Invesco files for its own nontransparent ETF structure

Offering would solve for multiple asset classes, joins long line waiting for SEC approval

Invesco is the latest asset manager to join the line of firms waiting for SEC approval of their nontransparent ETF structures, with a proposal that allows for foreign securities and multiple asset classes.

The structure would maintain the confidentiality of a fund’s investment strategy by keeping a proportion of its holdings secret from the market.

A fund using Atlanta-headquartered Invesco’s structure would disclose a “substitute basket” designed to closely track the actual performance of the portfolio, which will include a significant proportion of the securities the fund holds, each day.

It’s designed to have an “active share” of 5% to 30% compared to the actual portfolio, and this differential will be published daily alongside the substitute basket. The proposed structure would also strike at least two NAVs per day.

Paulita Pike, an asset management partner at Ropes & Gray who led the legal team involved in advising Invesco on its application, explained that where the substitute basket differs on weightings or securities will be decided through a combination of a proprietary optimization process, market events, and portfolio manager desires.

The proposal would also give funds the option to invest in US and foreign listed stocks, bonds, notes, debentures and other fixed income instruments. ETFs, exchange traded notes, exchange-traded American Depository Receipts and Global Depository Receipts would all be available too.

Pike said that she sees no reason why all of the asset classes wouldn’t work in the framework presented.

“I suspect the specifics of that will be teased out during the exemptive application process,” she said, and added that she expects the novel aspects of the Invesco application will “address what I anticipate will be several of the SEC’s areas of focus.”

So far, Precidian Investments’ ActiveShares is the only nontransparent ETF structure to get approval from the SEC. The model only covers domestic equities, leading rivals to try to differentiate.

Some applicants, including Blue Tractor Group and Natixis Investment Managers, have been tweaking their existing applications to allow for foreign-listed securities.

Matt Witkos, head of global distribution at Eaton Vance, which is awaiting approval of its own multi-asset class ClearHedge structure, recently argued: “The next structure has to solve for all asset classes, because that’s what investors want access to.”

Precidian itself is not taking this threat lying down. CEO Daniel McCabe told Fund Intelligence in June that the firm is looking to expand the capabilities of the ActiveShares structure to allow for bonds and foreign securities in the future.

McCabe is looking to bring a few products to market called ADR Plus, which adds a currency overlay to American depositary receipts to mitigate foreign currency risk. Companies outside the US offer access to their own shares on US exchanges through ADRs, which allow investors in the US to trade foreign stocks. Typically, the performance of ADRs are tied to how their home currency fares against the dollar, which ADR Plus looks to eliminate, McCabe explained.

Precidian recently received approval for ADR Plus after three years of back and forth with regulators, he said. While this is a separate initiative, he could also look to plug it into ActiveShares, McCabe added.

While others await response from the SEC, Precidian has succeeded in signing up a large portion of the industry as licensees. But as the commercial failure of Eaton Vance’s NextShares structure has shown, industry watchers said, licensees don’t equal product launches or a long-term commitment to a structure.

Fund boards could have a role in encouraging usage of the structures, explained Pike, although it will not be a direct one.

“Boards can be catalysts in the softer sense, because they are quite aware of market dynamics. They hear things at conferences, and what other fund groups may be pursuing, and they definitely ask those questions of the adviser…those conversations can be catalysts for management to think about things that may not be on their radar,” she said.

She pointed to margin pressures, flows into a variety of product types, and the premium placed on diversification as trends that have created an environment which “lends itself to boardroom conversations about products that the adviser may or may not have wishes to expand into.”

For Invesco, success in launching a structure could give it a new outlet to develop new, or re-home existing, active strategies. The firm’s active mutual fund range has struggled to retain assets of late.

Invesco hemorrhaged $22.3bn from its US open ended fund products year to date. The lineup has lost $37.6bn over the past 12 months, according to Morningstar Direct data.

By comparison, its US ETF business has attracted $6.9bn in flows so far this year, with low volatility factor products the biggest success stories.

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