The past year or so has seen a number of established mutual fund issuers start to dip their toes into the exchange-traded fund pool. What we have also started to see are established separate account managers looking to expand their distribution to the retail crowd by launching ETF versions of their composite accounts, or overall strategy. While there are some potential benefits to retail investors gaining access to institutional-level portfolio management, there are also some caveats, one in particular, which I'll get into a little later.
Mulholland & Kuperstock is an investment advisory firm with locations in California and Nevada. From reviewing the firm's Form ADV, it looks like they opened its doors in 2019 and since then have managed to attract $27 million of advised assets. On the "Who You Are" section of their website, their target audience seems to be doctors, tech workers, entrepreneurs, and individuals with at least $500,000 to invest. Thresholds that are out of reach for a lot of Americans but quite reasonable given the multi-million dollar minimums at many other shops, not to mention mutual fund Institutional Share classes. The firm teamed up with white-label issuer Alpha Architect to issue its first ETF earlier this month. Let's take a look.
The Fund
The MKAM ETF (MKAM) launched on April 12 with $3 million of seed capital and sports a 96-basis point (bps) expense ratio, which includes 2 bps allocated to acquired fund fees, so investing $1,000 over a calendar year would mean giving up $9.60 in fees to the issuer and service providers.
The strategy is billed as using a "proprietary algorithm that combines valuation and trend." And seeks to "capture the majority of equity market returns, while exposing investors to less volatility and downside risk than other equity investments." The fund is actively managed, so let's turn to the summary prospectus to see how they plan to go about delivering the MKAM investor experience.
The high-level view of the strategy is that the portfolio managers are targeting S&P 500 Index performance through investing in a mix of equities cash and cash equivalents including Treasuries, Money Market Securities, and Money Market Funds. My take on the language in the prospectus is that the fund uses what seems to be a momentum model that keeps an eye on valuations, including some type of relative strength metric. This metric can signal when markets are overextended and prompt either a shift in the equity/cash mix or prompt managers to put on a hedge using either options or futures, which are also permitted as part of the strategy.
MKAM's current holdings show that the fund is currently positioned with a 50/50 mix of the iShares Core S&P 500 ETF (IVV) and iShares 0-3 Month Treasury ETF (SGOV) as well as other short-term treasury securities. Considering the current yield of 3.79% in SGOV and the 4%+ yields on the various Treasuries as compared to the quarter-to-date -1.19% returns as of yesterday's close for IVV I, have to say this positioning makes sense.
My Take
One thing I have noticed about the latest wave of actively managed funds is the strategy and the fee structure. It seems to me that the days of a 50-bps to 60-bps expense ratio sweet spot for funds bringing more than broad beta to the table are starting to wane. Another thing I noticed while I was looking through the Statement of Additional Information (SAI) to see if the fund was using any Active Non-Transparent technology were risks that were not talked about in the summary prospectus. In the section labeled "Potential Conflicts of Interest." One potential conflict, as identified, is that given that the portfolio managers also manage other accounts using the same strategy, the manager "could favor one account over another." Later in the section, this language appears, "Another potential conflict could include a portfolio manager's knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of the Fund."
To be clear, this language indicates these as potential conflicts and were most likely added to appease some lawyer, somewhere, but still, I would expect that issues like this would have been squared away prior to launching a retail-facing product. Again, not saying this issuer will engage in this behavior but, as the kids on the internet say, "IYKYK" (If You Know, You Know).
