Actively managed exchange-traded funds are more popular than ever, reaching a record $1.26 trillion in assets at the end of February, according to a March 25 release from independent research and consultancy firm ETFGI.
Lazard wants to get in on that action.
The new global head of ETFs and managing director at Lazard Asset Management is planning to launch five new active equity ETFs this year. It's aiming to get a foothold in the active equity ETF market that's dominated by longstanding heavyweights as Dimensional Fund Advisors, J.P. Morgan Asset Management and American Century, according to Morningstar.
Tasked with building out Lazard’s ETF portfolio, Robert Forsyth joined the firm in September and brought with him more than two decades of ETF-related experience at both State Street Global Advisors and UBS Group AG.
Forsyth most recently was at State Street Global Advisors where his last role was as global head of ETF strategy and he helped build the firm's ETF business into a $1 trillion-plus behemoth. At State Street, he had experience across product development, capital markets, sales and investment strategy.
“I had a cockpit seat in building and growing some of the largest ETFs in the world, and I plan to apply those (experiences) here at Lazard as we build our own ETF franchise,” he said in a recent interview. “Beyond that, I was able to see firsthand how State Street operates and works for its clients, which is why we’re using them as our custodian and fund administrator for our own ETFs.”
According to State Street’s website, some of its largest ETFs include the $584 billion SPDR S&P 500 ETF Trust (SPY); the $66.9 billion SPDR Technology Select Sector ETF (XLK), and the $51.7 billion SPDR Financial Select Sector ETF (XLF).
Client interest in ETFs has been surging in recent years, Forsyth said. “While the number of active fund launches and new active ETF sponsors has steadily increased since 2020, significant inflows into active strategies have only recently begun to take substantial market share,” he noted.
According to ETFGI, actively managed ETFs saw net inflows of about $51.7 billion in February, while year-to-date net inflows of $103.7 billion set a new record.
Much of the flows into active ETFs have actually been going into enhanced index funds or indexes with active derivative overlays, he said. Overlay strategies are investment strategies that use derivative investment vehicles to obtain, offset or substitute specific portfolio exposures, beyond those provided by the underlying portfolio assets.
“We aim to differentiate ourselves by offering true active management with high-conviction, more concentrated, and higher information ratio-based strategies,” Forsyth said. The information ratio measures the risk-adjusted returns of a particular asset or portfolio against a certain benchmark like the S&P 500 index.
Moreover, Lazard has had the experience of managing active equity products for several decades. Lazard had $226 billion in AUM as of Dec. 31, including $191.5 billion in equity, all of which is actively managed.
The five new ETFs that Lazard will launch later this year are all sector-specific: Emerging Markets Opportunity, Equity Megatrends, International Dynamic Equity, Japanese Equity and Next Gen Technologies.
Annual management fees for these ETFs will range from 0.4% to 0.75%.
The International Dynamic Equity ETF, which will be launched in late April, is a conversion from the existing Lazard International Equity Advantage Portfolio, a mutual fund that has about $38 million in assets. The other four ETFs are brand new.
“We have a strong track record of generating alpha across various product categories and geographies, including global, international, and emerging markets, using both fundamental and quantitative portfolio management capabilities,” Forsyth said
Overall, Lazard’s approach to active ETF product development will be ”deliberate and intentional,” he noted. “The five ETFs we’ve filed for provide access to some of our strongest investment capabilities, which were previously available only to our largest institutional clients or clients outside the U.S.,” he explained. “In bringing these strategies to the market in an ETF wrapper, we needed to ensure we could meet client expectations for transparency, liquidity and tax-efficiency.”
Lazard plans to launch more ETFs after the first five make their debuts.
“We are not stopping with just these five ETFs,” he said. “We plan to offer ETFs across various geographies and asset classes where investors can benefit from active management and the structural advantages of the ETF vehicle. We are targeting market segments, geographies, and sectors where inefficiencies exist, allowing Lazard Asset Management to exploit these inefficiencies to generate alpha over a full market cycle.”
Forsyth also said he is looking to have a team of up to 10 people across various roles on his global ETF team. The team currently has a staff of two people.
Conversions
Regarding the potential conversion of some of its existing mutual funds into ETFs, Forsyth said conversions “require careful consideration to understand the impact on existing clients and the compatibility of the underlying portfolio with the ETF structure. While the ETF vehicle is popular, converting a mutual fund to an ETF isn’t always suitable.”
Overall, he noted, ETFs have become popular because they offer transparency and tax efficiency, which are cornerstone reasons for their rapid growth. “However, there are additional factors at play,” he added.
“First, investor behavior has shifted. Both retail and institutional investors are adopting a barbell approach to portfolio construction. On one side, they are increasingly seeking exposure to private assets, which are illiquid and have higher fees. To help balance that, investors are turning to ETFs for their tradability, intraday pricing, and fee transparency. ETFs help bring balance to the overall portfolio construction process.”
Second, Forsyth said, is the matter of fees. “Advisers and institutional clients often have a fee budget for what they are willing to charge their own clients,” he stated. “They use passive ETFs that provide cheap beta to lower overall costs and then allocate the remaining fee budget to more expensive alternative assets. The remainder of their budget can be used to leverage active strategies that allow for more specialization.”
Finally, macro trends are driving ETF growth.
“Wage growth and job turnover during the pandemic have accelerated the shift from employer-sponsored pensions to 401(k)s, IRAs, and taxable accounts,” he added. “As investing becomes more personalized, individuals take more control of their investments. The ability to allocate savings to non-taxable accounts has not kept up with wage growth in recent years, so excess savings are going into taxable accounts. ETFs become a natural choice for individual investors, advisers and institutions because they want efficient solutions for their savings and their clients' savings.”
Forsyth emphasized that the pandemic accelerated job transfers, resulting in people switching jobs and rolling their 401(k)s into IRAs As such, the pandemic’s net effect on the labor market drove more individuals to roll assets from 401(k) accounts to accounts where they can personalize further.
Forsyth emphasized that there is “definitely growing interest” from institutional investors for active ETFs. “They use ETFs for efficient market exposure,” he explained. “As the product landscape expands, institutions have more options for targeted portfolio construction. ETFs offer specificity, efficiency, and cost-effectiveness for various styles or exposures; there’s an ETF for just about every style or exposure an institution may want, and they can get it efficiently and cheap.”
The use of ETFs for these purposes is still in its infancy, he noted, as these investors focus more on highly liquid products, but “there’s a lot of opportunity for growth,” he added.
Forsyth also said he thinks the ETF marketplace may see more vehicles investing in such asset classes as private markets and cryptocurrencies.
“The proliferation of active ETFs will allow institutional investors, and their clients, to benefit from well-performing managers to better meet their investment objectives,” he said.
As for ETFs that are now investing in cryptocurrencies like bitcoin, Forsyth cites this as another example of how innovation is driving the ETF industry.
“Up until recently, holding cryptocurrencies collectively with other investment assets in the same investment account was prohibitively difficult until it came in an ETF,” he said.
