Armed with seven actively managed exchange-traded funds, including two fixed income funds it launched Friday, Grail Advisors plans to aggressively expand its lineup this year as the actively managed ETF sector continues to go mainstream.
William Thomas, the chief executive officer of the San Francisco money manager, said in an interview that the company plans to introduce more equity and fixed income actively managed ETFs, and is in discussions with several mutual fund companies that are interested in converting to actively managed ETFs. “We expect to significantly ramp up assets now that we have been in market for almost a year,” he said. “We should be between $500 million and $800 million by the end of the year.”
Thomas said Grail is in discussions with a number of financial institutions and asset managers, and expects to launch a series of customized, actively managed ETFs.
Grail announced Friday it launched the Grail McDonnell Intermediate Municipal Bond ETF and the Grail McDonnell Core Taxable Bond ETF. Both of the bond funds are actively managed and subadvised by McDonnell Investment Management LLC, a Chicago-based fixed-income specialist that manages more than $13 billion in assets.
The funds are important for Grail’s fund lineup, Thomas said, because they “provide a kind of transparent, liquid and low-cost exposure to the bond market that should enable investors and financial advisors to implement strategies more effectively than they could with traditional fixed-income mutual funds.”
Grail launched its first actively managed ETFs in May and it is “very much in its infancy,” Thomas conceded. But, he is confident it can develop assets. “In the active market there are really only 14 products globally and the sector is by far the growth engine for ETFs in the next several years,” he said.
Analysts said a number of firms, including John Hancock, Goldman Sachs [GS], and T. Rowe Price [TROW], have filed applications with the Securities and Exchange Commission to begin introducing actively managed ETFs.
T. Rowe is one of the few large fund providers that is not currently offering exchange-traded funds. James A.C. Kennedy, its chief executive officer, said in an interview Thursday that ETFs are still “primarily index products and that is not what we do.” He admitted the company has filed an application with the SEC for permission to introduce an actively managed ETF, but “at this point we have to be careful about what we do offer.”
He said that a T. Rowe actively managed ETF is not imminent because transparency rules require a company to detail all trading, and “that does not make sense for us.”
“The trading and intellectual power behind our funds belongs to our clients and if we expose those everyday we’d be giving it away to the marketplace,” Kennedy said. “Unless we can do a nontransparent ETF, we cannot proceed with active ETF.”
Thomas is excited by the possibility of new competition because, he said, “it validates that active is the next step.”
Currently, three companies—BlackRock Inc. [BLK], State Street Corp. [STT], and Vanguard Group—dominate the ETF market. In December, BlackRock Inc. completed its $13.5B acquisition of Barclays [BCS]—a longtime leading ETF provider with its iShares products—to become the largest provider of ETFs in the industry. BlackRock’s ETF business increased 44.5% to $114.7B last year, and already this year, BlackRock has started to introduce new ETFs.
Last year, nine companies began offering ETFs as the total number of funds increased by 10%. Three of those nine companies, including Grail, introduced actively managed ETFs.
Thomas said a few large players overwhelm the ETF universe because ETFs began as index-based products. With more actively managed products being introduced, competition will increase.
Grail plans to introduce more products this year, including sector-based funds, international country-specific funds and hedge-like products. In addition to McDonnell, Grail uses three other money managers, American Beacon Funds, New York-based RiverPark Advisors and St. Louis-based Wedgewood Partners, to subadvise its actively managed equity ETFs.
Last month, Grail announced it hired Gary Black, the former CEO of Janus Capital Group [JNS], to join Grail’s advisory board. Black will work with three other executives to help set Grail’s strategy and determine when it should introduce different products, Thomas said, adding: “His hiring is a major coup for us.”