Jeremy Grantham’s GMO enters ETF space for the first time

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GMO, the value-oriented house co-founded by the veteran investor Jeremy Grantham, has filed to launch its first exchange traded fund, a regulatory filing shows.

The actively managed GMO US Quality ETF will invest primarily in companies that GMO believes to be of “high quality”, the filing says.

The ETF will select companies that have an established business that will deliver a “high level of return” on past investments and will use cash flow to make investments with the potential for a high return on capital or to return cash to shareholders through dividends, share buybacks or other mechanisms.

In addition to investing directly in equities, the ETF might invest in exchange-traded and over-the-counter derivatives and ETFs, the filing says.

The fund may also invest in the $432mn GMO US Treasury Fund.

The head of GMO’s focused equity team, Thomas Hancock, along with portfolio managers Ty Cobb and Anthony Hene, will manage the ETF.

That trio manages GMO’s $7.9bn Quality and $76mn Quality Cyclicals mutual funds, Morningstar data shows.

The two funds bled a combined $389mn during the year ended July 31, according to data from Morningstar Direct.

Hancock also manages GMO’s $1.9bn Resources, $1.1bn Climate Change, $468mn Resource Transition and $72mn Small Cap Quality funds, according to Morningstar.

Those funds recorded combined net inflows of $114mn during the same year, driven largely by the $138mn investors piled into the Climate Change Fund.

Fees for the ETF were not disclosed.

“GMO has always been committed to offering innovative investment solutions in the structures that best suit our clients,” a GMO spokesperson said. “Our extension into exchange traded funds is a natural evolution of that commitment, driven by demand from the intermediary and wealth management space.”

Active managers’ continuing to launch ETFs was “not surprising,” given that advisers were becoming increasingly comfortable with the ETF structure and continued to increase allocations to it, said Daniil Shapiro, director of product development at Cerulli Associates.

“Managers tell Cerulli that their offering of ETF product can be a case of client demand, as it allows for more tax-efficient exposures than mutual fund product, making having it available a must,” Shapiro said. “A key challenge at this stage of the market is finding a niche for a product, and while this often sends upstart firms in the wrong direction, often via overly targeted exposures, there is plenty of room for trusted managers offering active exposures.”

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