Active ETFs Present A Distribution Opportunity For Managers – Randy Bertman, President Huntington Asset Advisors
Tuesday, July 6th, 2010ActiveETFs | InFocus writes:
Active ETFs | In Focus spoke with Randy Bertman, who is the President of Huntington Asset Advisors. Huntington recently filed with the SEC to launch actively-managed ETFs and got a lot of attention after announcing its intent to roll one of its mutual funds into a proposed Active ETF. Randy chats with us about their mutual fund conversion plans, their decision to take a fee haircut and why Active ETFs make a lot of sense for shareholders while presenting a new distribution opportunity for mutual fund managers.
Click here and hit the play button below to listen to the full audio interview. Alternatively, find the transcript of the interview below.
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Shishir Nigam – ActiveETFs | InFocus: Will the daily disclosure required for Active ETFs in the US be an issue for your portfolio managers?
Randy Bertman – President, Huntington Asset Advisors: No, they shouldn’t be much of a difficulty at all. We have a number of systems in place at Huntington, we are a fiduciary of about $13.5 billion and about 20,000 customers of a trust fiduciary nature and about 10,000 mutual fund customers. So we’ve got the infrastructure in place that will allow us to be able to expose our shareholders to the assets that are actually being held. The SEC has from years and years gone by, looked at different things in order to communicate more effectively with shareholders and to do things that from time to time cost a little bit of money for us. I recall we had to do some hiring of a third-party entity to look at pricing of the securities that are based both in the US and internationally to make sure that there is not an event that would create a pricing mechanism that would unfair at the end of the trading day in the US. So there’s a number of things that have had to take place – proxy voting, all together that has to be displayed on websites that mutual funds are involved with. So there’s nothing that is outside the realm of what we’re used to.
Shishir: Another announcement was that the existing Huntington Rotating Market Fund will be rolled into the actively-managed ETF in the future. What are the benefits to existing shareholders of this conversion?
Randy: We’re what’s known as a top-down investment shop. So we spend a great deal of time trying to understand what’s going on in the economy and the big picture and as a result of that, we created a mutual fund called the Rotating Market Fund, back in 2001. The intent of that was to have an index fund, but since there are so many indices and index funds that are available to the public, we wanted to do something a little different. So we used our top-down philosophy to rotate our emulation of different indices in that particular fund. If we feel perhaps that smaller-caps are going to outperform large-caps, then we will have that fund emulate the S&P600. If we feel mid-caps are the place to be, then we’ll do the S&P400. If we’re ambivalent about the market, then typically we’ll emulate the S&P500. We also can go into the global sectors as well, so it’s a fund that was quite unique. It took the SEC a little bit longer to approve it because there was nothing like it at that time. Now, that fund has got a proven track record that has vastly exceeded the return of the S&P500 since its inception. So we felt that, one, this was a good fund to roll into an ETF space. People can use the track record that the Rotating Markets mutual fund has achieved to give the individual investor a little bit of an idea of what they can expect, in terms of the rotations and the performance. The same fund manager has run the mutual fund for the last 9 years, certainly he’ll continue to run the ETF as well, so that should give some solace to the shareholders of the ETF.
Shishir: Do you see actively-managed ETFs being a better delivery vehicle for active managers than active mutual funds?
Randy: It’s hard to say. There’s certainly advantages to the ETF space, it is a growing area of investment interest. It’s a little more flexible than the mutual fund industry. Obviously, people can buy and sell during the trading day, rather than having to accept the valuation at the end of the day when things are settled and priced. It’s a different environment and I think that it appeals to a lot of people, certainly ETFs are more purchased more by the individual investor or the institutional investor based upon their interest in that market. Mutual funds, unless they are no load, are typically sold to an investor by a sales person that collects a load as well. So here the commission versus the load is a little more attractive for many shareholders. So I think certainly you’re going to see more people moving into the actively-traded space on ETFs.
Shishir: From the company’s perspective, does Huntington lose out financially due to the lower overall expense ratio of the active ETF compared to the mutual fund?
Randy: Yes, we will have to sacrifice some of our management fee, it will be lowered on the ETF space. But you make business decisions all the time and this was the decision where we felt that we needed to be in the ETF space. We will be the first bank that’s sponsoring an ETF that’s in the Midwest and we like to be on the forefront of a number of things like that. So sacrificing some return in order to gain market share perhaps, or to enter a different distribution space, we feel is well worth the cost give-up or the income give-up.
Shishir: Currently the Rotating Markets fund has a management fee of 50 bps, that’s what you’re suggesting will be lowered?
Randy: The bank also receives a 12b-1 on the mutual fund as well as a shareholder servicing fee, most of which are used for distribution purposes. So yes, the ETF will be considerably more attractive in terms of expenses to the customer.
Shishir: How do you see the Active ETF space evolving in the next 2-3 years?
Randy: If it is anything that is indicative of the non-active space, the index emulation space that ETFs originally started out as, and the success that was achieved there, I think you’ll see a lot of mutual fund managers want to get into the managed space as well. It just makes an awful lot of sense for the shareholders and like I say, it does present a different distribution challenge but also a different distribution opportunity than most mutual funds have not experienced.
Shishir: Which other existing funds may be converted into actively-managed ETFs in the future?
Randy: We will be evaluating the success of the two that we’ll be cloning now. Actually one’s a mutual fund, the other’s a separately managed account – the ecological investing program, we have done only with separate accounts. But we will be cloning a common trust fund. I had wanted to utilize the strategy that we’ve had in the past that is more of an equity protection strategy – we call it Huntington Equity Protection Strategy. It uses options as part of the protective mechanism and unfortunately the SEC, they’ve got a massive amount of regulations that have to be written on their plate in order to comply with some of the changes that have been dictated by Congress. They want to make sure that they do things properly with new fund entrants and so our attorneys tell us they’re really not going to approve anything that has derivatives associated with it – and they are considering options as derivatives. So the strategy that we’re employing there now is we’re doing it in a common trust fund and at some stage of the game, when the SEC is a little bit more lenient with regards or their interpretation of derivatives is a little bit more liberal, then we intend to clone that and put it into the ETF space as well.
Shishir: That’s great, thanks a lot for speaking to us Randy and we wish you all the best.
Randy: Thank you very much. We’re interested in the new products and the investment business it’s an exciting business, I wish it could be a little more attractive at the moment. But, it’s certainly is something that people need to take advantage of and use the best skills that they can and find the best people that have the skills to help them weather both the storms and find the opportunities. Thank you very much.
Disclosure: No positions in above-mentioned names.
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