Ameriprise To Buy Grail, Push Into ETF Industry

by on April 15, 2011 | ETFs Mentioned:

After months of speculation sparked by an SEC filing announcing Grail Advisors was near an agreement to be acquired, the future for a pioneer in the active ETF space is a bit more clear. Minneapolis-based Ameriprise Financial has reportedly agreed to acquire Grail, giving the financial giant the exemptive relief required to launch actively-managed ETFs.

In a January SEC filing, Grail noted that it had “entered into a letter of intent concerning a transaction involving its ownership interests in order to enable it to continue its operations.” No details on the identity of the suitor were released, with the company’s CEO indicating only that the would-be acquirer was a “well-known firm in the money management space.” According to industry sources, last month the two sides were far apart on the purchase price for the San Francisco-based firm and the exemptive relief it holds. It isn’t clear if the firm mentioned in the January SEC filing was Ameriprise, or if other potential buyers have been involved in recent months [Exemptive Relief Update].

Terms of the deal weren’t immediately available.

Floodgates Opening?

Active ETFs have long been touted as the next area of significant growth for the ETF industry, but momentum has been slow to build. In addition to difficulties accumulating assets, significant regulatory hurdles have emerged for firms interested in developing and potentially launching active ETFs. The SEC has been slow to sign off on exemptive relief for companies seeking to break into the ETF space, as an ongoing review of the use of derivatives in mutual funds and ETFs had extended the regulatory approval process. That left many mutual fund firms that had been laying the groundwork for an entrance into the ETF industry on the outside looking in, unsure of how long the SEC’s review may take. Legg Mason and T. Rowe Price are among the firms that have sought permission to offer active ETFs [see all the news stories about Actively Managed ETFs].

But in recent weeks there have been signs that the deep freeze at the SEC has begun to thaw. iShares received the green light, and was followed shortly by Eaton Vance.

By acquiring Grail, Ameriprise is following the model utilized by Russell to accelerate an entrance into the ETF industry. Russell recently acquired U.S. One, the Reno-based issuer behind the One Fund (ONEF). Russell has filed for dozens of ETFs, including both active and passive products, and could make its ETF debut sometime in the second quarter [Russell ETF Push Picks Up Momentum].

Grail’s Future

Grail burst on to the scene just over two years ago when it introduced one of the first actively-managed equity ETFs. Many expected that the American Beacon Large Cap Value ETF (GVT) would be a smash hit with investors, delivering an alpha-seeking strategy that featured all the benefits of the exchange-traded structure. But GVT has never caught on with investors; the fund currently has assets of only about $2 million.

In addition to GVT, Grail’s lineup consists of two additional equity ETFs and a pair of active fixed income funds as well. Though some of the funds have delivered impressive returns, the cash inflows haven’t materialized. Aggregate assets are only about $20 million, meaning that Grail’s annual revenue from management fees is in the neighborhood of $175,000 [see Seven Wildly Successful Active ETFs].

It isn’t clear if Ameriprise would continue to operate existing Grail products, though that seems likely given that many of them have established impressive track records so far [Grail Advisors: End Of The Road For Its Active ETF Lineup?].

Ameriprise Plans

It remains to be seen what path Ameriprise plans to take in the ETF industry. The company offers hundreds of mutual funds, which it could theoretically now offer in ETF wrappers. Ameriprise also has thousands of financial advisors under its umbrella, a potentially useful asset for a firm looking to get a line of ETFs up to speed.

Stay tuned for more details on this story; there figures to be much more to come.

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Disclosure: No positions at time of writing.