While Dimensional Fund Advisors (DFA) recently made waves by converting nearly $30bn across four mutual funds into ETFs, it wasn’t the first to the finish line. That distinction goes to Guinness Atkinson, which took two much smaller mutual funds and converted them to active ETFs in March.
DFA made waves for the size of its converted funds, and both firms have expressed interest in future conversions. They likely won’t be alone, as ETFs have been surging at the expense of mutual funds.
Guinness Atkinson picked two small funds for the firm’s first conversions: the SmartETFs Dividend Builder and SmartETFs Asia Pacific Dividend Builder, both of which had less than $20m in assets in 2020. The former has continued to outperform its index and is up to total net assets up to $51m, buoyed by rising inflows. But the latter hasn’t done as well. It’s still up performance-wise, narrowly beating its index, but it hasn’t seen a comparable increase in inflows and is only about 10% of the size of its sibling ETF at $4.8m.
A few months after Guinness Atkinson’s first conversion, Citywire Professional Buyer caught up with CEO Jim Atkinson to gauge the future of fund conversions. (This conversation has been lightly edited for grammar and clarity.)
Q: What made you want to take a mutual fund and convert it into an ETF?
A: The mutual fund industry for many, many years was the trading and investment vehicle of choice for investors. But then ETFs came along, and it became pretty apparent that investors preferred ETFs over mutual funds. We’re an open-ended mutual fund provider, we’re sort of seeing what’s going on, and I can see that flows industry-wide are leaving mutual funds and going into ETFs. That’s just not a very good environment to be in.
We thought about this hard, and it just occurred to me, the best way for us to solve all of our problems is to convert all of our mutual funds to ETFs.
Now, it had never been done before, and that’s a sobering thought. It also meant that if we were able to do it, it would take time, and we weren’t sure how our investors or how the investing public was going to react to it.
Q: What were some of the things that made you question the feasibility of this?
A: Well, the big one was ‘What do we do with our current shareholders?’ We spent months trying to figure out what to do with shareholders, because what you’d want to do is ask the shareholders to transfer to a brokerage firm, but you know they’re not going to all do it, and in fact, they didn’t.
[Transfer agency American Stock Transfer & Trust Co.] were willing and able to take our direct shareholders’ shares and hold them on their transfer agency platform. Now, we were fairly successfully in getting our shareholders to move off ahead of time, but we still have, I think, 25 shareholders across the two funds [who haven’t transferred].
We didn’t want to force them to sell. We didn’t want to liquidate them; it’s just bad business to trigger that on investors.
Q: Were there any problems that arose since you reached out to the SEC two years ago?
A: Actually, no. I was very worried that when we started the process that we were going to learn something and that we were going to have a major surprise. As we got closer and closer to the end, it became very clear that we did know what we were doing.
Q: Was any of it easier than you expected?
A: None. None of it was easy. This is the biggest project I’ve done in my career. This process touched every aspect of our business, and it involved so many people and so many details, and those details cut across everything. It just the sheer number of small details that was sort of overwhelming.Q: Has it been worth it?
A: We’re going to do more. We now know we can do it. We know the next time we do it, it’ll go quicker. We don’t have to chart a new course next time.
We’ve gotten positive feedback (and) I’ve gotten no negative feedback from any shareholder. I’ve also got investors who are coming to me saying, ‘Hey, when are you going to do the others?’ People prefer ETFs, and that’s sort of been confirmed by our experience with the conversion.
Q: How do you measure its success? Is it just by that feedback?
A: No, it’s how we grow these funds. They were small and they weren’t getting a lot of attention, and now they’re definitely getting attention. They still need to grow faster, but it’s been all inflows since we did the conversion.
Q: So, why do you think one of them has shown pretty substantial growth, and the other one is about the same?
A: I don’t have a good answer for that. An Asian dividends fund, I don’t think most people wake up and think ‘I need to have Asia in my portfolio,’ but I think they do wake up and think they need dividends.
Q: You mentioned you were planning to do more of these and that investors are wanting more. Can you share your plans for future conversion?
A: I am in the process of planning what we’re going to do next and how we’re going to get there, and there’s a lot of moving parts I have to sort through. Do I do them all at once? Do I do them in stages? If I do them in stages, which ones do I do, and will an ETF structure be good for all of these?
I think the answer to that question is yes, but there’s a couple that need a little fine-tuning to them. I’m anxious to get these done, but I know enough to know that this is not a small thing.
Q: It sounds like it’s the start of a bigger thing, if you look at Dimensional taking $30bn, or nearly that. Do you see this as the start of a trend?
A: Yes.
Q: Why do you feel so strongly about this?
A: You will find, over the last decade, monthly net flows in ETFs is 90% positive. You go look at the open-ended equity funds, you’re going to find the inverse. Everybody in the industry is aware of this, I mean, this is not some fancy insight that I came up with. It is clear that investors prefer ETFs.
So, if you’re a mutual fund company, and you see what’s going on, you want to figure out a way to get involved. You sort of have to.
Our challenge to convert these two was relatively simple. But many mutual funds have a much more complicated system. For instance, many mutual funds have a dozen share classes or half a dozen share classes, they have multiple distribution channels, they have 100 funds.
As I told you, for me, this project with two ETF conversions was the biggest project of my career. So if you have another mutual fund company that’s got 50, 100, 200 mutual funds ... this is not a small thing. This is going to take some of these firms years to do.
This article originally appeared on CityWire.
