Welcome to trillions. I'm Joel Webber and I'm Eric bel Tunis Eric. A couple of days ago, something happened that has never happened in the history of e t s. What was it? It was the first ever e t F to convert from a mutual fund into an e t F. So if you're in this fund, you would go to sleep h one night with mutual fund and wake up with an e t F sequel. And this was really monumental um and the first one to do
it was Guinness Atkinson. But there are a couple others now lined up, including a massive one from d f A that could be about twenty six billion dollars, and
it's got a lot of people buzzing. They there's a lot of talk about how this could start to really spread and really become the way as opposed to some other ways that the traditional active mutual funds sort of comes over and it takes advantage of the e t F ructure and the benefits that are in it, while being able to keep the track record and start with some assets as opposed to try to, you know, make it on their own in the terror dome as a newborn,
which is hard so this will be a fascinating conversation and joining us from Guinness Atkinson Funds Jim Atkinson as well as his lawyer Alex Albert stat They were the two that helped bring these two e t f to market, Smart E t F S Dividend Builder with the ticker DIVS and the Smart E t F S Asia Pacific Dividend Builder the ticker A d I V, as well as at Bloomberg News Claire Valentine who wrote that story in March, this time on Brilliance converting from a mutual
fund to an TF. Jim, Alex, Welcome to Trillians, Thanks so much for joining us, Thank you for having so this just happened in March. How long ago did you start dreaming about leaving the mutual fund world for the E t F world? Uh more than two years ago. Um, maybe three or four or five years ago. But we started in earnest on this project, I think about two years ago. And what was the attraction? Well, we've been
in the mutual fund business for a long time. We have some great funds, and we're noticing that the E t f s are attracting all the assets. And you look at the flows. You notice that UM mutual fund flows have been persistently negative and E t F flows have been persistently positive, and you look around and you say, well, there's a reason for that, and that's because e t
s are a better mouse trap. And once you conclude that, you start to say to yourself, I think we need to be in the e t F space, not the mutual fund space. But we've got some great funds. How do we convert these into E t F s? Uh and then And it was a little bit seuraging it first, because I've never been done before and there were a lot of obstacles, But I talked to Alex at length about it, and uh, we just decided to go for it.
And we had a few phone calls with the SEC, and we just pushed ahead, and we just kept pushing that rock up the hill. I want to ask about phone calls with the SEC, but I also want to bring my colleague Claire in uh and and clear I helped set the stage for us, like if they if they were the first ones, how many more conversions are we likely to see in the days slash week slash months ahead. Well, the big one that we know is coming up is Dimensional Fund Advisors UM. They're conferred converting
quite a few of their mutual funds. That's going to make them, right out of the gate a really big E t F issue where they've launched a couple of their own E t F s separately, but with these conversions, that's going to UM make them one of the largest et F issue. Where's just from that and UM, outside of just that, we've seen a couple of other smaller players file to convert their funds. UM one is a cannabis fund. So it's an interesting trend and I think
we're gonna see it more and more. And what stood out to you about the Atkinson one, Like, what was significant to you about it other than being first? Being first? Definitely, And I remember last year hearing about this and just in the middle of such a crazy pandemic year. I just remember UM looking at this and having observed how much money mutual funds have been losing and how much money ETFs have been gaining. I remember my first thought
was like, WHOA is this possible? This is a game changer. So it's it's a really interesting trend, I think, And just the fact that it's possible is is pretty notable. So Jim, I I curious about this idea of how to do it because when we first started talking about conversions um I think it was the guy from um UH Presidian who brought up conversions on our podcast about a year and a half ago, and he said, some lawyers are talking about it. I put this out on Twitter.
Some people replied, well, I don't know if this can ever happen because people need brokerage accounts all of a sudden, and it's tough to do that. What if it's in a four one K plan? How did you work out those kinks? Well, the biggest kink was the direct shareholders. So most shareholders nowadays by their new tool funds through a brokerage firm, but there's still some people and the
legacy shareholders that hold their shares direct. And you're correct, the traditional transfer agent system doesn't permit the holding of what what is essentially an equity security from an operational standpoint. Uh and And we had to do a little research to find the answer to this. But we we came across a firm called American Stock Transfer and there are
a corporate transfer agency. So the way worked was as we got close to the conversion, we reached out to the shareholders who were direct and we said to them, we'd like you to transfer your shares to a brokerage firm UH or exchange into another one of our funds. And our least preferred option was for them to redeem UH. And most clients came back and said, we want to transfer and and by the way, that is a whole
other process we can talk about later. But we knew we weren't going to get a hundred percent of our shareholders that were direct to transfer, so we arranged for American Stock Transferred to step in and fill the gap. So any shareholder that that was on our records as a direct shareholder on the march in these two funds got transferred over to American Stock Transfer and it's our plan to get them to move off of there into
a brokerage account eventually. UM. That was sort of a key breakthrough we had to come across, because that was the operational snag that we kept bumping up against. Alex, I want to bring you in here. Did did the converse station between Jim and the sec Did that start before you or or once you were part of the team. Now that was. I mean, Jim and I planned this structure out together. We've talked about it for a few years.
We've researched a lot of bits and pieces of different transactions involving mutual funds, UM and closed down funds in the past, and we sort of put all those elements together and then we did what anybody can do, which is you reach out to the SEC. You have a conversation, You explain to them what your idea, your concept is. You show them why it fits within the existing regulatory scheme that they are comfortable with, and sometimes they have questions.
You respond to those questions, and eventually you get to the point where you move forward with your disclosure filings, which is what we did. So these aren't billable hours, um, so I want to ask, um, you know now doubt now, not exactly, but not not not a billable for me right now at least. So so as long as I have that advantage, I just want to ask, you know, what, what did you find surprising in that conversation with the
SEC and throughout this process. Well, I mean the first surprise was, um, we thought it was gonna be We thought we were going to have to do a proxy to get shareholder approval. UM. There's a special rule that applies to mutual funds. When you're merging two mutual funds that are managed by the same advisor, you don't always need to have a proxy. Proxy is a very uh time consuming and somewhat expensive process for mutual funds because
of the way funds are distributed. UM, it's extremely difficult to get those proxy statements out and out to all the shareholders and achieve your first shift to achieve acorum, and then you have to get the approval vote. So we were pleased to find out we didn't need a proxy. But the other thing that surprised me is some number of years ago, there were other fun complexes that tried to go down this path and there was actually a
denial letter out there. And I thought that from that two thousand twelve denial letter we were going to have a bigger problem, and we really didn't. I think that the industry has evolved. E t F obviously have grown significantly since that time frame. And then also we had the benefit of the SEC taking a deeper look at how E t F operate, and that came out of the E t F rule. So that was obviously a huge piece that. Um, you know, we've probably made them
more favorably inclined to this idea. I'm interested to just in talking with your shareholders, was there any pushback? I mean, did you get any concerns raised? How did that go? Um? No, that's a great question. It well is the answer that question. So a couple of things. First of all, when we first started thinking about this, I reached out to some of the advisors that have assets in these funds, and
of them weren't fa are this? And then I'd occasionally get on the phone with a shareholder and I'd ask them the same question, how do you feel about this? What if we did this? Uh? And the answers were again a hundred percent positive. And then, of course, as we went through the process, I had the chance to speak to several dozen of our shareholders. Not one person expressed any reluctance to do this. That everybody thinks it's a great idea. Now, are there some out there that
I didn't talk to? That's quite possible, But UM, let me pretty do this differently. We've had a number of advisors who are in our other funds and they're asking me when are we going to get to these other funds and convert them? This seems to be something that everybody is interested in, and we've had zero pushback. Now, there's been some operation elections we had to sort through, you know, on a couple of account levels. Um, but but those are those are all minor issues. Um, universal acceptance.
I guess it is the answer. You all have already wild to convert a third fund. Are you going to do all the mutual funds? How far are you going with it? Uh, that's not fully determined, but I would say, don't be surprised if a year from now we have zero opening funds and were an entire e d F fan. Wow, yeah, it's UM, this is kind of new information. I know you did it, but to hear this sort of testimonial,
it's very interesting. Now. I was with a manager yesterday, UM, and they're a mutual fund manager, and we were talking and they were saying that part of their problem was the four when K plans. Do you have any of your shares in four when K plans? Or or no, we do but not a lot. So you're right to raise this issue. That was one of the first things I looked at when we started thinking about this a few years back. We don't have a lot of penetration
in the four oh one K market. We do have some and in fact, I will tell you the Guinness Atkinson four one K does invest in the dividend builder. And I called our administrator and said, hey, what happens if this becomes an e t F And their answer was not a problem. We can handle it. So we know that there are some retirement platforms that struggle with e t s or can't handle them, but that's not a universal problem. And there's nothing inherent about e t
f s that keeps them out of retirement plans. So I guess if if somebody's out there listening and they're thinking, oh, every mathful fun, well, I mean, do you think this will be something that's targeted to to fun families that might not have that big of a four one K presence, or do you think it might spread and they'll just figure out how to solve that too. They'll figure out
how to solve it. Yeah, there's there's um. There is nothing to my knowledge, there's nothing inherent about the operations or legal structure of four one case that's keeping them
out of retirement plans. So there was some questions in forward k plans and the reason E t s aren't tend to be in the four one care well, besides the fact that you can get the institutional classes cheap, you don't need to interdate trade your four one k ets lose a lot of their superpowers when they go into the four one k that they have outside of it.
That said, one of the reasons I, you know, would assume is that if you have an e t F in there and your drip drip drip buying, you're constantly paying a spread where you wouldn't pay that with the mutual fund. Yeah, well, I think I don't know that that's really that big of an issue there. There's I refer to those as carriage costs. So when you buy a mutual fund, the carriage costs go to the entire fund.
That is to say, the bid ESTs you put money to the neutral fund, the mutual fund has to deployed that. They're paying commissions, they're paying custody charges, they're paying the bidst spread and everything they're buying. Those carriage costs, which rightfully belong to the person coming in and being shared by everybody in the fund. There's one of the benefits of ets. So the fact that the carriage cost is more visible in E t F doesn't mean it's being
a something the mutual fund. To your point about the drip one the sort of psychological problems about e t s versus mutual funds. Mutual funds are bought in dollars and e t s are bought in shares. But that's not an impediment that can't be overcome. Yes, so I, if I can summarize you, mutual funds are internalizing those costs. The e t F it's externalized, but you're paying it
either way. Okay, understood, So that's interesting. Um, that really makes the world much bigger that could do this because we had said, well, it's probably gonna be targeted. But but then again we people were pretty barossed that anybody would do it, And now you've got five or six lined up. Um. Anyway, interesting, So, Jim, if if there are one mutual funds out there, arbitrary picking a number, how many of those could you see doing what you've did? Um, well,
if there are, you a hundred. But let's let's talk about what are some of the impediments for other people doing it. So first of all, I should say that the project that we just went through was the biggest project of my career, and that's because the level of detail that has to be dealt with when with this conversion isn't just affecting part of the business. It affects our entire business, from asset management, portfolio construction, trading compliance,
shareholder communications. Every every single one of our service providers for mutual fund was involved. The broker do you know can news and the level of detail was enormous. We did two funds. Now, imagine if you're a mutual fund company with a hundred and fifty funds and seven share
classes each. That is an enormous project. And when you start talking about all of these share classes, and many of the share classes are four different types of retirement plans, they might decide just to leave them as they are because it does work. But for everybody else, I think you're gonna decide that the e t F is a better mouse trap. And yes, it's a big object, but it's a project worth doing both for your business and fear shareholders. So could it be a hundred yes, might
it be eight? Could be eight. There's some other issues to some funds don't really work well as an e t F. You can need to have a liquid pool of investments otherwise the arbitrage mechanism doesn't work UM, and the create process actually can I but it isna that all mutual funds become e t s and that might
take a decade. So in the small cap area, you're saying it wouldn't be if you have a decent sized small cap converting that to an e t F, then you get into this whole debate they're having with Cathy Wood right now and ARC, which is you're too big to own these small stocks. You're going to push them around and the arbitrage band would widen and it just wouldn't really make sense. Whereas in a mutual fund you can close to close it if you need it. If you're a small cap fund, you get too big and
you have capacity issues, you can just close the fund. Yeah, okay, Gus. My question too, is now that this has happened, UM, does this sort of pave the way for more or as more people do it, does it get easier for the next person to do it? Or is it more just a very individualized kind of process. Um. Yeah, it definitely is gonna pay. It's paving the way for people
to follow and Geinness Atkinson's paths here for sure. UM, we know a lot of advisors who are obviously there are a number of advisors who have already filed documents indicating that they're going to pursue this. There are a number of other advisors who are talking about it, thinking about it UM and looking into it. And there are also people who are thinking about converting other types of either pooled vehicles or assets, types of institutional accounts into
e t s and I think that's probably coming. And then I think there's a group of people who are looking at converting into non transparent or semi transparent e t s and I think that's probably you know, on the horizon, and I haven't seen any filings on those yet, but it's possible. It's interesting because the non transparent has been one route to go um A d f A did transparent active UM and this is sort of doing
it where you bring it everything over. Jim, was was it attractive to you because you could launch e t f s that are cloni sho off your strategies and still have the tax benefits. But then you've got to start from scratch. Was it attractive to you the fact that you could bring over the assets as well as the track record and the shareholders. I mean, if if we had launched the clone for a shareholder to take advantage of the e t F, they'd have had to
realize a taxable gain. So, but yes, we wanted to bring There were two bedrock principles from the very beginning. We wanted to be able to bring the track record over. We wanted it to be a non taxable event for our investors. Uh. And those were critical. Um. And then just from a business standpoint, I don't really want to be having, you know, two different structures and two different overheads.
So so Jim, I have to ask, um, this being such a seminal event in in your career, uh, and you know it taking a what sounds to be like just a considerable amount of work. What was the point in the process that you were like, what have I gotten myself into? I'm like bashing my head against the wall. What what were what were those things that made you bash your head against the wall. Well, the thing that worried me throughout the process even even before we started
was what am I going to learn? That I wished I knew now? And I was always worried about the unknowable unknown um. And in fact, we didn't really stumble across anything major. But I will tell you where I had my sort of moment of panic. We've been having phone calls with everybody in the operations. These are fall like thirty different people from from five or six different firms. These phone calls have been going on once a week and then later more than that, going back to like August.
Just a tremendous amount of effort, all these details, and everything just kept looking like it was going fine. The workload kept going up. But we got about ten days out and I said to myself, what happens if something goes haywire here? What if this thing just completely fails? Um? And I knew it wasn't going to but that was sort of like my moment of panic. And I woke up the next day and we were about nine days out, and I said, you know what, this is going to
go fine. And as it turned out, UM so. So the conversion happened on a Friday, last days a mutual phone was Friday first days in ETF was a Monday, so we had that weekend and I was thinking, my phone's gonna ring up the hook, I'll have problems all weekend. I got nothing. I had no phone calls over the weekend. We had a seven am call on Monday morning. At nine am call on Monday morning, just to check in all of this build up and all of this work. It was like the whole thing was a whimper at
the very end. It must be like you're you're describing like what I would imagine carnation sounds like No, what are you's describing? Is y t K? Remember that was the whole faith? That's what There you go, Thank you, My work is done here, I'm going to happen. You're You're welcome. Yeah y t K. Comparison way better than reincarnation, but less weird too, less weird. I went to super Meta and you kept it real. So thank you for that.
Um so so Jim. I have to ask, since since this happened, how many phone calls of of former peers UM in the Mutual Fun world have you been getting? It doesn't UM emails, UM phone calls. Uh yeah, it's surprising because you know you're sort of just working away, working away, and that you don't realize that so many people are watching. But a lot of people were in a lot of people have noticed. So I've been in touch with people I hadn't been in touch with for
five or tenure. And and Alex, how about for you since you are the trailblazing lawyer that got this done. Yeah, I've heard from a lot of people. Um, you know, I think lawyers, you know, need to fun lawyers. We usually connect every year two we all go to a big conference together. So that conference did happened. I don't think it even happened last year. It happened virtually this year. I think, you know, I have a lot of drink
tickets coming my way next year. By the way, just speaking of mutual fund lawyers, UM, I think of the word compliance when I think of you guys, and I think of someone who's just constantly saying no. And it just seems like, I don't know, but you seem pretty cool, Like you seem like you're a little more optimistic. Can you talk about the sort of trying to work in
between the need to market and the rules. Well, I mean, first of all, thank you, Um, there are plenty of times where I have said no to to Jim and he'll vouch for that, UM there you know. Look, it's always attention. Mutual funds are extremely regulated. This Investment companies are highly regulated when you look into the scheme of how things operate in the US, right and there are very significant and very specific rules around mutual fund marketing.
And that is accommodation of statutory UM, elements of the statute itself, regulations that were adapted UM under the Investment Company Act UM, and pieces of the Investment Advisor's Act. And then there's this whole body of law which is in no action letters and other sec pronouncements, and they are very precise about what you can and cannot say UM with respect to mutual funds and performance and compliance with those requirements is obviously a big piece of this picture. Now.
The e t F rule came out a couple of years ago. It also has a series of very specific compliance obligations. UM. The fund manager requires very precise information to be put up on the website every day if you're operating for sea to a rule, which these funds are are under that rule. That's rule six C eleven UM.
And you know, you have to compliances. As Jim said, this is touching every piece of the advisory business and compliance as part of that, and compliance is all as part of a mutual fund business too, So it's really UM trying to just make sure you don't have conflicts. The two sets of schemes harmonized, they're not exactly at all. Fours And we are in the middle of this suit because there's a new rule that applies to investment advisor
marketing that has just been adopted by the SEC. It's gonna be going into applying shortly, so we're sort of retooling this all. But you know, the standardized information that you see, whether it's about a mutual fund or an exchange traded fund UM, what you're seeing out there is put together in accordance with a very specific set of
accounting and financial reporting rules UM. And that's what you had with the mutual fund perspectives, and now you have that with the e t F. In the case of these conversions to eat, TF is the accounting and performance survivor in these merger transactions, so they adapt the performance
of the predecessor mutual funds. So I had to UM I have to ask if there are as many mutual funds going to make this jump as as Jim sort of indicated, you know, he thinks, my, how many mutual fund lawyers are gonna jump over to become E t F lawyers. Well, I mean there are a lot of mutual fund lawyers who are also E t F lawyers. It doesn't necessarily we don't sort of separate ourselves into
those buckets. Um, I think you know, there are a lot of fund lawyers who are representing or advising UM fund complexes or words of directors of funds who are already focused on these transactions and looking into them. So, um, I think that you know, there's As I said, I think there's a lot of opportunity here. The concept of converting and existing pool of assets into the E t F is appealing because it's much harder, It feels much
harder for the advisor to start from zero out. When you're converting an existing pool or an existing account, you already have a performance history, you know your strategy works. Question is this the E t F rapp or the right distribution? One thing that I'm wondering just about the conversion environment in general is from questions that I've gotten
on Twitter or that kind of thing. People who maybe are mutual fund shareholders and they're wondering like, oh, is my mutual fund going to become an e t F or just the idea that that could could sneak up on you. Um, But there is a lot of disclosure involved in it, right. I mean, people listening shouldn't be like either worried or you know, freaked that suddenly something's
going to happen without them knowing. They'll definitely notice, Yeah, they're gonna get a you're gonna get an adage in the mail, and then they'll get less capital gains distributions. They'll notice that that's exactly right. And I think if if a shareholder is worried about that, they should be thinking this is a good thing for them, not a bad thing. Uh. They'll they'll have an et F one morning where they previously had a mutual fund and it
will be on their statement. Um. They'll most of these investors have their their funds currently through a broker dealer, so they'll place there there you only want to redeem. They'll do what they normally do. They'll just call the broker to get their exit. Okay, let me just like we'll put the thing out there that any investor would want to know here, which is what downside if any do you see here? Um well, I don't really um,
particularly an era of zero commissions. Now if you have, if you're if you're a client at a broker's from the still charges commissions, that's a bit of a negative. Um. You know you do have to deal with you know, figuring out what kind of order you're gonna put in so they can put in a limit order, a market order, and I would advise a limit order. Um, but be
on that. I mean, you should be realizing cost savings, you should be gaining tax efficiency, you should be gaining transparency, and you should be gaining the ability to have intra day liquidity. Let me just um, I put a question in the in the chat to the guys on my team to see if they had any questions. Um. It's a good question. Actually, this would be from Athanacios in London. Hey, Ethanacios, thanks for listening. I feel like radio show. Um. He asks you as a question for Jim, how do you
feel though about having to be transparent now? Because that's a good question. Yeah, right. Our our shop tends to be transparent um by the way, that's our sort of style. That's a different question from our portfolio being fully transparent every day. We are a low turnover shop. That's part of how we manage money, and we don't mind people seeing our holdings. So that sort of raises a question
of okay, what about front running. The way we've set it up, when we make a change in the portfolio, it will be completed before the end of the day and before people realize what has happened. So we have to report our holdings um every day, put them on our website every day after the market closes, and we distribute the basket through the n SEC system to the market participants. But by the time they see that it's different from the day day before. We're done. So we're
not worried about people front running. We we touched on this, but we're looking at, say, by the way, I mean, the fact that you're getting all these calls and emails speaks volumes about what we're probably going to see. But the mutual fund industry is I want to say, of the equity and fixed income sides together, is I think ballpark twelve trillion somewhere in there, twelve thirteen trillion. What percentage of that do you think is convertible? I don't
know the answer that question. UM. Part of that would would relate to how much is in fixed income and how many of those fixed income funds would be convertible. UM. It's not quite as easy for some of the fixed income vehicles to become ets. That's such that they couldn't be. But there's some things to be thought through, and then there's some derivative based strategies that may not work as
e T F s. UM. If this happens, which is to say, if there's a long term trend to convert mutual funds of e t s, which is what I think will happen, it is not going to happen quickly. It's gonna be a potentially a decade long process because some of the ones that are more difficult are going to have to take longer to figure out. I don't know if that answers your question, and you're asking me
the future of it, UM. I can't really speak for the rest of the industry, but I just sort of look at this from my perspective and from a shareholder perspective, the E t F is just a better mouse trap, and if we can deliver a better product, we should all be thinking about doing that. Now. Might it be
difficult in some cases? Yes, and and increasingly difficult for certain firms, and some strategies might not make it, might might pass the test, alright, So Jim, what about for uh, like a big mutual fund player, like a Fidelity how much how much of this conversation is going to go down there? Well, well, I don't have any information about what's going on inside of Fidelity UM, but I have heard that UM new to fund executives at other large
firms are watching this very closely. And again it's it's almost a case by case basis. Uh, there's a lot of business complexity at a larger firm. Uh, the more products you have, the more esoteric the products are, the less liquid they are. I mean, there's just there's a whole lot of things to think about, not to make some multiple share classes, distribution channels, etcetera. So it's it's it's impossible for me to say what might be happening
in a particular firm. All I can tell you is I know from multiple sources that that the senior executives of very large asset management firms are looking at what we're doing and you're the guinea pig. Well listen, Joel I I tweeted out the other day Dives. I was like, this little guy made history. Um, it's you know, gonna be the first one over. There's been all kinds of conversions.
Canada has done this. In the U S. There's been I think closed and fun to E t F but there has never been this, and so Dives definitely has broken ground. It's probably gonna make the history book. So congratulations Jim and Alex. I think you've earned a couple of drink tickets Alex plus Guinness. By the way, Jim, do you get free Guinness? Well that's just that's just a perk, so you don't need drink tickets if you hang out with Jim. Uh, Jim, Alex, thank you so
much for joining us. Some Tralians thank you. Yeah, this was Thanks so much, guys. Thanks for listening to trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify, and where else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Ball Tuness and you can find Claire at CFB Underscore eight teen. For more on Guinness Atkinson Funds, check out
smart Ets. This episode of Trillions was produced by Magnus Hendrickson. Francesco Levi is the head of Bloomberg Podcast. Bye.