Morningstar Advisor - October/November 2013 - (Page 37)

That’s a Winner: As we predicted, BOND, the active-ETF version of the open-end fund PIMCO Total Return, has been a huge success with investors. Net Assets $ Bil PIMCO Total Return ETF 6 5 4 3 2 1 02/ 2012 03/ 2012 04/ 2012 05/ 2012 06/ 2012 07/ 2012 08/ 2012 09/ 2012 10/ 2012 11/ 2012 12/ 2012 01/ 2013 02/ 2013 03/ 2013 04/ 2013 05/ 2013 06/ 2013 07/ 2013 Data as of July 31, 2013 Share Class (Monthly) Base Currency. Right Church, Wrong Pew These are items where our prediction bore fruit, but perhaps not exactly for the reasons we laid out. First on the docket is our prediction of the role technology would play in redefining fund distribution. In 2011, a lot of our focus was on ETFs as a technology, and that kept us from seeing the whole picture. ETFs certainly play a vital role in this transformation, but joining them were other new wrappers for managers and strategies. During this period, we began seeing a tremendous increase in vehicles such as collective investment trusts and a renaissance of sorts of separately managed accounts. Beyond investment wrappers, there was another new technology that was just starting to find its stride in 2011: unified managed accounts. The UMA is a new platform that allows advisors to consolidate all the different investment vehicles and securities that they hold for clients into one account. After several false starts over the past decade, UMA platforms have worked out most of the kinks and are now growing assets at an astounding rate as more and more advisors migrate to their platforms. This new technology is the driving force behind an advisor market that is increasingly vehicle agnostic and more likely to run wrap programs for their clients themselves. We Swung, We Missed Our prediction that active management would not die during this migration was heavily focused on the role active ETFs would play, but that isn’t exactly how things played out. While BOND was a success, we have yet to see that spread in a material way to other active-ETF offerings. Mind you, active management is still alive and well; its future will just manifest in different ways, several of them made possible by the technology that UMA platforms provide. In our original predictions, we proposed that active ETFs would be the future, but now I would say we see active management moving in three directions. First, we expect active management to move up the chain from security selection to a more active role at the portfolio or allocation level. In 2011, we noted a new type of manager that we labeled an ETF managed-portfolio manager. This area of the market has exploded since then, posting year-over-year growth rates in excess of 40%. Many of these strategies are extremely tactical and actively managed. Next, we expect active strategies to take advantage of lower-cost delivery vehicles such as institutional share classes, active ETFs, and separate accounts. In the face of low-cost and low-friction passive options, active strategies need to continue to lower costs, especially those resulting from paying for distribution. Last, we expect active management to continue to explore the alternatives space. Beyond the fact that alternatives are the hot sector right now, there is another reason for fund marketers to target alternatives. When MorningstarAdvisor.com 37 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2013

Morningstar Advisor - October/November 2013
Contents
Contributors
Letter From the Editor
How to Make Social Media Work for You
Do Mutual Funds Still Have a Role?
More Personal Than Finance
How to Handle Your TIPS Positions
A Real Estate Veteran Starts From Scratch
Investments á la Carte
Investment Briefs
When to Say No
Take a Guarded Approach to Homebuilders
Fund Distribution Has Been Turned on Its Head. Now What?
Winning the Distribution Battle
Active ETFs Wait for Their Heyday
A Fund Firm Defies Indexing Trend
Piloting New Channels
A Good Fit
The Predictive Power of Fair Value Estimates
Does Being Prudent Pay Off?
Utilizing Utilities’ Total Return
Stuck in the Middle Is Not a Bad Place to Be
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Good Guys Win

Morningstar Advisor - October/November 2013