Despite the fact the markets have largely recovered most of their losses from late Q1, it is likely the rest of 2020 will remain challenging for passive and active managers alike. A variety of product wrappers, including traditional mutual funds, passive and smart beta ETFs, and SMAs will be tested. Already, there are once again calls to examine whether traditional mutual funds that invest in hard-to-trade assets such as high yield bonds should allow daily investor withdrawals.
At the same time, structures that have been gaining ground in recent years such as interval funds and non-traded REITs will also be put into the crucible where it will become apparent which sponsors and distributors had procedures in place to ensure advisors and their clients were properly vetted and educated as to the pros and cons of these products. It is unlikely, given the turmoil in the private markets—whether for debt, equity or real estate—that alternative managers will be completely spared. For example, in 2019, non-traded REITs raised more than $11.8 billion—more than twice the amount raised in 2018.* As a result, a number of managers are imposing restrictions upon both new subscriptions and, more importantly for those investors who need access to their capital, redemptions. At the same time, some large wealth managers have seen record sales in alternative products during the first half of 2020. In any event, regardless of variations in short-term demand for these products, we remain convinced that investors’ desire to include these products in their portfolios in order to increase diversification and access to non-correlated return streams means the medium to long-term future of these structures remains bright.
Importantly, new vehicles such as non-transparent active ETFs and auction funds continue to be launched and their ability to withstand the stresses of a difficult market will be carefully examined. In fact, American Century launched the first non-transparent active ETFs on April 2—American Century Focused Large Cap Value (FLV) and American Century Focused Dynamic Growth (FDG). Legg Mason followed shortly thereafter with the launch of ClearBridge Focus Value (CFCV) on May 28, and Fidelity launched three new funds on June 4 using its own proprietary methodology. Interestingly, Fidelity chose to offer funds that are clones of existing mutual funds, setting up an interesting future comparison in terms of performance, price and market demand.
And, although smaller investors can invest as previously mentioned in increasingly shareholder-friendly non-traded REITs, it remains difficult for retail investors to access private equity. This may be about to change as Macquarie Investment Management, the owner of Delaware Funds, filed a Prospectus for an auction fund with the SEC on April 15. For all intents and purposes, it is a privately placed version of an exchange traded fund for illiquid assets with a market auction instead of a redemption or a tender back to the fund plus a series of mechanisms to keep the auction pricing near the net asset value—a kind of slow-motion ETF. The investment manager will be Delaware Management Company and the sub-adviser will be Wilshire Associates. The fund will be open to “accredited investors” and “qualified clients” and will have an investment minimum of $25,000. We believe that this is an exciting development, and the fact that a major investment manager with a significant brand and a well-developed distribution network is getting behind this structure is a very positive endorsement. While not as high-profile as the recent launch of non-transparent active ETFs, we would encourage readers to follow this structure closely as both have the potential to be catalysts for change.
It is encouraging to see the asset management industry adapt to challenging circumstances while continuing to push forward with new and innovative structures. SS&C is committed to being a part of this process and looks forward to working with our many partners as they strive to provide product solutions that meet the needs of an increasingly sophisticated and demanding investment community. You can learn more here.
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