The asset-management industry suffered a setback when
regulators rejected a proposal by BlackRock Inc. to launch an exchange-traded
fund that would have kept its holdings hidden from investors. The product,
known as a “nontransparent ETF,” is a key part of the industry’s attempt to
broaden its customer base beyond traditional index-tracking investments by
selling more funds that are actively managed.
BlackRock, the world’s biggest fund manager with $4.32
trillion in assets, had filed with the Securities and Exchange Commission in
September 2011 for permission to sell the ETF. Precidian Investments had filed
a proposal of its own in January 2013.
Most funds in the nearly $2 trillion ETF market track
indexes such as the S&P 500. Some actively managed ETFs, in which a manager
or team makes decisions about asset allocation, have gotten the green light
from the SEC. But in a twist New York-based BlackRock, led by CEO Laurence
Fink, had proposed keeping the fund’s investments secret, which is against the
agency’s rules. Daniel McCabe, chief executive at Precidian, said his firm
plans to pursue approval of nontransparent ETFs.
Much of the growth in ETFs has come at the expense of
traditional mutual funds managed by stock or bond pickers. Through the first
nine months of the year, traditional mutual funds that own stocks from
developed economies took in $53 billion in assets, a figure dwarfed by the $127
billion that flowed into passive ETFs, according to S&P Capital IQ.
BlackRock and Precidian proposed an ETF that used a blind
trust, among other mechanisms, to manage a portfolio’s securities without
disclosing the contents. It asked for an exemption from rules requiring daily
disclosure and would have revealed holdings on a quarterly basis. Many active
fund managers feared that daily disclosure would allow other investors to copy
their trades.
Precidian was the designer of the structure that BlackRock
put before the SEC, and Precidian later went ahead with a filing of its own and
appeared much closer to launching funds.
In a notice published Wednesday, the SEC said that without
portfolio transparency, the plan failed to guarantee that the ETF would
consistently trade at or close to the total value of the assets held, known as
net asset value.
The SEC routinely puts the brakes on the introduction of
some new types of investment products. Of the $1.87 trillion in U.S. assets
held in ETFs at the end of September, $17.05 billion, or less than 1%, was in
actively managed ETFs, most of them focused on the bond market, according to
Morningstar. That compares with $3.01 billion, or 0.3%, in actively managed
ETFs at the end of 2010.
There are other nontransparent, actively managed ETF
products under consideration by the SEC, most notably a proposal for a mutual
fund from Navigate Fund Solutions. A decision on that proposal is expected from
the SEC by Nov. 7.
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