Multi Manager Small Cap

Bitcoin update:

• ProShares futures-based bitcoin ETF received $993 million in inflows on day 1, making it the most successful ETF launch ever. (Contrary to what we expected, and published on Monday).
• For an analysis of why it may have succeeded despite limitations of futures I’d recommend Ben Fulton’s essay here. He argues that a lot of bitcoin ETF demand will come from “affiliated” fund managers given the restrictions they face buying bitcoin directly. Retail investors by contrast are already well-served buying bitcoin directly on Robinhood and Square.

USA

First Trust multi manager small cap

First Trust is listing another actively managed fund-of-funds that buys into small cap mutual funds run by specialists. The First Trust Multi-Manager Small Cap Opportunities ETF (MMSC) will be managed by First Trust’s investment committee, who choose which managers make the cut.

At the time of writing, MMSC will invest equally into two funds: one run by Driehaus Capital Management and the other run by Stephens Investment Management. Driehaus focusses on earnings momentum while Stephens focusses more on sustainable earnings, the promotional material from First Trust indicates.

MMSC will try to beat the Russell 2000 Growth Index. If one fund manager strongly outperforms the other, and therefore one fund manager takes more than 60% of MMSC’s weight, then the fund will rebalance.

The fund charges 0.95%.

For those wondering, the philosophy behind a multi-manager funds is that different managers have different areas of expertise and styles. And having more than one of them allows investors to spread their bets and diversify.

The weakness is that the fees are almost inevitably higher and there is no evidence of better performance. Operationally, covering more active managers means more due diligence work for the investment committee.

First Trust’s other multi-manager ETF, the First Trust Multi-Manager Large Growth ETF (MMLG US) holds $160M in assets despite being launched only in July last year.

Bernie’s commentary – forget how big active still is

Reading through the product literature, I felt like I’d been put in a time machine and taken back to the funds management industry before the 2008 financial crisis.

It stresses the importance of fund manager track record, investment process, having a committed and clear investment philosophy–and the rest. The investment committee, in its wisdom, only awards deserving fund managers the [your] pot of gold. Then comes the 0.95% fee.

Working in the trenches in the ETF industry so long it’s easy to forget how big active management still is. It’s shrunk the past 13 years, and it will continue shrinking with the encouragement of regulators and end-investors. But it’s still the bigger part of the global funds management industry.

For me at least, the launch of MMSC is a reminder of this.