SS&C Technologies Holdings is the world’s largest hedge fund and private equity administrator, as well as the largest mutual fund transfer agency, responsible for USD1.7 trillion in assets.
It’s that mutual fund transfer agency business that arrived with the 2018 acquisition of DST Systems in 2018 that brought in SS&C ALPS Advisors, whose President, Laton Spahr, explains, is an in-house asset management firm, that partners with sub-advisers to find new distribution channels.
Spahr, who joined the firm a year ago, previously had a 20-year career in portfolio management with OppenheimerFunds, and ColumbiaThreadneedle group. Spahr, in a somewhat self-deprecating throwaway, describes the USD13 billion ALPS Advisors as a bit of an underdog, partnering with other underdogs.
“When I talk to Bill Stone, [SS&C founder], the asset management piece was a very small part of DST Systems and not a core part of the strategic rationale for that deal at the time” Spahr says.
“ALPS Advisors is trying to find its way through all the technologies and turn into an asset management that partners with sub-advisors to find new distribution channels and make the active investment process more efficient for the financial advisor,” he says.
The firm’s most recent news is that it has partnered with Blue Tractor Group and GSI Capital Advisors to expand its business into semi-transparent ETFs.
“We have optimism and trepidation at the same time approaching a semi-transparent launch as there has been no big splash yet,” he says. But he remains very committed to the cause.
“My roots are as a mutual fund portfolio manager and one of the things that stood out for me was the hidden costs within operating a mutual fund. There are many you don’t have to pay in the ETF structure,” he says. He is very aware that DST is the largest mutual fund transfer agency and so he has a uniquely complicated role when commenting on mutual funds.
“At ALPS, I believe we are the innovator, trying to disrupt our own environment, so most companies learned that you can’t resist innovation. ALPS is the entity that gets to embrace the potential of the non-transparent space.”
Spahr notes that the embedded interests of mutual funds are significant, with deep roots.
“Semi-transparent ETFs cut into that profit model because they are more efficient, they are more tax efficient, they are easier to distribute and they are more liquid. Really, they are better.
“The principal problem is that the adviser businesses make as much money from distributing mutual funds as clients make in mutual funds,” he says, observing that while fewer US advisers now charge commission, even on a fee-based level, the layers of fees would surprise people with maybe six or seven layers of fees which have been recategorized rather than reduced.
“The slowness of the adoption of Active ETFs, is that the mutual fund cost for one person is revenue for another, and where the balance of power resides is really important. Inertia for change is everywhere and it takes a lot of time and energy to get that inertia in motion.”
However, Spahr notes that there are large independent RIAs that have built their value proposition on low cost performance and personal relationships and those that have done are the most keen to adopt active ETFs in the semi-transparent structure.
The firm also has other in-house investment products, a partnership with Smith Capital Investors with two original funds, which have over USD1 billion in assets, and this year has seen the launch of two new funds in that partnership. They also have a clean energy ETF, The ALPS Clean Energy ETF (ACES), which outperformed 99 per cent of its peers this year, gaining 80 per cent YTD. This year also saw the 10-year anniversary of their commodities fund, the ALPS|CoreCommodity Management CompleteCommodities Strategy Fund.
Clean energy has worked for them where old-fashioned energy supplies have not in another ironic twist this year. Spahr explains that the firm survived pretty well through the market volatility of early 2020, but their AMLP strategies struggled with low oil and energy prices in the first quarter. “First quarter declines in the energy sector were the biggest headwind for us to deal with,” he says. “We are beginning to see some recovery with oil markets but they are still well below where they were at the beginning of the year.
“This was offset with some really great growth within thematic ETFs and ACES has been a strong one for us. That’s the good thing about working with multiple partners. Clean energy and fixed income had a good year generally so they have offset some of the pain in the energy space in terms of the assets under management standpoint,” he says.
“I am a ‘how do you make lemonade out of lemons’ person, and as a new entrant into semi-transparent ETFs, the Covid playing field has given us a chance to gain on the opposition,” Spahr observes.
“Face to face meetings remotely have levelled it for the underdogs as it’s easier for us to compete and build new relationships faster in a remote environment than in a standard environment – it’s not meetings in the Ritz Carlton that matters any more, but being able to Zoom.”
For Spahr, the key point is having a concise message. “It’s more important than ever. Everybody I have talked to over the last six months finds that the idea of an hour long conversation on Zoom is wanted less and less, but a 15 min call with a humorous story and an idea on how an asset allocation idea could work can make more headway.”
Previously, a day would have held five or six calls or meetings but now there are maybe 12 but just 15 to 45 minutes, he says. “And with sub-advisers, it needs to be more frequent as the adviser needs a new message more frequently. Emails and webinars allow for a precision that the classic lunch meeting didn’t have.
“People love people and there will be a good middle ground but we have learned a lot about the efficiency of the digital distribution model and the future will see a hybrid with a lot more emphasis on digital interaction.”
And one of the things that advisers want to talk about is increasingly allowing their retail clients to access private strategies such as private equity and private credit, Spahr says.
“The return environment is tough with interest rates close to zero and an equity market that has been so strong for a decade. Most advisers are nervous and private equity and private credit have some return premium over public equity and credit markets.”
He also observes that it dampens volatility and there is a behavioural attraction in using a retail model in a private equity strategy which has a three-year time frame as investors don’t see the day to day volatility.
“Especially outside of the US, Europe and Asia’s private capital returns have significantly outperformed the public equity markets and it’s hard to find and only available to institutional investors who have billions of dollars but now it’s available in smaller pieces, in increments of USD5,000 to USD10,000.”
Retirement plans in the US are opening up the possibility of investing in private equity but it has to offer some liquidity component so Spahr observes that there are now some ETFs being built that look like a private equity investment as much as possible, by riding alongside a private equity fund in a retirement plan.
The Blue Tractor Team, Terry Norman and Simon Goulet, debated the motion that semi-transparent ETFs will cause the end of mutual funds, against Ed Rosenberg of American Century Investments at the etfLIVE North America digital summit in October. You can watch that debate here: https://www.etfexpress.com/event/etflive-north-america
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