Products November 16, 2017

Investment Products and Services Launches

Wilshire launches latest indexes tracking REITs; New York Life Investments announces new equity fund; ProShares presents advanced ETFs and public index funds; and more.

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American International Group, Inc. (AIG) and Clearwater Analytics will partner to execute technological enhancements to the global insurance organization’s investment data management.

Clearwater, an automated SaaS solution, will provide AIG a cloud-based, highly scalable software platform that offers daily reconciled investment portfolio data, accounting entries, and reporting tools. The data management system will support AIG’s more than $250 billion in fixed income securities, equity investments, and residential mortgage loans. 

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“Partnering with Clearwater will allow us to further shift focus from collecting data to analyzing it, so that we can support AIG’s objectives and investment strategies,” says Elias Habayeb, deputy chief financial officer at AIG. “With Clearwater’s expertise and their platform’s scalability, we are excited to take this decisive action in promoting technological excellence and operational efficiency.” 

“Establishing Clearwater as the core platform for its investment data management will provide AIG with greater freedom and flexibility, positioning the organization for future growth as it evolves investment strategies and asset classes,” says Dave Boren, CEO of Clearwater Analytics. “Clearwater’s automated solution can also support future integration efforts for mergers, acquisitions, and other growth strategies. AIG is a natural fit for Clearwater’s best-in-class platform and we look forward to a long and productive collaboration between our firms.”

Wilshire Launches Latest Indexes Tracking REITs

Wilshire Associates has announced the launch of new indexes Powered by Wilshire, Adelante NEXTGen Property Securities Index (ACMNXT) and Adelante CORE Property Securities Index (ACMCOR).

The new indexes, created and owned by Adelante Capital Management, LLC (ACM), with Wilshire retained as custom index consultant and calculation agent, are designed to measure the performance of publicly-traded real estate securities, primarily real estate investment trusts (REITs), which own and operate commercial real estate. Adelante NEXTGen Property Securities Index is designed to serve as a proxy for non-traditional commercial real estate property types that have evolved and emerged over the past decade. The Adelante CORE Property Securities Index is designed to serve as a proxy for widely accepted commercial real estate property types. 

The Indexes measure the performance of two universes of property securities that have been constructed by property type.

“Wilshire Analytics is proud to fuel two new Powered by Wilshire index offerings from Adelante Capital Management, LLC. Wilshire’s index consulting and calculation expertise combined with ACM’s proprietary commercial real estate index methodology demonstrates the value of a Powered by Wilshire approach to help clients bring innovative index strategies to market quickly,” says Jason Schwarz, president of Wilshire Analytics. 

“We are proud to introduce the Adelante NEXTGen Property Securities Index and the Adelante CORE Property Securities Index, calculated by Wilshire,” states Michael A. Torres, CEO of Adelante Capital Management. “These indexes enable investors to more accurately evaluate the public and private commercial real estate markets and establishes the universe of NEXTGen property types, which are difficult to access privately,” adds Torres. 

American Century Joins List of Firms Licensing Precidian ETF Tool

Global asset management firm American Century Investments has entered into an agreement with Precidian Investments LLC to license the firm’s ActiveShares methodology in support of the potential launch of actively-managed, semi-transparent exchange-traded funds (ETFs). 

Subject to regulatory approvals, Precidian’s patented ActiveShares structure would allow American Century to deliver its actively-managed investment strategies in an ETF vehicle without the daily holdings disclosure requirement of fully transparent ETFs. Precidian is seeking exemptive relief from the Securities and Exchange Commission (SEC) to allow for the use of ActiveShares by asset managers. 

“As we build out American Century’s ETF product suite, our long-term plan is to leverage our established active-management capabilities to bring clients our investment strategies in an ETF format, which aligns with certain investors’ preferences,” says Edward Rosenberg, senior vice president and head of ETFs for American Century. “While waiting for SEC approval of the ActiveShares methodology, we are proceeding with plans to launch other transparent ETFs that are informed by decades of experience and apply our unique insights to solve common investment problems and help investors achieve their goals.” 

Since appointing Rosenberg to the firm’s top ETF post back in June, American Century has been laying the foundation for its entry into the ETF marketplace. In October, the firm filed registration statements for two transparent ETFs: an index-based value ETF and an actively-managed diversified corporate bond ETF. The firm anticipates a mid-January effective date for both funds, subject to SEC approval. 

American Century joins JP Morgan Asset Management, BlackRock, Capital Research, Legg Mason, ClearBridge, Royce and Nationwide in licensing Precidian’s intellectual property. Precidian’s ActiveShares structure seeks to combine beneficial aspects and protections of the traditional mutual fund with the efficiencies and flexibilities of an ETF. The patented ETF structure seeks to provide asset managers with the ability to generate alpha without daily disclosure of their proprietary strategies while simultaneously creating improvements in tax efficiency, manager flexibility and lower operating costs. 

New York Life Investments Announces New Equity Fund

New York Life Investments has launched the MainStay Candriam Emerging Markets Equity Fund. The fund will seek long-term growth through investments in equity securities of attractively-valued companies with strong sustainable growth and profitability, and that are located or economically tied to emerging markets.

The fund will be managed by Candriam Investors Group, a Pan-European asset manager and a subsidiary of New York Life Investments. Candriam will manage the fund in a substantially similar manner to Candriam’s Emerging Markets Equity strategy in Europe. The investment team includes Jan Boudewijns, Philip Screve and Mohamed Lamine Saidi, who collectively bring decades of fundamental investment experience across the emerging markets.

This fund complements the MainStay Emerging Markets Equity Fund, a quantitatively managed strategy, which seeks long-term growth of capital via a broadly diversified portfolio.

Jan Boudewijns, head of Emerging Equity Management at Candriam, says, “With volatility at historically low levels and corporate valuations remaining reasonable across developing regions, we see considerable long-term value opportunities within emerging-market equities. This new fund brings our time-tested investment approach and global capabilities to financial advisers and investors in the United States.” 

Kirk Lehneis, chief operating officer at New York Life Investment Management, says, “This new fund reflects a core strength of our multi-boutique model, which allows us to offer investors access to high quality investment specialists across core asset classes. Candriam Investors Group brings a wealth of experience in accessing emerging market opportunities, and our investors seeking a fundamental, bottom-up approach will be well-positioned to benefit from their expertise and global perspective.”

ProShares Presents Advanced ETFs and Public Index Funds

ProShares, a provider of ETFs, has launched ProShares Decline of the Retail Store Exchange-Traded Fund (ETF), the first specifically designed to benefit from the decline of bricks and mortar retailers. ProShares Long Online/Short Stores ETF has been launched as well.

ProShares Decline of the Retail Store ETF is the first designed to allow investors to benefit from the potential on-going erosion of value of retailers that rely principally on in-store sales. It provides short exposure to the new Solactive-ProShares Bricks and Mortar Retail Store Index. The ETF is designed to deliver the inverse of the daily performance of the index.

The Solactive-ProShares Bricks and Mortar Retail Store Index is the first public index to be composed exclusively of traditional retailers and is intended to become the standard for measuring their performance. It is equally weighted and currently has 56 constituent companies that include department stores, supermarkets and sellers of apparel, consumer electronics and home improvement items. Current constituents include retailers such as Barnes & Noble, The Gap, Macy’s, Kroger and Best Buy.

“Investors are witnessing signs of trouble in the malls and falling stock prices in the markets,” says Michael L. Sapir, co‑founder and CEO of ProShare Advisors, LLC, the adviser to ProShares. “For the first time, investors can turn these trends into a potential investment opportunity through an ETF.”

CLIX, also recently launched, is the first ETF to provide investors opportunities arising from both the potential growth of online companies and the decline of bricks and mortar retailers. It tracks the new ProShares Long Online/Short Stores Index which combines a 100% long portfolio of on-line and non-traditional retailers with a 50% short position in bricks and mortar retailers.

“With CLIX, investors not only receive the investment potential of online retailers like Amazon and Alibaba but also have the possibility of additional return from short exposure to traditional retailers,” says Sapir. “CLIX’s 50% net exposure to the equity markets may result in less volatility than typical long-only equity strategies.”

To be included in the Solactive-ProShares Bricks and Mortar Retail Store Index, a retailer must be characterized as receiving at least 50% of its revenue from retail operations; receive 75% or more of its retail revenues from in-store sales; and be a U.S. company.

In addition, a retailer must have a market capitalization of at least $500 million, a six-month daily average value traded of at least $1 million, and meet other requirements. The index is rebalanced monthly and reconstituted annually.

The ProShares Long Online/Short Stores Index combines two specialized retail indexes. It includes a 100% long position in the ProShares Online Retail Index and a 50% short position in the Solactive-ProShares Bricks and Mortar Retail Store Index. The long and short positions are rebalanced monthly.

Retailers in the ProShares Online Retail Index include U.S. and non-U.S. companies. To be eligible, a retailer must be classified as an online retailer, an e-commerce retailer, or an internet or direct marketing retailer, according to standard industry classification systems; have a market capitalization of at least $500 million; have a six-month daily average value traded of at least $1 million and meet other requirements.

When the index is rebalanced, it is weighted so that no company may exceed 24% of the value of the index, the sum of companies individually weighing more than 4.5% may not exceed 50% of the value of the index, and the total weight of all non-U.S. companies will be capped at 25% of the value of the index. The index is rebalanced monthly and reconstituted annually.

 

 

 

Compliance November 16, 2017

SIFMA Urges Court to Affirm Decision in Fidelity Stable Value Fund Suit

The association argues that plaintiffs’ claims rely on hindsight, ask Fidelity to “follow the herd” and imply Fidelity should not align its interest with those of 401(k) plan participants.

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The Securities Industry and Financial Markets Association (SIFMA) has weighed in on an appeal to a case against Fidelity Management Trust Company over the management and monitoring of a stable value fund offered to 401(k) plans.

In an amicus brief filed with the 1st U.S. Circuit Court of Appeals, SIFMA says it has a strong interest, on behalf of its members, in clarifying the fiduciary obligations of investment managers in selecting and managing investment options in retirement plans governed by the Employee Retirement Income Security Act (ERISA).

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The lawsuit, which accused Fidelity of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP), a stable value fund offered as an investment option in some 401(k) plans for which Fidelity was trustee, was dismissed by a district court in June.

In its brief, SIFMA notes that a stable value fund is a conservative investment option that is designed primarily to provide stability, as opposed to growth. It points out that the plaintiffs do not claim that the portfolio failed to achieve its desired stability, nor that it lost value, but they claim that, in the immediate aftermath of the 2008 financial crisis, Fidelity was obligated by ERISA to invest the portfolio in riskier, longer-term assets in pursuit of greater yield. “Plaintiffs’ theories—if endorsed by a court—would prove deeply problematic to the financial services industry and to the ERISA plans that it serves,” SIFMA says. “With the benefit of hindsight, it will always be possible to observe that, during any given period, more risk in particular segments was either rewarded or punished. At the point of decision, however, asset managers lack the benefit of hindsight. Courts have rightly refused to credit claims, like this one, that rely, inextricably, on hindsight.”

Rather than evaluating ERISA prudence claims on performance—which is inherently a hindsight assessment—courts should focus on whether the manager engaged in a prudent process, SIFMA argues. It notes that the Labor Department’s regulations obligate fiduciaries to engage in a deliberative process in which they probe key issues pertaining to their investment duties and make determinations based on their evidence-based assessments. SIFMA says Fidelity did just that—repeatedly assessing, for example, how best to maintain wrap coverage while wrap providers were exiting the market, and challenging, for example, whether another benchmark might prove more effective. It says plaintiffs’ argument that a lack of unanimity among Fidelity’s decisionmakers shows there is a real issue. “Internal debates and disagreements on tough issues are evidence of sound fiduciary processes—not evidence of fiduciary shortcomings,” the association wrote in its brief.

No need to follow the herd, and aligning interests is good for all

SIFMA also rejected plaintiffs’ theory that Fidelity was wrong to “increase the conservatism” of the portfolio in the aftermath of the 2008 financial crisis because some other stable value fund managers were willing to keep their money in asset-backed securities, mortgage pass-throughs, and lower-rated corporate bonds. SIFMA says to engage in a prudent process, asset managers need not follow the herd, and that asset managers reasonably differentiate their investment offerings from competitor’s funds.

The plaintiffs had argued that Fidelity acted in its own self-interest by agreeing to overly stringent wrap insurance guidelines that sacrificed the competitiveness of the portfolio, while allowing Fidelity to grow its assets under management. Fidelity argued that because the plaintiffs have not disputed that stable value funds need wrap coverage or that Fidelity was facing the potential withdrawal of several of the portfolio’s wrap providers in 2009, to prove a breach of the duty of loyalty, the plaintiffs need to show that the portfolio did not need additional wrap coverage and that the new wrap guidelines to which Fidelity agreed were overly conservative.

In its brief, SIFMA notes that under ERISA, courts have interpreted the duty of loyalty to prohibit adversity between fiduciaries and their beneficiaries but have rejected an expansion of the duty to prohibit fiduciaries from benefitting from their decisions. “Fiduciaries—including asset managers to retirement plans—should be encouraged to align their interests with the interests of plan participants. That is, after all, the norm in the financial services industry,” the association wrote. “Fund managers frequently get paid a fee that is proportional to their assets under management—so if their funds perform well, they will get paid more. Individual asset managers likewise may receive bonuses for exceeding performance targets for the funds that they manage. These practices are desirable, as a rising tide lifts all boats. This Court should be loathe to adopt a rule that would prove impossible to administer, inconsistent with industry norms, and lacking any discernible benefit to plan participants.”

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