By Andrew Gogerty
Two weeks ago, Morningstar released the ETF Managed Portfolios Landscape Report at IndexUniverse's Inside ETFs Conference. Primarily structured as separate accounts, the ETF Managed Portfolio strategies typically have more than 50% of portfolio assets invested in exchange-traded funds and represent one of the fastest-growing segments of the managed-account universe. Morningstar is currently tracking nearly 370 strategies from 95 firms with collective assets under advisement, or AUA, of $27 billion as of September 2011--a 43% growth rate over the previous 12 months.
We estimate that the total ETF managed portfolio space is likely between $40 billion and $100 billion when considering discretionary and non-discretionary assets and model portfolios. Strategy launches have increased dramatically in recent years: Nearly two thirds of the strategies started in 2005 or later, and 30% of the strategies are less than three years old. Whether mandated by law or continued market pressures, the fiduciary standard will continue to grow as the standard for managing a client's portfolio, and the shift to a fee-based compensation structure will likely follow. This shift, for many, has led to the outsourcing of the money-management function to ETF managed portfolio firms. Advisors continue to focus on gathering and retaining client assets and managing a client's overall financial profile while ceding more of the actual portfolio management duties to strategist firms.
A New Industry Standard
The tactical ability imbedded in many of these strategies to quickly change a portfolio profile forces decision-makers to look past standard holdings-based analysis in order to choose the most suitable strategies for client portfolios and properly frame potential return expectations. To aid that effort, Morningstar has developed a proprietary portfolio attribute classification system for ETF managed portfolios. The new structure consists of four main attributes: Universe, Asset Breadth, Portfolio Implementation, and Primary ETF Exposure Type.
Global-Focuses, All-Asset Solutions Dominate Advisor Appetite
Global strategies dominate the space, holding over $19 billion--or 72%--of ETF Managed Portfolio assets reported to Morningstar. Inside the Global universe, All-Asset strategies are the hot dot, with $10 billion in current assets. The ability and ease to construct multi-asset portfolios with ETFs enable portfolio strategists to provide a complete solution to advisors and other asset allocators within one strategy. Global strategies have also dominated the new launches over the past two years, and there's been no shortage of new equity-focused offerings coming to market.
Asset growth and distribution access remain key focuses for firms providing ETF managed portfolio strategies. The increased interest in unified managed accounts, or UMAs, has given some renewed life to traditional separate accounts, and because ETF strategies contain relatively few holdings in a portfolio, they are very attractive in this space. Advisors also have the flexibility to allocate capital to multiple strategies inside one overall account, and this demand is expected to continue.
Firms such as Good Harbor Financial, Quantitative Advantage, and Cougar Global Investments have seen significant asset growth and moved up the list toward industry leaders Windhaven Investment Management, RiverFront Investment Group, and Innealta Capital.
A Peek at the Future
Morningstar's initial report provides a framework for advisors and other decision-makers to gain perspective on the space and is a kickoff to regular research, analysis, and commentary on market trends in this growing area of both ETFs and managed accounts. With the demand for global, multi-asset portfolios showing no signs of slowing in the near term, we expect this space to continue to dominate product launches in the short term as strategists get in on the asset land-grab over the next few years.
The next wave? That's dependent on demand from advisors, but given the ability of the ETF investment vehicle to allow investment across the globe, it's likely that multi-asset, yield-focused strategies may very well be the next soup de jour.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including BlackRock, Invesco, Merrill Lynch, Northern Trust, and Scottrade for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.