Blue Whale Growth Fund managing partner and CIO Stephen Yiu told ETF Stream an active ETF is the “best thing in the world” due to its liquidity benefits; however, he identifies four key barriers preventing an ETF iteration of the firm's $1.1bn mutual fund.

Yiu stated his team has done “some work” researching an active ETF launch and was “excited” by Cathie Wood’s success in the US with ARK.

“To me, an active ETF is the best thing in the world, a bridge between the investment trust and open-ended fund, with daily liquidity at the same time,” he said.

The CBI's recent announcement to amend its stance on ETF share class naming also puts a spotlight on mutual fund managers considering adding an ETF share class. Yiu described this as an “interesting” development, noting they already have the Blue Whale Growth Fund ICAV.

Despite his enthusiasm, Yiu outlined four barriers that remain in place for launching the mutual fund in ETF format. Two are regulatory challenges, alongside concerns around demand and tax implications.

Regarding tax, he said, “The reason US investors have shown strong interest in ETFs is largely due to the favorable tax regime, which we do not have in Europe.

“I have to factor in that perhaps 50% of Cathie Wood's active ETF success is due to these tax benefits, rather than solely her strategy or reputation,” he added.

Transparency versus competitive edge

While active managers have increasingly entered the active ETF market this year with high-conviction strategies, such as Janus Henderson’s recent ETF debut, Europe’s daily transparency rules for ETFs are also a concern for Yiu.

He explained although Blue Whale initially drew ideas from competitors' portfolios, they have since stopped as their own performance has strengthened and the number of strong competitors has declined.

“Since we are doing well, we do not want competitors doing the same to us every day. Otherwise, where is the alpha? They might as well just copy us. So, from a competitive perspective, it is a consideration.

“But I do understand that, from an investor’s standpoint, some level of transparency is important.”

Yiu’s final regulatory challenge in launching an active ETF is UCITS' capping limits. He believes a more concentrated, non-UCITS-compliant 15-stock portfolio could deliver stronger performance and better excite investors.

Demand not there yet

Finally, Yiu explained their investor base is divided roughly 50:50 between retail investors and wealth managers. While there is interest from retail investors in passive ETFs, Yiu argued there is little demand from wealth managers or retail investors for an active ETF.

Instead, they have received more inquiries about launching an investment trust, which Yiu said remains more popular among traditional investors.

Regarding retail investors, he said, “The top 10 selling funds on various platforms are published monthly, and about two-thirds of these are passive ETFs. I have not seen any active ETFs among them. Many active funds seem to be losing traction, so whether converting to an active ETF would attract retail interest remains uncertain.”

The final word

Yiu ultimately stated he has “no issue” with launching an active ETF, and although the barriers discussed are important, demand is the most crucial factor.

“Who is going to buy it? I could launch it tomorrow - though it would mean more work and some investment - but if there is no demand, there is no point.”