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Mutual fund managers move into ETF space

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Global financial services firm BBH is the second largest ETF servicer, providing custodial and administrative services for 26 different ETF sponsors and with USD320 billion in assets under custody. 

Shawn McNinch, Managing Director, Head of Global ETF Servicing at BBH, says: “We work with a wide variety of ETF sponsors, helping them think through their strategies and build operating models for their ETF business.”
 
A recent trend has seen a new group coming to the ETF marketplace. “We do a lot of consulting work with ETF sponsors,” McNinch says, “especially with those who are coming to the market for the first time. We see a lot of mutual fund managers coming into ETFs who don’t have a lot of experience with the structure and we try to work with them and their teams to educate them on the product nuances.”
 
McNinch describes it as helping them to adapt from the mutual fund mind set to the ETF one. “We educate boards, explaining how ETFs work, what does it mean to have your funds on an exchange and being actively traded as many mutual fund managers may not have a trading background.”
 
This is a relatively recent development. “Three plus years ago if you went to talk to a mutual fund manager they would say ‘I am an active manager. I would never launch an ETF’ but that thought process has changed.  ETFs were being regarded as passive products, they are now viewed as a structure which can have active management inside it.”
 
In the US, more funds have flowed into ETFs than mutual funds in recent years, a fact that has not been ignored by mutual fund managers.
 
“Mutual fund managers are coming into this space and thinking of ETFs differently than in the past, they are thinking of different active strategies and how they can launch smart beta ETFs using rules based methodologies to achieve their investment goals.”
 
McNinch has observed an appetite for active ETFs that are transparent and also new structures where the sponsor doesn’t have to disclose holdings on a daily basis.
 
BBH works with many managers in the US but also in Europe where they have launched products with firms such as Vanguard, Pimco, Source and Unicredit.They have offices and teams in Dublin, Luxembourg, and London to support their ETF business.
 
“There are a lot more challenges for managers with funds in Europe due to the number of exchanges and depositaries across different countries.   Understanding the various market structures and associated fragmentation issues, positions us well to consult with our clients to develop an optimal distribution and operational strategy.  
 
He feels it is too early to assess the post Brexit landscape. “There are open questions for UK managers with UK domiciled products,” he says. “They may look to launch Irish or Luxembourg products because of the transportability of those to different European markets. We could see our cross border ETF business increase as a result and are ready to work with managers in the new environment.”
 
Another trend McNinch has observed in the US is consolidation. “As active mutual fund firms come in, they will acquire some of the smaller firms to acquire talent and expertise at a minimal cost,” he says.
 
 

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