On February 26, 2016 Eaton Vance’s subsidiary NextShares launched its first patented non-transparent exchange traded managed fund (ETMF). More NextShares fund launches are expected throughout 2016.
Currently, NextShares has license agreements with twelve fund managers, including Eaton Vance. The NextShares launch represents a major milestone as it is the first exchange traded product where managers are packaging active strategies in a non-transparent manner. This is an evolution of a trend already underway; firms who have traditionally offered actively managed products, such as Goldman Sachs, John Hancock, and PIMCO have been entering the ETP market by launching smart-beta indexed funds, transparent active funds, and now with Eaton Vance non-transparent active funds.
In this edition of Exchange Thoughts we discuss the potential features of this new structure and highlight key considerations for managers contemplating this model.
BBH has worked with NextShares, managers with license agreements, and other third-party providers to design an operating model to service these products. If you’d like more information on how BBH plans to support NextShares, please contact us at:
Brown Brothers Harriman interviewed Stephen Clarke on Asset TV as part of our Client Insight Series on February 29, 2016. Click here to watch the full interview.
What is NextShares?
NextShares is a new fund structure: a hybrid of an ETF and actively managed mutual fund. It combines the intra-day trading and tax and cost efficiencies with the characteristics of an actively-managed mutual fund, including the delayed publication of portfolio holdings (typically quarterly with a sixty day lag). By combining these structures, NextShares believes they will offer a vehicle that is less expensive and more accessible to investors, while potentially improving performance compared to traditional active mutual funds.
NextShares seek to replicate the cost savings of ETPs while not disclosing the proprietary investment strategy and process of the manager. In this wrapper, certain fees that are present in a mutual fund are either eliminated or reduced:
- Elimination of sales loads and 12b-1 fees
- Lower cost of shareholder account administration
- Reduced trading charges related to shareholder activity
Given the potential cost savings combined with a unitary management expense, single share class, and low investment minimum, NextShares expects these products to be easier for investors to access than traditional actively managed mutual funds.
Considerations for Managers
The NextShares structure is patent-protected, so managers considering this structure will be required to enter into a licensing agreement with NextShares directly. This product structure may be ideal for an asset manager who is managing active strategies and is wary of publishing their holdings daily. In addition to the licensing agreements, managers should ask themselves:
- How will I price a NextShares product alongside my existing investment menu?
- Should I seek to replicate existing strategies or launch something new?
- Will broker/dealer platforms support the NextShares products?
- What are the operational nuances that are unique to NextShares products?
- How will I need to adjust my distribution strategy to support these products?
- How should I structure my capital markets team to support NextShares?
Structural Innovation is Gathering Momentum
In addition to NextShares, Precidian Investments is seeking to offer an actively managed ETF structure. Precidian recently re-filed its 19b-4 with the US Securities and Exchange Commission (SEC) and is currently awaiting a ruling or extension by the SEC. This is a revised filing by Precidian with the regulators, which seeks to implement changes from their initial reviews. In advance of the regulator’s findings, Legg Mason entered into an agreement with Precidian that gave them a 20% stake in the firm. The New York Stock Exchange also has a different non-transparent structure under review with the regulators as well.
Beyond the non-transparent ETP launches and filings, growth in the broader active ETP market continues. While active ETPs in the US account for only 1% of ETP AUM, their annual growth by flows and products outpaces that of passive ETPs.1 While fixed income strategies control much of these flows in the active market today, fund launches through the end of 2015 favor alternative and tactical asset allocation strategies.2
We expect 2016 to be another busy year in the ETP market with further innovation in both product structure and investment strategies. Brown Brothers Harriman (BBH) believes the space will continue to see large, established asset gatherers enter the market given the proliferation of smart-beta strategies as well as the on-going development of new and innovative structures that allow them to port successful strategies into new product wrappers. Although the NextShares structure is currently only licensed in the US, as the global ETP market continues to mature we expect that the structure could be the blueprint for non-transparent ETPs in Europe and Asia.
1 Cerulli Associates: The State of U.S. Retail & Institutional Asset Management 2015
2 Morningstar Direct