I think there’s a huge opportunity for actively-managed strategies in that ETF structure.

Shishir: On the flip side, what do you see being the main challenges for the Active ETF space and how does AdvisorShares plan to overcome those hurdles?

Noah: Good question. There are probably a few challenges but I think the biggest one still starts with education. There’s still a lot of people out there that don’t understand what ETFs are and how they work and so I think that’s by far the biggest thing – helping people understand the benefits the structure provides and then the next piece that you have to educate on is the investment strategy and the investment manager. And that has its normal challenges as you’re positioning yourself against other bigger companies that are more established. In our particular case, how we hope to overcome some of those issues is we’re working with managers that already have a track record managing money, so we’re not picking obscure managers that don’t have any experience. They might be managers that people don’t have easy access to today but they would in the structure that we’re able to offer them in. We’re able to take their experience and their expertise and in some cases their track record, which most of the time you can read in the prospectus, and be able to offer a product with a proven money manager to investors.

Shishir: Specifically for the Dent Tactical ETF (DENT), have you been satisfied with the growth and the level of investor interest in that product?

Noah: We have, for a while, till PIMCO came into the space, we were the largest actively-managed ETF. We launched in the middle of September and have grown to almost $30 million, so it’s been nice, steady growth in the product. We get an opportunity to explain to people the investment strategy and how it’s different from what’s out there. And in particular, this investment strategy has a tactical nature to it, so it’s designed to react to developments in the markets that we’re in today. That’s a well-received story and I think our asset growth has been reflective of that. We’re happy with it and we hope to continue to see it grow and perform well.

Shishir: Something in the pipeline for AdvisorShares is the WCM/BNY Mellon Focused Growth ADR ETF (AADR) and this will be the first Active ETF that will be investing in international equities. Who are the managers behind this fund?

Noah: It’s a firm called WCM Investments, based out of Laguna Beach, California. They’re a firm that has over 20 years experience. They’re solid, well pedigreed and have great experience. They’ve been only an institutional money manager so your average investor hasn’t been able to get direct access to them – now they can in an ETF structure. And in particular, we’re running strategy that they’ve been managing now for 5 years. It has a history of outperformance over its benchmark and so your regular investor and financial advisor of any size account will have access to a very good investment team such as WCM.

Shishir: You also announced a partnership very recently with Peritus Asset Management to launch an actively-managed high-yield bond fund. How do you plan to compete with the likes of PIMCO who are also in the active fixed income space?

Noah: We’re going to compete with them in two ways. One is, we might actually outperform them, but we’ll see. Peritus actually has a 10 year track record, a very good track record. You’ll be able to see that in the registration statement we hope to eventually file with them. We’re excited to bring a really good money manager in that investment strategy and I’d go back to the diversification point. Are investors truly diversifying their fixed-income allocation if they go all in on PIMCO – they’re a great shop and they have a great strategy but for us diversification means not just asset classes but investment managers and styles. So I think we’ll have a pretty compelling option for investors to do that with their high-yield allocation.

Shishir: How does AdvisorShares plan to differentiate themselves from other Active ETF issuers like Grail Advisors?

Noah: It’s a good question. I can’t say I understand their model completely but my sense is they focus in on a lot of institutional firms. You look at a firm like American Beacon – a $60 billion mutual fund shop, that’s a great partnership and a great relationship for them. So they seem to have partnered with those types of firms. For us, we partner obviously with institutional money management firms like a WCM but we partner with Peritus Asset Management which is a Colorado based investment advisor and the same with a product we have in registration which uses another RIA money manager. So I think with our model, and how we’ll differentiate is we work with a lot of different types of money managers of varying size and strategy and I think as you’ll see with a couple of products, we’ll probably have more of an alternative bent to us. There’ll be something really different and unique about our investment strategies with the underlying advisors. There won’t probably be a lot of large cap value with 300 positions that try to outperform a benchmark within a certain stated range of risk. We’re going to have managers like WCM which have 20-25 picks and they’re either going to pick really well or pick really poorly. Or even long/short strategies that again I think are good diversifiers and good complements to people’s existing investment portfolio.

Shishir: One of the biggest opportunities that Active ETFs face is to break into the 401(k) and retirement portfolios. How do you think Active ETFs can do that?

Noah: Hopefully how they can do it is by offering a compelling investment solution within a great overall price – meaning management fee, tax efficiency and operational expenses. For me at least, ETFs are all about choice and I think that’s what people are looking for more of in a 401(k) platform. Practically speaking, we’ve got a lot of big firms looking to make their way into that space so I think we’ll benefit from their effort. For our firm in particular, we’re connected with players who have made an acquisition in a professional employment organization which gives us direct access to develop an ETF based plan for their qualified 401(k) plans that they offer. So we’re definitely looking at that space and how we can get our offerings available on those platforms as well.

Shishir: Looking into the future, what kind of strategies and investment options is AdvisorShares looking to bring to the market in the form of Active ETFs?

Noah: It’s a good question, as you mentioned earlier, we’re a platform for advisors to develop their own investment strategies. So for us, it’s not about coming up with what we think is the best investment strategy. It’s talking to advisors and talking to investors to figure out what they’re really good at and what’s out there in the marketplace in terms of needs. We really talk to advisors to find out who’s interested in developing products, who has a great track record and an area of expertise and who has something that’s very different that will work well in our structure that we’ll have an ability to distribute. So we’re pretty open to the types of strategies we’ll build in the future. Again, I think they’ll all be caveated with having something different and something unique about them. Just because you’re an actively-managed ETF structure doesn’t mean you automatically generate sales. You really got to have something compelling about the strategy that makes people want to move money from where it’s at today, into your product.

Shishir: That’s fantastic. Noah, thanks a lot for joining us and we wish you all the best.

Noah: You’re welcome, thank you very much.