American Century Investments has entered into an agreement with Precidian Investments to license the firm’s ActiveShares methodology in support of the potential launch of actively-managed, semi-transparent ETFs. The Precidian model allows ETF issuers to deliver actively-managed investment strategies in an ETF vehicle without disclosing holdings on a daily basis.

Edward Rosenberg, senior vice president and head of ETFs for American Century.

While most passive and active ETFs today require daily portfolio disclosure, which exposes active managers’ investment ideas to other investors, the ActiveShares approach masks an ETF’s holdings by inserting a blind trust, known as a ‘confidential account’, between the fund and its authorized participants.

Normally, authorized participants are entitled to purchase and redeem large blocks of ETF shares from an ETF in exchange for baskets of securities and cash that are acceptable to the fund managers. All other market participants trade ETF shares on a secondary basis. As with an ordinary ETF, the current valuation of the underlying portfolio would be disseminated to the market, and arbitrageurs would be able to compare this indicative value, which is to be updated each second and verified by a second pricing vendor, to the quoted price of the ETF shares.

ActiveShares differs, however, in that authorized participants would not be able to calculate their own indicative value, since the creation basket will only be disclosed to a representative (a custodial bank) that will manage the confidential account. To create ActiveShares for an authorized participant, the custodian would accept the required consideration and assemble a creation basket, which it would contribute to the fund for new ETF shares in the confidential account. It would then distribute the ETFs to the authorized participant.

American Century is the latest asset manager to express interest in the structure – other interested parties include JPMorgan Chase, BlackRock, Capital Research, Nationwide, as well as Legg Mason affiliates ClearBridge and Royce. Precidian is still seeking approval from the Securities and Exchange Commission (SEC) to allow for the use of ActiveShares by asset managers.

American Century has been laying the foundation for its entry into the ETF marketplace, and is reportedly considering other avenues of entry other than ActiveShares. In October, the firm filed registration statements for two transparent ETFs: an index-based value ETF and an actively-managed diversified corporate bond ETF. The firm anticipates a mid-January effective date for both funds, subject to SEC approval.

Edward Rosenberg, senior vice president and head of ETFs for American Century, commented: “As we build out American Century’s ETF product suite, our long-term plan is to leverage our established active-management capabilities to bring clients our investment strategies in an ETF format, which aligns with certain investors’ preferences. While waiting for SEC approval of the ActiveShares methodology, we are proceeding with plans to launch other transparent ETFs that are informed by decades of experience and apply our unique insights to solve common investment problems and help investors achieve their goals.”