Speaker 1: Welcome to trillions. I'm Joel Webber and I'm Eric bel
Speaker 1: Tunis Eric. A couple of days ago, something happened that
Speaker 1: has never happened in the history of e t s.
Speaker 1: What was it? It was the first ever e t
Speaker 1: F to convert from a mutual fund into an e
Speaker 1: t F. So if you're in this fund, you would
Speaker 1: go to sleep h one night with mutual fund and
Speaker 1: wake up with an e t F sequel. And this
Speaker 1: was really monumental um and the first one to do
Speaker 1: it was Guinness Atkinson. But there are a couple others
Speaker 1: now lined up, including a massive one from d f
Speaker 1: A that could be about twenty six billion dollars, and
Speaker 1: it's got a lot of people buzzing. They there's a
Speaker 1: lot of talk about how this could start to really
Speaker 1: spread and really become the way as opposed to some
Speaker 1: other ways that the traditional active mutual funds sort of
Speaker 1: comes over and it takes advantage of the e t
Speaker 1: F ructure and the benefits that are in it, while
Speaker 1: being able to keep the track record and start with
Speaker 1: some assets as opposed to try to, you know, make
Speaker 1: it on their own in the terror dome as a newborn,
Speaker 1: which is hard so this will be a fascinating conversation
Speaker 1: and joining us from Guinness Atkinson Funds Jim Atkinson as
Speaker 1: well as his lawyer Alex Albert stat They were the
Speaker 1: two that helped bring these two e t f to market,
Speaker 1: Smart E t F S Dividend Builder with the ticker
Speaker 1: DIVS and the Smart E t F S Asia Pacific
Speaker 1: Dividend Builder the ticker A d I V, as well
Speaker 1: as at Bloomberg News Claire Valentine who wrote that story
Speaker 1: in March, this time on Brilliance converting from a mutual
Speaker 1: fund to an TF. Jim, Alex, Welcome to Trillians, Thanks
Speaker 1: so much for joining us, Thank you for having so
Speaker 1: this just happened in March. How long ago did you
Speaker 1: start dreaming about leaving the mutual fund world for the
Speaker 1: E t F world? Uh more than two years ago. Um,
Speaker 1: maybe three or four or five years ago. But we
Speaker 1: started in earnest on this project, I think about two
Speaker 1: years ago. And what was the attraction? Well, we've been
Speaker 1: in the mutual fund business for a long time. We
Speaker 1: have some great funds, and we're noticing that the E
Speaker 1: t f s are attracting all the assets. And you
Speaker 1: look at the flows. You notice that UM mutual fund
Speaker 1: flows have been persistently negative and E t F flows
Speaker 1: have been persistently positive, and you look around and you say, well,
Speaker 1: there's a reason for that, and that's because e t
Speaker 1: s are a better mouse trap. And once you conclude that,
Speaker 1: you start to say to yourself, I think we need
Speaker 1: to be in the e t F space, not the
Speaker 1: mutual fund space. But we've got some great funds. How
Speaker 1: do we convert these into E t F s? Uh
Speaker 1: and then And it was a little bit seuraging it first,
Speaker 1: because I've never been done before and there were a
Speaker 1: lot of obstacles, But I talked to Alex at length
Speaker 1: about it, and uh, we just decided to go for it.
Speaker 1: And we had a few phone calls with the SEC,
Speaker 1: and we just pushed ahead, and we just kept pushing
Speaker 1: that rock up the hill. I want to ask about
Speaker 1: phone calls with the SEC, but I also want to
Speaker 1: bring my colleague Claire in uh and and clear I
Speaker 1: helped set the stage for us, like if they if
Speaker 1: they were the first ones, how many more conversions are
Speaker 1: we likely to see in the days slash week slash
Speaker 1: months ahead. Well, the big one that we know is
Speaker 1: coming up is Dimensional Fund Advisors UM. They're conferred converting
Speaker 1: quite a few of their mutual funds. That's going to
Speaker 1: make them, right out of the gate a really big
Speaker 1: E t F issue where they've launched a couple of
Speaker 1: their own E t F s separately, but with these conversions,
Speaker 1: that's going to UM make them one of the largest
Speaker 1: et F issue. Where's just from that and UM, outside
Speaker 1: of just that, we've seen a couple of other smaller
Speaker 1: players file to convert their funds. UM one is a
Speaker 1: cannabis fund. So it's an interesting trend and I think
Speaker 1: we're gonna see it more and more. And what stood
Speaker 1: out to you about the Atkinson one, Like, what was
Speaker 1: significant to you about it other than being first? Being first? Definitely,
Speaker 1: And I remember last year hearing about this and just
Speaker 1: in the middle of such a crazy pandemic year. I
Speaker 1: just remember UM looking at this and having observed how
Speaker 1: much money mutual funds have been losing and how much
Speaker 1: money ETFs have been gaining. I remember my first thought
Speaker 1: was like, WHOA is this possible? This is a game changer.
Speaker 1: So it's it's a really interesting trend, I think, And
Speaker 1: just the fact that it's possible is is pretty notable.
Speaker 1: So Jim, I I curious about this idea of how
Speaker 1: to do it because when we first started talking about
Speaker 1: conversions um I think it was the guy from um
Speaker 1: UH Presidian who brought up conversions on our podcast about
Speaker 1: a year and a half ago, and he said, some
Speaker 1: lawyers are talking about it. I put this out on Twitter.
Speaker 1: Some people replied, well, I don't know if this can
Speaker 1: ever happen because people need brokerage accounts all of a sudden,
Speaker 1: and it's tough to do that. What if it's in
Speaker 1: a four one K plan? How did you work out
Speaker 1: those kinks? Well, the biggest kink was the direct shareholders.
Speaker 1: So most shareholders nowadays by their new tool funds through
Speaker 1: a brokerage firm, but there's still some people and the
Speaker 1: legacy shareholders that hold their shares direct. And you're correct,
Speaker 1: the traditional transfer agent system doesn't permit the holding of
Speaker 1: what what is essentially an equity security from an operational standpoint.
Speaker 1: Uh and And we had to do a little research
Speaker 1: to find the answer to this. But we we came
Speaker 1: across a firm called American Stock Transfer and there are
Speaker 1: a corporate transfer agency. So the way worked was as
Speaker 1: we got close to the conversion, we reached out to
Speaker 1: the shareholders who were direct and we said to them,
Speaker 1: we'd like you to transfer your shares to a brokerage
Speaker 1: firm UH or exchange into another one of our funds.
Speaker 1: And our least preferred option was for them to redeem UH.
Speaker 1: And most clients came back and said, we want to
Speaker 1: transfer and and by the way, that is a whole
Speaker 1: other process we can talk about later. But we knew
Speaker 1: we weren't going to get a hundred percent of our
Speaker 1: shareholders that were direct to transfer, so we arranged for
Speaker 1: American Stock Transferred to step in and fill the gap.
Speaker 1: So any shareholder that that was on our records as
Speaker 1: a direct shareholder on the march in these two funds
Speaker 1: got transferred over to American Stock Transfer and it's our
Speaker 1: plan to get them to move off of there into
Speaker 1: a brokerage account eventually. UM. That was sort of a
Speaker 1: key breakthrough we had to come across, because that was
Speaker 1: the operational snag that we kept bumping up against. Alex,
Speaker 1: I want to bring you in here. Did did the
Speaker 1: converse station between Jim and the sec Did that start
Speaker 1: before you or or once you were part of the team.
Speaker 1: Now that was. I mean, Jim and I planned this
Speaker 1: structure out together. We've talked about it for a few years.
Speaker 1: We've researched a lot of bits and pieces of different
Speaker 1: transactions involving mutual funds, UM and closed down funds in
Speaker 1: the past, and we sort of put all those elements
Speaker 1: together and then we did what anybody can do, which
Speaker 1: is you reach out to the SEC. You have a conversation,
Speaker 1: You explain to them what your idea, your concept is.
Speaker 1: You show them why it fits within the existing regulatory
Speaker 1: scheme that they are comfortable with, and sometimes they have questions.
Speaker 1: You respond to those questions, and eventually you get to
Speaker 1: the point where you move forward with your disclosure filings,
Speaker 1: which is what we did. So these aren't billable hours, um,
Speaker 1: so I want to ask, um, you know now doubt now,
Speaker 1: not exactly, but not not not a billable for me
Speaker 1: right now at least. So so as long as I
Speaker 1: have that advantage, I just want to ask, you know, what,
Speaker 1: what did you find surprising in that conversation with the
Speaker 1: SEC and throughout this process. Well, I mean the first
Speaker 1: surprise was, um, we thought it was gonna be We
Speaker 1: thought we were going to have to do a proxy
Speaker 1: to get shareholder approval. UM. There's a special rule that
Speaker 1: applies to mutual funds. When you're merging two mutual funds
Speaker 1: that are managed by the same advisor, you don't always
Speaker 1: need to have a proxy. Proxy is a very uh
Speaker 1: time consuming and somewhat expensive process for mutual funds because
Speaker 1: of the way funds are distributed. UM, it's extremely difficult
Speaker 1: to get those proxy statements out and out to all
Speaker 1: the shareholders and achieve your first shift to achieve acorum,
Speaker 1: and then you have to get the approval vote. So
Speaker 1: we were pleased to find out we didn't need a proxy.
Speaker 1: But the other thing that surprised me is some number
Speaker 1: of years ago, there were other fun complexes that tried
Speaker 1: to go down this path and there was actually a
Speaker 1: denial letter out there. And I thought that from that
Speaker 1: two thousand twelve denial letter we were going to have
Speaker 1: a bigger problem, and we really didn't. I think that
Speaker 1: the industry has evolved. E t F obviously have grown
Speaker 1: significantly since that time frame. And then also we had
Speaker 1: the benefit of the SEC taking a deeper look at
Speaker 1: how E t F operate, and that came out of
Speaker 1: the E t F rule. So that was obviously a
Speaker 1: huge piece that. Um, you know, we've probably made them
Speaker 1: more favorably inclined to this idea. I'm interested to just
Speaker 1: in talking with your shareholders, was there any pushback? I mean,
Speaker 1: did you get any concerns raised? How did that go? Um? No,
Speaker 1: that's a great question. It well is the answer that question.
Speaker 1: So a couple of things. First of all, when we
Speaker 1: first started thinking about this, I reached out to some
Speaker 1: of the advisors that have assets in these funds, and
Speaker 1: of them weren't fa are this? And then I'd occasionally
Speaker 1: get on the phone with a shareholder and I'd ask
Speaker 1: them the same question, how do you feel about this?
Speaker 1: What if we did this? Uh? And the answers were
Speaker 1: again a hundred percent positive. And then, of course, as
Speaker 1: we went through the process, I had the chance to
Speaker 1: speak to several dozen of our shareholders. Not one person
Speaker 1: expressed any reluctance to do this. That everybody thinks it's
Speaker 1: a great idea. Now, are there some out there that
Speaker 1: I didn't talk to? That's quite possible, But UM, let
Speaker 1: me pretty do this differently. We've had a number of
Speaker 1: advisors who are in our other funds and they're asking
Speaker 1: me when are we going to get to these other
Speaker 1: funds and convert them? This seems to be something that
Speaker 1: everybody is interested in, and we've had zero pushback. Now,
Speaker 1: there's been some operation elections we had to sort through,
Speaker 1: you know, on a couple of account levels. Um, but
Speaker 1: but those are those are all minor issues. Um, universal acceptance.
Speaker 1: I guess it is the answer. You all have already
Speaker 1: wild to convert a third fund. Are you going to
Speaker 1: do all the mutual funds? How far are you going
Speaker 1: with it? Uh, that's not fully determined, but I would say,
Speaker 1: don't be surprised if a year from now we have
Speaker 1: zero opening funds and were an entire e d F fan. Wow, yeah,
Speaker 1: it's UM, this is kind of new information. I know
Speaker 1: you did it, but to hear this sort of testimonial,
Speaker 1: it's very interesting. Now. I was with a manager yesterday, UM,
Speaker 1: and they're a mutual fund manager, and we were talking
Speaker 1: and they were saying that part of their problem was
Speaker 1: the four when K plans. Do you have any of
Speaker 1: your shares in four when K plans? Or or no,
Speaker 1: we do but not a lot. So you're right to
Speaker 1: raise this issue. That was one of the first things
Speaker 1: I looked at when we started thinking about this a
Speaker 1: few years back. We don't have a lot of penetration
Speaker 1: in the four oh one K market. We do have
Speaker 1: some and in fact, I will tell you the Guinness
Speaker 1: Atkinson four one K does invest in the dividend builder.
Speaker 1: And I called our administrator and said, hey, what happens
Speaker 1: if this becomes an e t F And their answer
Speaker 1: was not a problem. We can handle it. So we
Speaker 1: know that there are some retirement platforms that struggle with
Speaker 1: e t s or can't handle them, but that's not
Speaker 1: a universal problem. And there's nothing inherent about e t
Speaker 1: f s that keeps them out of retirement plans. So
Speaker 1: I guess if if somebody's out there listening and they're thinking, oh,
Speaker 1: every mathful fun, well, I mean, do you think this
Speaker 1: will be something that's targeted to to fun families that
Speaker 1: might not have that big of a four one K presence,
Speaker 1: or do you think it might spread and they'll just
Speaker 1: figure out how to solve that too. They'll figure out
Speaker 1: how to solve it. Yeah, there's there's um. There is
Speaker 1: nothing to my knowledge, there's nothing inherent about the operations
Speaker 1: or legal structure of four one case that's keeping them
Speaker 1: out of retirement plans. So there was some questions in
Speaker 1: forward k plans and the reason E t s aren't
Speaker 1: tend to be in the four one care well, besides
Speaker 1: the fact that you can get the institutional classes cheap,
Speaker 1: you don't need to interdate trade your four one k
Speaker 1: ets lose a lot of their superpowers when they go
Speaker 1: into the four one k that they have outside of it.
Speaker 1: That said, one of the reasons I, you know, would
Speaker 1: assume is that if you have an e t F
Speaker 1: in there and your drip drip drip buying, you're constantly
Speaker 1: paying a spread where you wouldn't pay that with the
Speaker 1: mutual fund. Yeah, well, I think I don't know that
Speaker 1: that's really that big of an issue there. There's I
Speaker 1: refer to those as carriage costs. So when you buy
Speaker 1: a mutual fund, the carriage costs go to the entire fund.
Speaker 1: That is to say, the bid ESTs you put money
Speaker 1: to the neutral fund, the mutual fund has to deployed that.
Speaker 1: They're paying commissions, they're paying custody charges, they're paying the
Speaker 1: bidst spread and everything they're buying. Those carriage costs, which
Speaker 1: rightfully belong to the person coming in and being shared
Speaker 1: by everybody in the fund. There's one of the benefits
Speaker 1: of ets. So the fact that the carriage cost is
Speaker 1: more visible in E t F doesn't mean it's being
Speaker 1: a something the mutual fund. To your point about the
Speaker 1: drip one the sort of psychological problems about e t
Speaker 1: s versus mutual funds. Mutual funds are bought in dollars
Speaker 1: and e t s are bought in shares. But that's
Speaker 1: not an impediment that can't be overcome. Yes, so I,
Speaker 1: if I can summarize you, mutual funds are internalizing those costs.
Speaker 1: The e t F it's externalized, but you're paying it
Speaker 1: either way. Okay, understood, So that's interesting. Um, that really
Speaker 1: makes the world much bigger that could do this because
Speaker 1: we had said, well, it's probably gonna be targeted. But
Speaker 1: but then again we people were pretty barossed that anybody
Speaker 1: would do it, And now you've got five or six
Speaker 1: lined up. Um. Anyway, interesting, So, Jim, if if there
Speaker 1: are one mutual funds out there, arbitrary picking a number,
Speaker 1: how many of those could you see doing what you've did? Um, well,
Speaker 1: if there are, you a hundred. But let's let's talk
Speaker 1: about what are some of the impediments for other people
Speaker 1: doing it. So first of all, I should say that
Speaker 1: the project that we just went through was the biggest
Speaker 1: project of my career, and that's because the level of
Speaker 1: detail that has to be dealt with when with this
Speaker 1: conversion isn't just affecting part of the business. It affects
Speaker 1: our entire business, from asset management, portfolio construction, trading compliance,
Speaker 1: shareholder communications. Every every single one of our service providers
Speaker 1: for mutual fund was involved. The broker do you know
Speaker 1: can news and the level of detail was enormous. We
Speaker 1: did two funds. Now, imagine if you're a mutual fund
Speaker 1: company with a hundred and fifty funds and seven share
Speaker 1: classes each. That is an enormous project. And when you
Speaker 1: start talking about all of these share classes, and many
Speaker 1: of the share classes are four different types of retirement plans,
Speaker 1: they might decide just to leave them as they are
Speaker 1: because it does work. But for everybody else, I think
Speaker 1: you're gonna decide that the e t F is a
Speaker 1: better mouse trap. And yes, it's a big object, but
Speaker 1: it's a project worth doing both for your business and
Speaker 1: fear shareholders. So could it be a hundred yes, might
Speaker 1: it be eight? Could be eight. There's some other issues
Speaker 1: to some funds don't really work well as an e
Speaker 1: t F. You can need to have a liquid pool
Speaker 1: of investments otherwise the arbitrage mechanism doesn't work UM, and
Speaker 1: the create process actually can I but it isna that
Speaker 1: all mutual funds become e t s and that might
Speaker 1: take a decade. So in the small cap area, you're
Speaker 1: saying it wouldn't be if you have a decent sized
Speaker 1: small cap converting that to an e t F, then
Speaker 1: you get into this whole debate they're having with Cathy
Speaker 1: Wood right now and ARC, which is you're too big
Speaker 1: to own these small stocks. You're going to push them
Speaker 1: around and the arbitrage band would widen and it just
Speaker 1: wouldn't really make sense. Whereas in a mutual fund you
Speaker 1: can close to close it if you need it. If
Speaker 1: you're a small cap fund, you get too big and
Speaker 1: you have capacity issues, you can just close the fund. Yeah, okay, Gus.
Speaker 1: My question too, is now that this has happened, UM,
Speaker 1: does this sort of pave the way for more or
Speaker 1: as more people do it, does it get easier for
Speaker 1: the next person to do it? Or is it more
Speaker 1: just a very individualized kind of process. Um. Yeah, it
Speaker 1: definitely is gonna pay. It's paving the way for people
Speaker 1: to follow and Geinness Atkinson's paths here for sure. UM,
Speaker 1: we know a lot of advisors who are obviously there
Speaker 1: are a number of advisors who have already filed documents
Speaker 1: indicating that they're going to pursue this. There are a
Speaker 1: number of other advisors who are talking about it, thinking
Speaker 1: about it UM and looking into it. And there are
Speaker 1: also people who are thinking about converting other types of
Speaker 1: either pooled vehicles or assets, types of institutional accounts into
Speaker 1: e t s and I think that's probably coming. And
Speaker 1: then I think there's a group of people who are
Speaker 1: looking at converting into non transparent or semi transparent e
Speaker 1: t s and I think that's probably you know, on
Speaker 1: the horizon, and I haven't seen any filings on those yet,
Speaker 1: but it's possible. It's interesting because the non transparent has
Speaker 1: been one route to go um A d f A
Speaker 1: did transparent active UM and this is sort of doing
Speaker 1: it where you bring it everything over. Jim, was was
Speaker 1: it attractive to you because you could launch e t
Speaker 1: f s that are cloni sho off your strategies and
Speaker 1: still have the tax benefits. But then you've got to
Speaker 1: start from scratch. Was it attractive to you the fact
Speaker 1: that you could bring over the assets as well as
Speaker 1: the track record and the shareholders. I mean, if if
Speaker 1: we had launched the clone for a shareholder to take
Speaker 1: advantage of the e t F, they'd have had to
Speaker 1: realize a taxable gain. So, but yes, we wanted to
Speaker 1: bring There were two bedrock principles from the very beginning.
Speaker 1: We wanted to be able to bring the track record over.
Speaker 1: We wanted it to be a non taxable event for
Speaker 1: our investors. Uh. And those were critical. Um. And then
Speaker 1: just from a business standpoint, I don't really want to
Speaker 1: be having, you know, two different structures and two different overheads.
Speaker 1: So so Jim, I have to ask, um, this being
Speaker 1: such a seminal event in in your career, uh, and
Speaker 1: you know it taking a what sounds to be like
Speaker 1: just a considerable amount of work. What was the point
Speaker 1: in the process that you were like, what have I
Speaker 1: gotten myself into? I'm like bashing my head against the wall.
Speaker 1: What what were what were those things that made you
Speaker 1: bash your head against the wall. Well, the thing that
Speaker 1: worried me throughout the process even even before we started
Speaker 1: was what am I going to learn? That I wished
Speaker 1: I knew now? And I was always worried about the
Speaker 1: unknowable unknown um. And in fact, we didn't really stumble
Speaker 1: across anything major. But I will tell you where I
Speaker 1: had my sort of moment of panic. We've been having
Speaker 1: phone calls with everybody in the operations. These are fall
Speaker 1: like thirty different people from from five or six different firms.
Speaker 1: These phone calls have been going on once a week
Speaker 1: and then later more than that, going back to like August.
Speaker 1: Just a tremendous amount of effort, all these details, and
Speaker 1: everything just kept looking like it was going fine. The
Speaker 1: workload kept going up. But we got about ten days
Speaker 1: out and I said to myself, what happens if something
Speaker 1: goes haywire here? What if this thing just completely fails? Um?
Speaker 1: And I knew it wasn't going to but that was
Speaker 1: sort of like my moment of panic. And I woke
Speaker 1: up the next day and we were about nine days out,
Speaker 1: and I said, you know what, this is going to
Speaker 1: go fine. And as it turned out, UM so. So
Speaker 1: the conversion happened on a Friday, last days a mutual
Speaker 1: phone was Friday first days in ETF was a Monday,
Speaker 1: so we had that weekend and I was thinking, my
Speaker 1: phone's gonna ring up the hook, I'll have problems all weekend.
Speaker 1: I got nothing. I had no phone calls over the weekend.
Speaker 1: We had a seven am call on Monday morning. At
Speaker 1: nine am call on Monday morning, just to check in
Speaker 1: all of this build up and all of this work.
Speaker 1: It was like the whole thing was a whimper at
Speaker 1: the very end. It must be like you're you're describing
Speaker 1: like what I would imagine carnation sounds like No, what
Speaker 1: are you's describing? Is y t K? Remember that was
Speaker 1: the whole faith? That's what There you go, Thank you,
Speaker 1: My work is done here, I'm going to happen. You're
Speaker 1: You're welcome. Yeah y t K. Comparison way better than reincarnation,
Speaker 1: but less weird too, less weird. I went to super
Speaker 1: Meta and you kept it real. So thank you for that.
Speaker 1: Um so so Jim. I have to ask, since since
Speaker 1: this happened, how many phone calls of of former peers
Speaker 1: UM in the Mutual Fun world have you been getting?
Speaker 1: It doesn't UM emails, UM phone calls. Uh yeah, it's
Speaker 1: surprising because you know you're sort of just working away,
Speaker 1: working away, and that you don't realize that so many
Speaker 1: people are watching. But a lot of people were in
Speaker 1: a lot of people have noticed. So I've been in
Speaker 1: touch with people I hadn't been in touch with for
Speaker 1: five or tenure. And and Alex, how about for you
Speaker 1: since you are the trailblazing lawyer that got this done. Yeah,
Speaker 1: I've heard from a lot of people. Um, you know,
Speaker 1: I think lawyers, you know, need to fun lawyers. We
Speaker 1: usually connect every year two we all go to a
Speaker 1: big conference together. So that conference did happened. I don't
Speaker 1: think it even happened last year. It happened virtually this year.
Speaker 1: I think, you know, I have a lot of drink
Speaker 1: tickets coming my way next year. By the way, just
Speaker 1: speaking of mutual fund lawyers, UM, I think of the
Speaker 1: word compliance when I think of you guys, and I
Speaker 1: think of someone who's just constantly saying no. And it
Speaker 1: just seems like, I don't know, but you seem pretty cool,
Speaker 1: Like you seem like you're a little more optimistic. Can
Speaker 1: you talk about the sort of trying to work in
Speaker 1: between the need to market and the rules. Well, I mean,
Speaker 1: first of all, thank you, Um, there are plenty of
Speaker 1: times where I have said no to to Jim and
Speaker 1: he'll vouch for that, UM there you know. Look, it's
Speaker 1: always attention. Mutual funds are extremely regulated. This Investment companies
Speaker 1: are highly regulated when you look into the scheme of
Speaker 1: how things operate in the US, right and there are
Speaker 1: very significant and very specific rules around mutual fund marketing.
Speaker 1: And that is accommodation of statutory UM, elements of the
Speaker 1: statute itself, regulations that were adapted UM under the Investment
Speaker 1: Company Act UM, and pieces of the Investment Advisor's Act.
Speaker 1: And then there's this whole body of law which is
Speaker 1: in no action letters and other sec pronouncements, and they
Speaker 1: are very precise about what you can and cannot say
Speaker 1: UM with respect to mutual funds and performance and compliance
Speaker 1: with those requirements is obviously a big piece of this picture. Now.
Speaker 1: The e t F rule came out a couple of
Speaker 1: years ago. It also has a series of very specific
Speaker 1: compliance obligations. UM. The fund manager requires very precise information
Speaker 1: to be put up on the website every day if
Speaker 1: you're operating for sea to a rule, which these funds
Speaker 1: are are under that rule. That's rule six C eleven UM.
Speaker 1: And you know, you have to compliances. As Jim said,
Speaker 1: this is touching every piece of the advisory business and
Speaker 1: compliance as part of that, and compliance is all as
Speaker 1: part of a mutual fund business too, So it's really
Speaker 1: UM trying to just make sure you don't have conflicts.
Speaker 1: The two sets of schemes harmonized, they're not exactly at all.
Speaker 1: Fours And we are in the middle of this suit
Speaker 1: because there's a new rule that applies to investment advisor
Speaker 1: marketing that has just been adopted by the SEC. It's
Speaker 1: gonna be going into applying shortly, so we're sort of
Speaker 1: retooling this all. But you know, the standardized information that
Speaker 1: you see, whether it's about a mutual fund or an
Speaker 1: exchange traded fund UM, what you're seeing out there is
Speaker 1: put together in accordance with a very specific set of
Speaker 1: accounting and financial reporting rules UM. And that's what you
Speaker 1: had with the mutual fund perspectives, and now you have
Speaker 1: that with the e t F. In the case of
Speaker 1: these conversions to eat, TF is the accounting and performance
Speaker 1: survivor in these merger transactions, so they adapt the performance
Speaker 1: of the predecessor mutual funds. So I had to UM
Speaker 1: I have to ask if there are as many mutual
Speaker 1: funds going to make this jump as as Jim sort
Speaker 1: of indicated, you know, he thinks, my, how many mutual
Speaker 1: fund lawyers are gonna jump over to become E t
Speaker 1: F lawyers. Well, I mean there are a lot of
Speaker 1: mutual fund lawyers who are also E t F lawyers.
Speaker 1: It doesn't necessarily we don't sort of separate ourselves into
Speaker 1: those buckets. Um, I think you know, there are a
Speaker 1: lot of fund lawyers who are representing or advising UM
Speaker 1: fund complexes or words of directors of funds who are
Speaker 1: already focused on these transactions and looking into them. So, um,
Speaker 1: I think that you know, there's As I said, I
Speaker 1: think there's a lot of opportunity here. The concept of
Speaker 1: converting and existing pool of assets into the E t
Speaker 1: F is appealing because it's much harder, It feels much
Speaker 1: harder for the advisor to start from zero out. When
Speaker 1: you're converting an existing pool or an existing account, you
Speaker 1: already have a performance history, you know your strategy works.
Speaker 1: Question is this the E t F rapp or the
Speaker 1: right distribution? One thing that I'm wondering just about the
Speaker 1: conversion environment in general is from questions that I've gotten
Speaker 1: on Twitter or that kind of thing. People who maybe
Speaker 1: are mutual fund shareholders and they're wondering like, oh, is
Speaker 1: my mutual fund going to become an e t F
Speaker 1: or just the idea that that could could sneak up
Speaker 1: on you. Um, But there is a lot of disclosure
Speaker 1: involved in it, right. I mean, people listening shouldn't be
Speaker 1: like either worried or you know, freaked that suddenly something's
Speaker 1: going to happen without them knowing. They'll definitely notice, Yeah,
Speaker 1: they're gonna get a you're gonna get an adage in
Speaker 1: the mail, and then they'll get less capital gains distributions.
Speaker 1: They'll notice that that's exactly right. And I think if
Speaker 1: if a shareholder is worried about that, they should be
Speaker 1: thinking this is a good thing for them, not a
Speaker 1: bad thing. Uh. They'll they'll have an et F one
Speaker 1: morning where they previously had a mutual fund and it
Speaker 1: will be on their statement. Um. They'll most of these
Speaker 1: investors have their their funds currently through a broker dealer,
Speaker 1: so they'll place there there you only want to redeem.
Speaker 1: They'll do what they normally do. They'll just call the
Speaker 1: broker to get their exit. Okay, let me just like
Speaker 1: we'll put the thing out there that any investor would
Speaker 1: want to know here, which is what downside if any
Speaker 1: do you see here? Um well, I don't really um,
Speaker 1: particularly an era of zero commissions. Now if you have,
Speaker 1: if you're if you're a client at a broker's from
Speaker 1: the still charges commissions, that's a bit of a negative. Um.
Speaker 1: You know you do have to deal with you know,
Speaker 1: figuring out what kind of order you're gonna put in
Speaker 1: so they can put in a limit order, a market order,
Speaker 1: and I would advise a limit order. Um, but be
Speaker 1: on that. I mean, you should be realizing cost savings,
Speaker 1: you should be gaining tax efficiency, you should be gaining transparency,
Speaker 1: and you should be gaining the ability to have intra
Speaker 1: day liquidity. Let me just um, I put a question
Speaker 1: in the in the chat to the guys on my
Speaker 1: team to see if they had any questions. Um. It's
Speaker 1: a good question. Actually, this would be from Athanacios in London. Hey, Ethanacios,
Speaker 1: thanks for listening. I feel like radio show. Um. He
Speaker 1: asks you as a question for Jim, how do you
Speaker 1: feel though about having to be transparent now? Because that's
Speaker 1: a good question. Yeah, right. Our our shop tends to
Speaker 1: be transparent um by the way, that's our sort of style.
Speaker 1: That's a different question from our portfolio being fully transparent
Speaker 1: every day. We are a low turnover shop. That's part
Speaker 1: of how we manage money, and we don't mind people
Speaker 1: seeing our holdings. So that sort of raises a question
Speaker 1: of okay, what about front running. The way we've set
Speaker 1: it up, when we make a change in the portfolio,
Speaker 1: it will be completed before the end of the day
Speaker 1: and before people realize what has happened. So we have
Speaker 1: to report our holdings um every day, put them on
Speaker 1: our website every day after the market closes, and we
Speaker 1: distribute the basket through the n SEC system to the
Speaker 1: market participants. But by the time they see that it's
Speaker 1: different from the day day before. We're done. So we're
Speaker 1: not worried about people front running. We we touched on this,
Speaker 1: but we're looking at, say, by the way, I mean,
Speaker 1: the fact that you're getting all these calls and emails
Speaker 1: speaks volumes about what we're probably going to see. But
Speaker 1: the mutual fund industry is I want to say, of
Speaker 1: the equity and fixed income sides together, is I think
Speaker 1: ballpark twelve trillion somewhere in there, twelve thirteen trillion. What
Speaker 1: percentage of that do you think is convertible? I don't
Speaker 1: know the answer that question. UM. Part of that would
Speaker 1: would relate to how much is in fixed income and
Speaker 1: how many of those fixed income funds would be convertible. UM.
Speaker 1: It's not quite as easy for some of the fixed
Speaker 1: income vehicles to become ets. That's such that they couldn't be.
Speaker 1: But there's some things to be thought through, and then
Speaker 1: there's some derivative based strategies that may not work as
Speaker 1: e T F s. UM. If this happens, which is
Speaker 1: to say, if there's a long term trend to convert
Speaker 1: mutual funds of e t s, which is what I
Speaker 1: think will happen, it is not going to happen quickly.
Speaker 1: It's gonna be a potentially a decade long process because
Speaker 1: some of the ones that are more difficult are going
Speaker 1: to have to take longer to figure out. I don't
Speaker 1: know if that answers your question, and you're asking me
Speaker 1: the future of it, UM. I can't really speak for
Speaker 1: the rest of the industry, but I just sort of
Speaker 1: look at this from my perspective and from a shareholder perspective,
Speaker 1: the E t F is just a better mouse trap,
Speaker 1: and if we can deliver a better product, we should
Speaker 1: all be thinking about doing that. Now. Might it be
Speaker 1: difficult in some cases? Yes, and and increasingly difficult for
Speaker 1: certain firms, and some strategies might not make it, might
Speaker 1: might pass the test, alright, So Jim, what about for uh,
Speaker 1: like a big mutual fund player, like a Fidelity how
Speaker 1: much how much of this conversation is going to go
Speaker 1: down there? Well, well, I don't have any information about
Speaker 1: what's going on inside of Fidelity UM, but I have
Speaker 1: heard that UM new to fund executives at other large
Speaker 1: firms are watching this very closely. And again it's it's
Speaker 1: almost a case by case basis. Uh, there's a lot
Speaker 1: of business complexity at a larger firm. Uh, the more
Speaker 1: products you have, the more esoteric the products are, the
Speaker 1: less liquid they are. I mean, there's just there's a
Speaker 1: whole lot of things to think about, not to make
Speaker 1: some multiple share classes, distribution channels, etcetera. So it's it's
Speaker 1: it's impossible for me to say what might be happening
Speaker 1: in a particular firm. All I can tell you is
Speaker 1: I know from multiple sources that that the senior executives
Speaker 1: of very large asset management firms are looking at what
Speaker 1: we're doing and you're the guinea pig. Well listen, Joel
Speaker 1: I I tweeted out the other day Dives. I was like,
Speaker 1: this little guy made history. Um, it's you know, gonna
Speaker 1: be the first one over. There's been all kinds of conversions.
Speaker 1: Canada has done this. In the U S. There's been
Speaker 1: I think closed and fun to E t F but
Speaker 1: there has never been this, and so Dives definitely has
Speaker 1: broken ground. It's probably gonna make the history book. So
Speaker 1: congratulations Jim and Alex. I think you've earned a couple
Speaker 1: of drink tickets Alex plus Guinness. By the way, Jim,
Speaker 1: do you get free Guinness? Well that's just that's just
Speaker 1: a perk, so you don't need drink tickets if you
Speaker 1: hang out with Jim. Uh, Jim, Alex, thank you so
Speaker 1: much for joining us. Some Tralians thank you. Yeah, this
Speaker 1: was Thanks so much, guys. Thanks for listening to trillions
Speaker 1: until next time. You can find us on the Bloomberg terminal,
Speaker 1: Bloomberg dot com, Apple Podcasts, Spotify, and where else you'd
Speaker 1: like to listen. We'd love to hear from you. We're
Speaker 1: on Twitter, I'm at Joel Webber Show, He's at Eric
Speaker 1: Ball Tuness and you can find Claire at CFB Underscore
Speaker 1: eight teen. For more on Guinness Atkinson Funds, check out
Speaker 1: smart Ets. This episode of Trillions was produced by Magnus Hendrickson.
Speaker 1: Francesco Levi is the head of Bloomberg Podcast. Bye.