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Creative Counterpunching from Active Managers

In the raging battle between passive and active management, it’s becoming increasingly clear that active managers are not going to go down without a fight (nor do we believe that either passive or active are going away anytime soon).

The latest countermove has come from fund manager Eaton Vance in the form of a new investment vehicle called NextShares. NextShares, as the product’s dedicated website boldly and aggressively states, are “a new type of actively managed fund designed to provide better performance.” NextShares seeks to deliver on this promise by combining lower expenses with certain structural advantages that together should result in higher investor returns than would be the case in a typical mutual fund structure.

With NextShares there are no sales loads, distribution or service fees, and administration fees are held to a minimum. As exchange-traded vehicles, NextShares avoid the trading costs of money moving into and out of the funds, as well as the cash drag from having to hold cash for redemptions. The result is potentially better performance. A study by Navigate Fund Solutions LLC, the entity created by Eaton Vance to promote NextShares, showed that after adjusting realized fund returns to remove avoidable structural costs, 55% of actively managed funds benchmarked to US equity indexes outperformed their corresponding average of index exchange traded funds.

So far Eaton Vance and subsidiary Parametric have introduced NextShares’ products, and American Beacon and Pioneer have signed on to the new approach. Whether NextShares can gain widespread traction remains to be seen. But the ultimate benefactor of the active-passive war may be investors who get better performing products at lower costs.