NEW YORK (Reuters) - Legg Mason Inc said on Friday it bought a stake in a company re-engineering exchange-traded funds in the hope of improving the performance of the popular investment products.
Legg’s stake in Precidian Investments also gives the Baltimore money manager a new foothold in a campaign by legacy mutual fund brands to enter the ETF market.
Precidian’s ActiveShares technology - which has been licensed by fund companies including ETF giant BlackRock Inc - is designed for money managers who actively pick stocks and bonds instead of following a market index.
If the products come to market, they will have characteristics of both actively managed mutual funds and ETFs.
Like traditional active mutual funds, ActiveShares will not be required to disclose their holdings on a daily basis as active ETFs must, but will trade on an exchange, like an ETF.
Fund managers might be able to offer more active ETFs and improve their performance by not revealing their trading strategies to rivals, unlike ETFs that must reveal their holdings of stocks and bonds daily.
After more than three years trying to bring the technology to market, Precidian has not yet won approval for ActiveShares from the U.S. Securities and Exchange Commission.
An ActiveShares competitor called NextShares and owned by Legg rival Eaton Vance Corp has won the regulator’s nod and could debut as soon as next month.
Advocates of the funds say they will be cheaper, more tax efficient and better performing than mutual funds. They could also help “active” money managers reverse the steady erosion of their market share by index funds.
In part because of the success of low cost, index-tracking ETFs, index funds have doubled their market share from 16 percent of the U.S. fund market in 2006 to 32 percent at the end of 2015, according to Morningstar Inc, an investment research service.
Legg did not disclose the terms of the deal.
Reporting by Trevor Hunnicutt; Editing by Phil Berlowitz