Like the exchange-traded fund, a tool at the core of their strategies, a contingent of money managers is looking to needle into institutional advisory and investment consulting.
Bundled by Morningstar Inc. and others into the catch-all grouping of “ETF managed portfolios,” such firms collectively manage at least $63 billion, mostly for retail and advisory clients, although the true figure for those using ETFs at the core in the U.S. could be twice that.
“The value propositions of these managers can range from alpha generation to a total portfolio solution,” said Morningstar ETF managed portfolio strategist Andrew Gogerty in Chicago.
Morningstar defines an ETF managed portfolio as a separate account strategy in which at least 50% of the assets held are U.S.-listed exchange-traded products. Strategies vary by geography, asset type and implementation. What's missing, however, is the traditional asset class style box associated with many large pension fund and endowment manager searches.
“Some view what we offer and say "this is a retail product,' but I'd say they're a bit behind the curve,” said Robert G. Smith, co-founder of Sage Advisory Services in Austin, Texas.
Sage Advisory, which has more than $10 billion in assets under management, offers fixed-income, tactical ETF and liability-driven strategies, to a mostly institutional client base. At the end of 2012, according to Morningstar, $2 billion was held in ETF portfolios.
The $28.4 billion Arizona State Retirement System, Phoenix, recently made a splash in the ETF world when it revealed that is was the anchor investor in three recently launched iShares products. But the pension fund previously had shown its willingness to explore larger ETF-based options when it allocated nearly 20% or $500 million of its tactical portfolio to Boston-based Windham Capital Management LLC in September 2011. Bridgewater Associates LP, Westport, Conn., makes up the rest.
“The relationship is still early, but it's not so much about the ETF,” said Dave Underwood, assistant chief investment officer for the Arizona State Retirement System. “It's about the manager. The vehicle is incidental.”
Windham also recently announced a $250 million win from the $10.8 billion, Portland-based Maine Public Employees Retirement System.
“We see Windham as a strategic partner in how we approach risk across the portfolio,” said Andrew Sawyer, chief investment officer of MainePERS. “ETFs are their approach and they've spent a lot of time understanding the tradability,” Mr. Sawyer added.
“The ETF is not always the best solution, but they are very good vehicles, cost efficient and tradable,” said Windham Chief Investment Officer Lucas Turton.
Michel Del Buono, chief strategist for Makena Capital Management in Menlo Park, Calif., cautions that for institutional investors with long time horizons, ETFs do not provide access to attractive assets with liquidity constraints, such as private equity. Makena manages more than $15 billion for endowments, foundations and family offices, among other large institutional clients, and will use swaps and futures for specific strategies where ETFs might be more expensive.
“For institutional investors seeking global diversification, many desired investment exposures, such as small- and midcap opportunities in targeted emerging markets, cannot be achieved via ETFs today,” said Mr. Del Buono.
“Managers have found an efficient vehicle for implementing a strategy, but having a product is not enough. There has to be a demonstrated advantage in a sustainable way,” said Kelly Cliff, head of public market manager evaluation for Callan Associates in San Francisco. For ETFs broadly, however, Mr. Cliff said that some in the institutional market are concerned about the ready availability and liquidity that is being translated through ETFs to traditionally less liquid asset classes, such as precious metals and commodities.