iShares expected to move into actively managed ETFs

A new iShares that is more heavily involved in actively managed exchange traded funds will likely emerge as the company changes hands, though some say it might be late to the party. In the past, iShares has been reluctant to offer such ETFs because its executives didn't see a clear need for the products or an easy way to deliver them. But that could change when BlackRock Inc. of New York — whose offer to buy iShares and its distributor, San Francisco-based Barclays Global Investors, was formally accepted last week by Barclays PLC of London — officially takes the reins. The $13.5 billion deal trumped an agreement Barclays made in April to sell iShares for $4.4 billion to CVC Capital Partners Ltd. BlackRock spokeswoman Bobbie Collins had no comment about the company's plans for iShares, saying that it is “too early to discuss details” of the acquisition. Even before making the deal for iShares, BlackRock was considering its own line of actively managed ETFs, according to industry sources. Now it will pour those efforts into iShares, they say.
“We very much expect [iShares] to aggressively move into active ETFs,” said Darlene DeRemer, a partner at Grail Partners LLC, a Boston merchant bank that specializes in the investment management industry. That would be the most likely outcome of its sale to BlackRock, agreed ETF pioneer Gary Gastineau, principal of ETF Consultants LLC of Summit, N.J

SHAKING THINGS UP

BlackRock is one of the largest active managers in the world and believes strongly in the technique, said Mr. Gastineau, who helped bring some of the first ETFs to market in 1993. The sale will certainly shake things up at iShares, said Jim Lowell, a partner and chief investment strategist of Adviser Investment Management Inc. of Newton, Mass., which manages more than $1 billion. Although it is the biggest ETF provider in terms of both assets and number of offerings, iShares has been reluctant to embrace anything beyond “traditional” index-based ETFs, said Mr. Lowell, who is also the editor of the Forbes ETF Advisor, a monthly newsletter in Needham, Mass., Any shakeup, however, is unlikely to involve iShares senior management. Deals are in place to keep the management team intact, according to sources. That should help remove any doubt concerning the future of Lee Kranefuss, the former global chief executive at iShares and one of those responsible for helping iShares to become the ETF industry leader. When Barclays announced it would sell iShares to CVC Capital Partners, a private-equity firm in Luxembourg, he was named iShares' non-executive chairman, focusing more on strategy and less on day-to-day management. Michael Latham and Rory Tobin were named co-CEOs of the business, the firm said. Previously, Mr. Latham, who joined Barclays Global Investors in 1994, was chief executive of U.S. iShares, while Mr. Tobin, who joined the company in 2004, was chief executive of Europe iShares. “I think that was to allow CVC to have leverage and latitude by not inflicting on them a de facto management team,” said Herb Blank, senior vice president of Rapid Ratings International Inc. of New York, and an industry consultant who has worked with iShares. “I think this was to make it malleable for a sale.” There are, however, no further management changes planned, said Christine Hudacko, a spokeswoman for iShares. The company declined to make its executives available for further comment.

OTHER PLAYERS

The ETF provider's perceived reluctance to offer actively managed offerings is overblown, Ms. Hudacko said. “iShares has been interested in, and has been moving forward with, actively managed ETFs,” she said. The business has two actively managed ETFs in registration, and more are planned, Ms. Hudacko said. Other ETF players, however, have beaten iShares to the punch. Firms such as Invesco PowerShares Capital Management LLC of Wheaton Ill., Grail Advisors of San Francisco and WisdomTree Asset Management Inc. of New York already have introduced such ETFs, and all have more planned. “It is where the innovation is,” said Jonathan Steinberg, chief executive of WisdomTree. Actively managed ETFs, however, are still in “the early stages,” Ms. Hudacko said. iShares hasn't rushed to offer such ETFs because “we're very thoughtful in our process,” she said. “We only come out with new products when we think they are going to work and add value for the client,” Ms. Hudacko said. Despite the rush to bring active ETFs to market, advisers, especially early adopters, remain skeptical about the funds.
Passively managed ETFs are a good way to get low-cost, transparent exposure to market segments, said Tom Mench, chairman and chief investment officer of Mench Financial Inc., a Cincinnati-based advisory firm with $200 million under management. As an adviser, he can add value by adjusting the mix of such ETFs, he said. “Because of that, I don't need to pay other individuals to add that value,” Mr. Mench said. A similar opinion was expressed by Richard Romey, president and founder of ETF Portfolio Solutions Inc. a Leawood, Kan.-based adviser with $50 million under management. “We really have no interest in actively managed ETFs,” he said.

WEAK DEMAND

With BlackRock buying iShares, it seems inevitable that iShares will get involved in producing more actively managed ETFs, but “if I had my choice I would rather they didn't,” Mr. Romey said. Of course, how far iShares takes actively managed ETFs depends on investor demand for such products, and that demand so far has been weak. Despite solid performance, the three actively managed equity ETFs from Invesco PowerShares — which were launched in April 2008 and have the longest track record among such ETFs — have just $15 million in assets, according to Morningstar Inc. of Chicago. But with iShares getting behind actively managed ETFs, that could change. “iShares with BlackRock now makes any 800-pound gorilla look like a dormouse,” Mr. Lowell said. “They can do whatever they want.” E-mail David Hoffman at dhoffman@investmentnews.com.