Columbia Management Investment Advisers LLC, a subsidiary of Ameriprise Financial Inc., has agreed to purchase Grail Advisors LLC in a move that could transform the firm into a major player in the active-exchange-traded-fund industry, experts said.
By purchasing Grail, Columbia will receive exemptive relief from the Securities and Exchange Commission to launch its own actively managed ETFs. Columbia hopes eventually to launch a line of active ETFs, said Christopher Thompson, head of product and marketing at Columbia.
“We have been looking at the industry, and clearly active ETFs are a newer addition to the market, but they certainly make sense for a number of different kinds of investors,” he said.
The deal was first reported on InvestmentNews.com last week.
Columbia plans to replace the subadvisers on Grail's five ETFs with its own managers. Those subadvisers are American Beacon Advisors Inc., RiverPark Advisors LLC, Wedgewood Partners Inc., McDonnell Investment Management LLC and Western Asset Management Co.
The new managers will be in place by end of May, Mr. Thompson said.
He declined to comment on what kinds of ETFs the firm is planning, but said there will likely be “significant overlap” with the firm's mutual funds.
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Ultimately, Columbia could convert some funds to ETFs, said Scott Burns, an analyst at Morningstar Inc. That capability, along with the fact that Ameriprise already offers ETF model portfolios and has 11,482 advisers, could transform Columbia into “a big player” in the actively managed ETF market, he said.
“They have the asset management platform, and they have the broker-dealer platform,” Mr. Burns said. “If they have the wherewithal, this could be a serious offering.”
Columbia has no immediate plans to convert funds into ETFs, but hasn't ruled it out, Mr. Thompson said.
There are a number of challenges facing Columbia.
First, it remains to be seen how the firm can avoid having its mutual fund managers' trades front-run by hedge funds if these portfolios are available as ETFs, which are completely transparent. The transparency issue has caused a number of mutual fund companies to shy away from actively managed ETFs.
“We don't see it as being an issue,” Mr. Thompson said.
It also remains to be seen whether advisers will pay attention to Columbia's foray into actively managed funds.
That's because Columbia, as a fund company, is a relatively average performer, with a few exceptions, said David Kathman, an analyst at Morningstar.
As of March 31, about a fifth of the firm's equity funds and a fifth of its fixed-income funds were in the top quartile of their peers over the previous three-year period; about a quarter of its equity funds and 17.28% of its fixed-income funds were in the top quartile for the previous five-year period.
Columbia's funds saw $7.87 billion in net outflows last year, leaving it with $218 billion in mutual fund assets.
Still, a canny marketing plan that plays to Columbia's strengths could overcome the obstacles.
“Anything with "ETF' in the name is pretty hot now, so that should get advisers' attention,” said Tom Roseen, a senior analyst at Lipper.
Much will depend on how Columbia decides to price its ETFs.
Columbia is still figuring out pricing, Mr. Thompson said.WELCOME ADDITION
Being able to offer its own ETFs, which are completely transparent and don't offer advisers any type of commission, would be welcomed by Columbia's parent, Ameriprise, and its advisers, given the firm's difficulties over the past several months, observers said.
Ameriprise and its Securities America Inc. subsidiary have been mired in litigation with investors who were burned by Regulation D offerings that the SEC is charging were fraudulent.
Last week, the firms reached a proposed $150 million agreement with clients who bought $400 million of these high-risk offerings that went bust.
“The fact that ETFs offer advisers no commissions will be a good thing for Ameriprise's image,” said Sophie Schmitt, a senior analyst at Aite Group LLC.
One issue that Ameriprise has had to confront over the years is the image that its advisers are pushing proprietary products, Ms. Schmitt said. “Since ETFs have no commission, that might lessen the challenge for advisers,” she said.
Particularly with the fiduciary standard and other regulations coming down the pike, being able to offer actively managed ETFs, which should cost less than mutual funds, would be attractive, said David G. Miller, an adviser with Miller & Associates, an Ameriprise franchise.
But integrating an ETF business into a traditional asset management firm can be tough, said Matt Hougan, president of ETF analytics at IndexUniverse.com.
For example, when Invesco Ltd. bought PowerShares Capital Management LLC, it took some doing for the firm to get the sales force to sell the ETFs aggressively, he said.
In addition, Columbia is entering a market that has been slow to take off. Active ETFs account only for $4 billion in assets, compared with over $1 trillion in the entire ETF industry. Still, over the past few weeks, BlackRock Inc. and Eaton Vance Corp. have received exemptive relief from the SEC to launch active ETFs.
E-mail Jessica Toonkel at jtoonkel@investmentnews.com.
