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These Funds Promise a Fine Balancing Act: Active and Passive Investing

Mar 09, 2023

Envestnet is a name that you might be familiar with, at least I believe you should be, given the roughly $346 billion in assets and 1.7 million accounts they have as reported in the latest Form ADV they have on file with the Securities and Exchange Commission.

The overall group includes portfolio and retirement products and services, microfinance, and asset management divisions, each with their own assets under advisement figures. The firm is branching out once more and while it has an existing fund of funds allocation products that use mutual funds and ETFs as underlyings, it recently launched its first exchange traded funds. Let's take a look at what they have brought to market.

The first currently offers what it calls an "ActivePassive Multi-Manager Portfolio" that uses a mix of mutual funds, ETFs, and individually managed separate accounts to provide a range of allocation exposures from "Capital Preservation" to "Aggressive Growth." The newly launched ETFs don't offer a range of allocation scenarios like their predecessor products, but they are all branded as ActivePassive.

There are four funds in total including the ActivePassive U.S Equity ETF (APUE) , ActivePassive Core Bond ETF (APCB) , ActivePassive International Equity ETF (APIE) , and ActivePassive Intermediate Municipal Bond ETF (APMU) . I looked through the prospectus for APUE for clues as to what they mean by "ActivePassive" and found that the passive part of the strategy is provided by the CSRP U.S. Total Market Index, which has over 4,000 constituents and very low thresholds including a $15 million minimum market capitalization, a 12.5% free float (shares available to trade) threshold and a liquidity threshold of just 0.08% of shares traded over a trailing 125 trading days (six months in calendar days).

This index serves to inform the passive aspects of the strategy, which is to say, the passive sleeve of the portfolio is managed via a sampling strategy, meaning the portfolio managers will not invest in every index constituent. In fact, the prospectus states that "the fund may invest in passively managed ETFs in trying to construct the passive allocation to track the index." The active part of the strategy is explained by the following language, "The portion of the Fund's investment portfolio that is actively managed by the Adviser will range from 15% to 65% of the Fund's net assets and is expected to shift over time as economic conditions change and the available information about the asset classes in which the Fund invests evolves."

In terms of the actual stock selection process, the prospectus describes what is generally known as a "Smart Beta" approach utilizing value, momentum, and quality factors with a tilt to large-cap names.

Envestnet acts as the sub-adviser for APUE, but has contracted with other third-party managers to act as sub-adviser for the other funds. The funds and sub-advisers are as follows:

APCB: Neuberger Berman Investment Advisers LLC, Sage Advisory Services, Ltd. Co.

APIE: AllianceBernstein L.P., Causeway Capital Management LLC

APMU: GW&K Investment Management LLC

The approach for these funds is the same as with APUE except for the underlying indexes and active selection criteria. While Envestnet doesn't have responsibility for security selection within the active sleeves of each fund, they are responsible for setting the allocation mix between active and passive for the third-party managed funds.

Envestnet has built a robust business based on both multi-manager and asset allocation-based products. Given their existing clientele and assets under management, I don't see why they shouldn't be able to replicate this success in the ETF space. If you are looking for an active product that falls back to a passive strategy instead of cash during risk-off periods, then perhaps these funds are worth a closer look.

At the time of publication, Abssy had no position in any security mentioned.

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