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Bill Miller Loses Market Share as ETF Allocators Reroute Clients

Stephen J.Cucchiaro, founder and chief investment officer of Windhaven Investment Management, poses in this undated handout photo provided to the media on June 7, 2011. Source: Charles Schwab Corp. via Bloomberg
Stephen J.Cucchiaro, founder and chief investment officer of Windhaven Investment Management, poses in this undated handout photo provided to the media on June 7, 2011. Source: Charles Schwab Corp. via Bloomberg

June 9 (Bloomberg) -- Stephen Cucchiaro is the type of money manager who makes life difficult for Bill Miller.

The founder and chief investment officer of Windhaven Investment Management doesn’t dig through balance sheets to pick stocks, like Legg Mason Inc.’s Miller. He studies markets and industries, then chooses cheap exchange-traded funds to allocate client money across asset classes and investment styles, avoiding mutual funds and their fees.

Cucchiaro, 58, who sold Boston-based Windhaven to San Francisco’s Charles Schwab Corp. last year, is part of a growing field of managers who use ETFs to build stand-alone portfolios that are grabbing market share from actively managed mutual funds such as Miller’s Legg Mason Capital Management Value Trust. Their models helped ETFs attract two-thirds more net cash than traditional mutual funds in the three years ended Dec. 31.

“ETF asset-allocation products are a permanent share taker from traditional asset managers like ourselves,” Miller, 61, wrote in an e-mail response to questions.

Cucchiaro’s firm took in $1.3 billion in net new investments this year through April 30, bringing the total to more than $6 billion. Value Trust lost an estimated $218 million to client withdrawals in the period, according to data compiled by Bloomberg.

Research firms are starting to monitor asset allocators, which are hard to track because most don’t offer their products as funds registered under the 1940 Investment Company Act, the format mutual-fund companies use to attract clients.

‘Not a Fad’

Morningstar Inc., the Chicago-based research firm that has rated mutual funds for more than 20 years, rolled out a database this month tracking managers offering asset-allocation models with more than 50 percent of their money in ETFs. The list includes 49 companies overseeing $7.7 billion in 179 products.

Informa Investment Solutions Inc., in White Plains, New York, which rates the performance of institutional investment strategies, tracks 269 ETF-based asset-allocation products from 88 firms managing $17.6 billion. New York’s BlackRock Inc., the largest ETF provider, publishes an annual guide to the field, the latest edition covering 83 firms and $18 billion.

“The growth in this area is undeniable, and it’s not a fad,” Scott Burns, head of ETF research for Morningstar, said in a telephone interview. “There’s a shift going on from seeking outperformance on an individual-company basis to seeking it on a macro basis.”

Most firms oversee less than $1 billion, typically pooling money into asset-allocation strategies from separately managed accounts held by high-end clients or financial advisers.

No Mutual Funds

Howard Present, chief executive officer of F-Squared Investments Inc., in Wellesley, Massachusetts, divides his U.S.- focused asset-allocation products into nine ETFs that track the primary industry segments of the Standard & Poor’s 500 Index, plus a short-term Treasury ETF.

About 40 percent of F-Squared’s $3 billion in assets come from financial-advisory firms, such as Birmingham, Michigan-based Strategic Asset Advisors and CoreStates Capital Advisors LLC in Newtown, Pennsylvania.

“We never use mutual funds,” CoreStates CEO William Spiropoulos said in a telephone interview.

His clients can invest with F-Squared for a fee of 1.25 percent annually, including CoreStates’ cut. He said clients get better protection against market declines than simply placing money in an index fund tracking the whole S&P 500, and at a price that’s competitive with actively run funds. The average expense ratio on U.S.-registered active mutual funds was 1.22 percent at the end of 2010, according to Morningstar, and advisers typically charge 0.5 percent to 1.5 percent to manage client assets.

Wealthy Clients

F-Squared teamed with Hartford, Connecticut-based Virtus Investment Partners Inc. in 2009 to introduce versions of F-Squared’s products that are packaged as mutual funds. The newest, the Virtus Premium AlphaSector Fund, opened in July and gathered $1.69 billion from investors through May 31.

Other managers, including London-based Iveagh Ltd., have long provided an asset-allocation strategy for a small number of institutional or high-net-worth clients and recently moved to widen their customer base with a product geared toward less-affluent individuals.

The firm was founded in 2006, when the family office that managed the fortunes of Ireland’s Guinness family took on partners to offer asset management services to outside investors. Arthur Edward Guinness, the 41-year-old great-great-great-great-great-grandson to Arthur Guinness, who founded the eponymous Dublin brewery in 1759, is the 4th Earl of Iveagh.

Family Office Portfolio

The 229 million-pound ($376 million) Iveagh Wealth Fund, which can be sold to investors across Europe, has 50 percent to 60 percent of its assets in ETFs, said Chris Wyllie, the fund’s co-manager. Opened Sept. 1, 2008, the fund returned 4.1 percent in the year ended June 3.

“ETFs allow us to replicate a core family office portfolio,” Wyllie said in an interview. “I’m not sure you could have done that five years ago.”

State Street Corp., the second-biggest provider of ETFs, is planning new products for the U.S. market using a mutual-fund structure. The Boston-based firm asked the Securities and Exchange Commission for permission in an April 1 filing to open five asset-allocation funds whose managers would make investments through the company’s SPDR ETF family.


The asset-allocator databases run by Morningstar, Informa and BlackRock don’t include registered funds like State Street’s or broker-dealers, which have rolled out their own versions of the products. San Francisco-based Wells Fargo & Co., the third-largest U.S. broker-dealer by client assets, manages about $7 billion in three ETF-based asset-allocation strategies, Ian MacEachern, the firm’s head of advisory products, said in an interview.

Selena Morris, a spokeswoman for Charlotte, North Carolina-based Bank of America Corp.’s Merrill Lynch unit, and James Wiggins, a spokesman for New York’s Morgan Stanley, declined to provide figures for similar products offered by the two firms.

Windhaven’s Cucchiaro said he’s as much an active investor as Miller, tinkering regularly with the lineup of ETFs in his portfolios and their weightings. He said his approach makes more sense than picking individual stocks and bonds.

“Our research shows there’s a lot more inefficiency between asset classes than within markets, so why not spend your energy there?” said Cucchiaro, who founded Windhaven, previously known as Windward Investment Management, in 1994.

Levels of Risk

Active investors typically look for securities whose real value hasn’t been recognized by other investors for lack of information. They refer to any deviation between a security’s price and its intrinsic value as an inefficiency in the market.

Windhaven’s three products aim to capture differing levels of risk. The largest has $2.9 billion in about 18 ETFs that include those holding domestic and non-U.S. stocks, corporate bonds, gold, real estate and Treasuries. It returned an average of 5.7 percent annually, after fees, over the five years ended Dec. 31, compared with 2.3 percent for the S&P 500 Index.

Miller, who beat the S&P for a record 15 straight years through 2005, topped the index in just one calendar year since: 2009. Value Trust lost an annual 8.1 percent in the last five years. Assets fell to $3.65 billion as of June 6 from a peak of $21 billion in April 2007.

Indexing Trend

ETFs have helped fuel the larger trend toward index-based investments in the past decade. Together, index mutual funds and ETFs attracted $559 billion in the U.S. in the three years ended Dec. 31, compared with $244 billion for actively run funds, according to the ICI. ETFs accounted for $412 billion of the net deposits.

The new products demonstrate that using ETFs doesn’t mean an investor’s approach is wholly passive, Martin L. Flanagan, chief executive officer of Atlanta-based Invesco Ltd., said in a telephone interview.

“When people think of ETFs, they really start by thinking of them as modern-day index funds,” Flanagan said. “But what ETFs are and what they can do is really not yet fully understood.”

Under Flanagan, Invesco purchased PowerShares, the fourth-biggest U.S. ETF provider, in 2006. The parent company manages $9 billion in asset-allocation strategies, mainly for institutional investors, that use ETFs as part of the mix.

Edward C. Bernard , vice chairman of Baltimore-based T. Rowe Price Group Inc., said he doesn’t believe asset-allocation products built with ETFs will succeed in the long term.

‘Market Timing’

“To the extent that some managers are trying to replace active security selection with active allocation across sectors, that is another name for market timing,” Bernard said in a phone interview. “History suggests that is rarely a durable strategy.”

T. Rowe Price, which doesn’t offer ETFs, limits asset allocation to its target-date mutual funds. The products shift to a more conservative mix of investments based on how far a client is from retirement, and without regard to any short-term outlook.

Cucchiaro agreed that investors can get hurt if they are chasing returns based on what’s been hot or cold, especially if they’re doing it day to day.

“We take a much longer-term view,” Cucchiaro said. “But an asset allocation that might be perfect today may not be several months down the road. It’s important for the manager to respond to a changing world.”

To contact the reporter on this story: Christopher Condon in Boston at

To contact the editor responsible for this story: Christian Baumgaertel at

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