Active managers go passive

Two people closely associated with active funds management have established a new ETF funds management business.

Monday, November 20th 2017, 6:00AM 7 Comments

Thom Bentley

The new funds management company, EBT Capital, is planning to offer three international funds which use ETFs in their portfolios.

EBT Capital has Simon Botherway as its independent director and chairman. Botherway has had a number of high profile roles in funds management including establishing Brook Asset Management and running ANZ’s investment management business.

Thom Bentley, who has been involved with Mint Asset Management and PIE Funds, is the co-managing director of the new business.

The other co-managing director is Steve Turner. Turner established a business Capital IQ in the US, which collected data on managed funds. The business, which had 4,000 employees and a turnover of US$300 million was eventually sold to Standard and Poor's.

Bentley says Turner realised that "passive is the right way to go" after his experience with Capital IQ. Tucker, moved to New Zealand and lives in Central Otago, as does Bentley. He couldn't find a suitable investment solution in New Zealand and worked to establish EBT Capital.

The fund invests in ETFs which are highly liquid, it is hedging returns and is making a commitment to low fees.

"In a low interest rate environment it makes sense to have a good portion of our assets in a fund where fees are as low as possible," Bentley says.

Unlike SmartShares, EBT is giving a commitment to lower its fees as FUM grows.

"There is a firm commitment to lower fees as we get bigger," Bentley says.

Breakeven is FUM of around $100 million, and the goal is to get to $1 billion in five years time.

EBT Capital plans to offer three low-cost global funds which use ETFs to track key global indices. Each have a flat all-in annual management fee of 50 basis points.

“We believe starting from scratch gave us some advantages,” Bentley says. “We peeled back the reasons passive investing has taken off, and really started to appreciate the impact of fees on investment returns.”

He says, “we believe our funds provide what investors want and need today – low cost, passive ETFs tracking major global indices. We throw into the mix financial institution diversification and funds that are fully hedged to the New Zealand dollar, and we think we nail it for investors.”

EBT expects to have the funds open to wholesale investors at the start of next year and it expects to make the funds available to retail investors in the future.

Bentley says although he is embracing passive management for international equities he still supports active management for New Zealand and Australian equities.
His distribution company, Remarkable Capital, continues to support Mint Asset Management, absolute return fund InSynch and Constellation Capital (read on)

The funds, and underlying ETFs, are:
EBT Global Equity

VT Vanguard Total World Stock Index Fund ETF ACWI iShares MSCI ACWI ETF

EBT US Equity

SPY SPDR® S&P 500 ETF
IVV iShares Core S&P 500 ETF
VOO Vanguard 500 Index Fund

EBT Global Short-Term Debt

FLOT iShares Floating Rate Bond ETF
FLRN SPDR Barclays Capital Investment Grade Floating Rate ETF

Tags: Active v Passive ANZ EBT Capital equities ETFs fees funds management Remarkable Capital Simon Botherway

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Comments from our readers

On 21 November 2017 at 8:08 am indy said:

"To invest where fees are as low as possible". Having a quick look at their website, it appears there is the fee they make (50bps), plus "estimated cost of currency trading & commissions of approx 13.34bps", plus the actual fund fee of the ETFs - looking at the Global Equity mix this would be 22bps. So all in it appears around 85bps for the Global Equity example. Not exactly what I would describe as cheap.

On 21 November 2017 at 9:24 am Brent Sheather said:

Hi Am Indy, yes it appears to be a hybrid product – passive management with active fees! This is quite common in NZ. Milford for example use ETF’s in many of their funds and often they are their largest shareholding. It’s a useful strategy for some – the clients pay the management fees and you can still charge a performance fee against a fixed interest benchmark.

On 21 November 2017 at 10:15 am Another AFA said:

EBT Capital – this is just not good enough! While I understand there are costs in running a funds management business, and third party services you must pay for (such as Supervisors etc), NZ investors deserve better than some loosely worded “it’s a low cost solution” rubbish! It’s time NZ investors and NZ Advisers rebelled against such offers that are not true to label, too high in fees - regardless of passive or active management - and rob investors of their capital. While market inflows/outflows will help Managers take notice, real action will only happen with regulatory intervention as has happened in other parts of the world. A few basis points here, a few basis points there…. It all adds up!

On 21 November 2017 at 10:43 am smitty said:

Completely agree Brent, perhaps FMA should do some public relations work around why using a OCR + a flat margin benchmark is not a good outcome for the investor.

On 21 November 2017 at 12:47 pm thombentley said:

Thanks for the comments.

Respectfully, we don't think you can find another NZ PIE global equity or US equity fund with all our attributes at such a low total cost to investors.

If we could have found a PIE fund or NZ ETF that invested in all passive strategies, with very high liquidity, diversified across ETF sponsors, fully hedged and with a reasonable tracking error, then we would have just invested in that, and not started EBT Capital.

Regarding trading and hedging costs, all institutional and individual investors have to meet this expense to gain the market exposure they want. We believe our total costs are low and effective, and it is unfair to criticise EBT for fully disclosing all costs when others may not.

Importantly, our fully passive strategies minimise portfolio turnover. Turnover seen in active strategies (referencing the same benchmarks) may have a negative impact on returns through trading costs, but these costs do not appear to be disclosed to investors.

We would welcome more transparency on total fund costs for both active and passive options, and we are leading with our chin on this issue.

We pay all the costs of running the PIE funds out of our 50 bps annual management fee (trustee, registry, fund accounting, audit etc). We do not charge the investor any additional fees, such as bid/offer spreads, commissions for entry or exit, application fees, custody fees, performance fees or 'basket' fees.

Regarding EBT’s fees being ‘active fees for passive management’, our analysis shows the average active global equity PIE has a TER of 1.6%, and we believe this excludes trading costs which are not generally disclosed.

Please note we will reduce our fees as we gain scale, which we believe is unique in this market. In our view economies of scale should always be shared with investors.

Nevertheless, at this point, we are confident our funds provide investors with important attributes at a fair overall (and fully disclosed) cost.

NB: We are a wholesale only manager and our funds are not open for investment to wholesale investors until early January, but feel free to get in touch if you want to discuss any of these points further with us.

On 21 November 2017 at 2:01 pm Brent Sheather said:

That’s not likely. The FMA seem to be deathly afraid of saying anything definitive on fees. No specifics just meaningless comments like “fees need to be fair”, “we expect fund managers to consider their clients”, that sort of thing. One can understand this sort of timid approach when we had a National government but surely the FMA could expect more support from a Labour government. Then there is career risk… I guess that’s why we haven’t seen too much in the way of action against the big players. Reality is that there is far more regulatory risk if you are a small player than a bank.

On 22 November 2017 at 6:52 am Pragmatic said:

I tend to agree with Brent Sheather's summary, that this is an actively priced strategy established to deliver a passive outcome (...less than passive once fees are deducted).

Good luck with the innovation, with global beta noticeably expensive to obtain in NZ - hopefully attracting lower cost gateways.

To put this into perspective: According to FactSet data, there are now 98 ETFs on the market that cost 0.10% (10 basis points) or less per year to own. There are 261 ETFs with an expense ratio of 0.20% or less and a whopping 424 ETFs with an expense ratio of 0.30% or less.

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