Precidian’s non-transparent ETF structure draws interest from active managers

Jun 23rd, 2017 | By | Category: ETF and Index News

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A new type of actively managed ETF, which avoids disclosing portfolio holdings, has drawn interest from several major asset managers who have filed applications with the SEC to use the technology.

New active ETF structure draws interest from big asset manager names

JPMorgan Chase, BlackRock, Capital Research, as well as Legg Mason affiliates ClearBridge and Royce have all filed applications with the SEC to use Precidian’s new ETF structure.

Designed by Precidian Investments, a minority investment of Legg Mason, the ‘ActiveShares’ structure is being sought after by JPMorgan Chase, BlackRock, Capital Research, as well as Legg Mason affiliates ClearBridge and Royce. In addition, Nationwide Investment Services is also reportedly in negotiations with Precidian to license the patented technology.

While most passive and active ETFs today require daily portfolio disclosure, which exposes active managers’ investment ideas to other investors, the ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants.

Neal Epstein, vice president, senior credit officer at Moody’s Investors Service, explained: “Normally, authorized participants are the brokerage entities that are entitled to purchase and redeem large blocks of ETF shares from an ETF in exchange for “creation baskets,” designated amounts of securities and cash that are acceptable to the fund managers. (All other market participants trade ETF shares on a secondary basis.) As with an ordinary ETF, the current valuation of the underlying portfolio would be disseminated to the market, and arbitrageurs would be able to compare this indicative value, which is to be updated each second and verified by a second pricing vendor, to the quoted price of the ETF shares.

“With ActiveShares, authorized participants would not be able to calculate their own indicative value, since the creation basket will only be disclosed to a representative (a custodian bank) that will manage the confidential account. To create ActiveShares for an authorized participant, the custodian would accept the required consideration and assemble a creation basket, which it would contribute to the fund for new ETF shares in the confidential account. It would then distribute the ETFs to the authorized participant.”

Precidian is not the first to design a hybrid ETF vehicle which would appeal to active managers. Eaton Vance Corp launched their first exchange-traded mutual fund, dubbed NextShares, in February 2016. Similar to mutual funds, the vehicle protects the manager’s proprietary research in a bid to obtain benchmark-beating returns but also enjoys intraday trading as all trades are finalised at day’s end with prices reflecting the fund’s Net Asset Value plus or minus a trading cost (premium/discount) that was established at the time the trade was executed. This intraday tradability allows the fund to maintain significant cost and tax advantages.

Despite the buzz surrounding NextShares prior to its launch, the structure has not managed to revolutionise the actively managed ETF space, with passive ETFs still representing approximately 99% of the ETF industry’s $4.1 trillion in total assets under management. Concerns over the visibility of an active manager’s positions remain a top issue with over three quarters of current active ETFs dedicated to fixed income exposures which are harder to replicate.

However, with major institutions such as JP Morgan and BlackRock, the asset manager behind iShares, the largest ETF issuer globally by AUM, seeking to back Precidian’s new ETF structure, this may provide the momentum needed to truly see demand for active ETFs take off.

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