WASHINGTON — A much-anticipated fund aimed at individual investors could help boost active managers’ reputation at a time when market conditions are becoming more favorable for stock-picking professionals.
Eaton Vance’s exchange-traded managed fund, dubbed NextShares, is a hybrid that would cast the cost efficiencies and convenience of an exchange-traded fund onto a conventional mutual fund wrapper. The fund, set for launch by the end of 2015, does not need to disclose portfolio holdings on a daily basis, unlike ETFs.
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Eaton Vance is the only firm to gain SEC approval for a fund vehicle like NextShares. The firm is also licensing its structure to other fund companies. So far 11 asset managers have licensed the new fund and filed exemptive applications with the SEC to unveil products, said Eaton Vance spokesman Montieth Illingworth, who added that Nasdaq could begin trading the new fund as early as Oct 1 if the product becomes available.
But NextShares is facing some skepticism on Wall Street. Citing concern about the new hybrid fund’s rollout, Credit Suisse downgraded shares of Eaton Vance to neutral from outperform, and lowered its 12-month target price to $44 from $50 on July 21.
The core of building this new fund remains in the never-ending active versus passive investing debate, said Jonathan Isaac, managing director of product strategy for Boston-based Eaton Vance’s Navigate Fund Solutions business.
“What we are trying to do is level that playing field and give them investment vehicles that are as efficient as one another,” Isaac said in a telephone interview.
Specifically, NextShares would do this by adopting ETF’s tax efficiencies and eliminating costs such as service fees and cash drags — as mutual fund managers typically leave a portion of the fund in cash. Exempt from these costs, NextShares is expected to achieve savings of around 65 basis points, or 0.65%, compared to conventional mutual funds, Isaac said.
Tom Roseen, head of research services at Lipper Inc., said that over time the active vs. passive competition narrows down to the difference in expenses. “So maybe [NextShares] will settle some of those debates,” he added.
Roseen said the current market environment has become more favorable to active managers.
Since the financial crisis, passive investing has been outpacing the active counterparts with its “double-digit returns,” Roseen said. “A high tide floats all boats” — it was harder then for active managers to outperform in markets where almost all sectors were booming, he added.
“But now we are in a ‘sideways’ market, where you are going to see active managers and good stock pickers come to the forefront,” Roseen said. He said the change took place in December— after the Federal Reserve signaled it might raise interest rates this year.
In a sideways market, benchmarks fluctuate between positive and negative 3%, as opposed to yielding double-digit gains or losses, Roseen said. Such a “rocky market” is ideal for active managers to “pick and choose, whereas a passive index cannot do that.”
Roseen added: “It’s not alarmingly positive, but I have seen the active managers in the large-cap arena outpace their passive managers by 100 basis points, more or less.”
In the first half of 2015, active U.S. open-end funds collectively outpaced their corresponding benchmarks for the first time since 2009, according to data compiled by investment researcher Morningstar Inc.
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