As the investment world moves towards passive investment strategies and exchange traded funds, traditional active managers have been trying to figure out how to keep their strategies in front of advisors and investors.
But most active managers are loath to reveal their holdings daily, fearing they are giving away their intellectual goods.
Enter NextShares, an actively managed fund that is traded on an exchange but does not have to disclose holdings on a daily basis. The idea is to put the tax efficiencies and lower cost structure of the ETF around a traditional actively managed mutual fund.
In 2011, Eaton Vance created Navigate Fund Solutions to develop the new structure, dubbed “exchange traded managed funds.” Stephen Clarke, a former senior vice president of Old Mutual Asset Management, led the effort.
Perhaps Clarke’s biggest hurdle was getting the Securities and Exchange Commission to approve it. While the SEC rejected filings for other non-transparent ETFs from BlackRock and Precidian Investments late last year, the agency approved Clarke’s version. And in late July, Eaton Vance made public an April letter from the SEC denying Precidian’s second proposal to launch a competitive product.
“If you think about non-transparent active ETFs, there have been filings with the SEC for over six years, and they haven’t yet won approval and there’s no guarantee they will,” says Deborah Fuhr, managing partner at ETFGI. “This is solving for a lot of the issues.”
Instead of using intraday pricing, NextShares’ pricing will be based on the fund’s daily net asset value plus or minus a trading cost that is determined in the market. And for active managers, it means they don’t have to tell the whole world what they own, yet can reap some of the price advantages of an ETF, as the structure puts the trading costs on the market maker and away from the fund.
The firm estimates the new structure could improve mutual fund performance by 63 basis points due to the reduction in operating expenses and trading costs. Also, because redemptions can be met in-kind, the fund won’t need to hold as much cash as a mutual fund, which can be a drag on performance when markets are up.
“This will make active management much more competitive,” Clarke says.
Clarke has licensed NextShares to 14 managers so far, including American Beacon, Gabelli Funds, Hartford Funds, Pioneer Investments, and Principal Management Corp. They are in discussions with 12 more. Some 66 funds are currently in registration, including 18 from Eaton Vance. The firm is targeting late 2015 for
introduction.
In late July, Credit Suisse downgraded Eaton Vance shares, on concerns that the firm won’t be able to get distribution for NextShares funds.
Next Chris Costello