The year 2020 has been one for the record books. Not only have we had to learn how to operate in a new normal of schooling and working from home, but we have finally seen the first of the semi-transparent ETF models that were approved in 2019. The launch came in the middle of a volatile market during a pandemic, bringing the total to twelve semi-transparent ETFs representing four of the approved methodologies on the markets. Although the NYSE Actively Managed Solution model is currently being utilized by American Century, it was Natixis Advisors in partnership with NYSE that helped lay the foundation for one of the four proxy portfolio methodologies to be approved in 2019. Recently, we sat down with Nick Elward, SVP, Head of Institutional Product and ETFs of Natixis Investment Managers for a two-part blog.
In this first part, we will take a deeper look at Natixis’s reason for selecting the NYSE Actively Managed Solutions methodology, and where active management and ETFs are going.
What is the Natixis asset manager footprint? Areas of expertise? Natixis Investment Managers is a large asset management company serving investors in multiple jurisdictions and through multiple investment vehicles. Natixis has over $1 trillion USD under management as of 6/30/2020. With a broad set of over 20 affiliate asset managers, Natixis is able to offer equity, fixed income and alternative investments.
Outside ETFs, what type of investment vehicles had Natixis historically supported and distributed? Natixis strongly believes in being vehicle agnostic. We seek to offer our investments in whatever vehicle type is right for the investor. Consequently, in the US, we offer mutual funds, institutional separately managed accounts (SMAs), retail SMAs, Collective Investment Trusts and private funds. We also offer a range of non-US vehicles to international investors.
What does Natixis think about transparent/semi-transparent active ETFs as they relate to certain investment capabilities? We are open to both transparent and semi-transparent ETFs—it all depends upon the portfolio management team’s comfort with daily transparency. In fact, we have a mix of active transparent ETFs, for quant equity (MVIN) and fixed income (LSST) strategies, and have recently launched three fundamental US equity strategies as active semi-transparent ETFs. They are the Natixis U.S. Equity Opportunities ETF (EQOP), the Natixis Vaughan Nelson Select ETF (VNSE) and the Natixis Vaughan Nelson Mid Cap ETF (VNMC).
Why did Natixis choose the NYSE Actively Managed Solutions structure? Would Natixis consider using multiple Semi-Transparent Active ETF Models? We performed due diligence on a variety of the potential structures but ended up liking the NYSE model the best. Beyond believing that their proxy portfolio approach should lead to tight spreads on our products, we liked the balance that the process offers between being transparent where we can and being non-transparent where we have to be in order to protect recent stock trading activity. We have no plans to use any other models at this time.
What does Natixis think about clone Semi-Transparent Active ETF strategies versus unique Semi-Transparent Active ETF strategies? We are open to launching both product types.
Are there any strategies that Natixis would not offer in an ETF (if the Semi-Transparent Active ETF models were not restricted to certain asset classes/regions)? We are currently focused on US equity ETFs for our semi-transparent ETFs, but we’d be open to other asset classes over time. I wouldn’t speculate on other asset classes that may or may not be approved by the SEC. However, we plan to fully explore all asset classes that the SEC allows us to pursue in this structure, at the appropriate time.
What does Natixis think about pricing ETFs relative to comparable mutual fund/SMA strategies? There are a variety of factors that are considered when pricing ETFs, without one factor dominating. A few of the factors that go into the decision include costs, the competitive landscape, client feedback and the price of the same strategy in different vehicle types. Most active semi-transparent ETFs seem to be priced similarly to the institutional class of their sister mutual fund.
Longer term, how does Natixis view mutual funds relative to semi-transparent, active ETFs? They are arguably a better product wrapper from a number of perspectives including tax efficiency and cash drag. What would it take to convince Natixis to convert mutual funds into this new product structure? Natixis is a product-agnostic firm. We want to provide our investment capabilities in whatever vehicle our clients and prospects seek. The benefits of ETFs have broadly been communicated in the marketplace, and we are happy to be able to offer this tax efficient, low cash-drag vehicle type to our investors. We don’t have plans to convert any mutual funds to ETFs at this time.
At an industry level, flows continue to move from actively managed mutual funds to passive on an almost one-for-one basis and within active funds, money is moving from higher cost to lower cost products. Does Natixis ultimately see these new models as a source of new money? Yes. Active semi-transparent ETFs have meaningful benefits that many investors appreciate, or will appreciate as we further provide them information. We expect this vehicle type to become very popular with investors, for good reason.
Does the use of a proxy portfolio for creation/redemption baskets present a material market risk for Authorized Participants (APs) and other market-making participants? The proxy portfolio has very effectively tracked the actual portfolio in all of our simulated and live tests. We expect that to continue as our semi-transparent ETFs break into the marketplace. If this strong correlation continues over time, there are no material risks to APs or other market makers.
What impact will rebalancing the proxy portfolios, in relation to creations and redemptions, cost the fund in execution costs and tax efficiency? Additional trading costs in order to rebalance the portfolio will be small. This will not be a material cost, nor will it have a material impact on tax efficiency. The main driver of success remains stock selection.
The question was raised early on in the exemptive filing stage if an unknown basket would lead to wider spreads when compared to passive ETFs; based on the spreads American Century has had of late, they have gone from around 25 bps to 15 bps, so clearly this isn’t the case here. Is the market maker keeping it tight because they really want it to work and they have found their threshold, or is it really due to the demand? How have your partners been able to handle efficient markets during the volatility? And what are your thoughts on the spreads during periods of volatility? I can’t comment on another firm’s product and the motives that their Lead Market Maker (LMM) has. As for spread during market volatility in the future, just as transparent ETFs may have wider spread during times of market stress, semi-transparent ETFs may get somewhat wider too. As is the case for any investor, whether it be in an ETF or a stock, if an investor is a seller in a market sell-off when there are no buyers on the ticker, the sellers will have to pay-up for the liquidity that they need. Most long-term investors, who are patient during these times, will realize no negative impact, since they are not transacting.
Why should managers consider these models? If I were an asset allocator considering ETFs using the NYSE proxy portfolio approach, I would focus on three points. First, I would actively analyze the investment team picking the stocks in the ETF. Second, I would observe the ETF’s spread and confirm the cost to enter is not excessive. I would compare its spread to active ETFs in the same asset class. Lastly, I would observe the ETF’s tax efficiency over time. I would expect great tax efficiency, but it should be something that investors test. We believe the NYSE model, when applied to Natixis’s asset management capabilities, will be a formidable combination that can help many investors with strong performance and tax efficiency.
What has been the biggest pain point for getting the Natixis/NYSE model to market? A lot of the hard work is behind us. Clearly, building the approach, perfecting the process, testing the results and getting SEC approval took a fair amount of time. We now look forward to watching our active semi-transparent ETFs, Natixis US Equity Opportunities ETF (EQOP), Natixis Vaughan Nelson Select ETF (VNSE) and Natixis Vaughan Nelson Mid Cap ETF (VNMC) perform in the marketplace.
What are you watching and what are you watching for? We’ve all been on lots of panels and doing interviews around Semi-Transparent Active ETFs; what do you think has been missing from the conversation—say a year from now, what will be the “why wasn’t this brought up before” or “why are we just considering this now after all this time?” I think we have covered it all! I look forward to the post-COVID-19 world where we can get together again at conferences and talk about the live products and how they are living up to their expectations.
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