Cabana becomes instant substantial ETF issuer with switch of target drawdown products from managed account structure

Runners

Fayetteville, Arkansas is home to Cabana Asset Management, which offers a range of actively managed funds, including a hedge fund, and recently found itself in the happy position of becoming an instant successful ETF issuer, with some USD1.1 billion of assets under management across the new family of funds.

The firm, led by CEO Chadd Mason, was founded in 2007 with the aim of implementing risk-based strategies through a hedge fund model.

“But I quickly figured out that I wanted to offer whatever insight I had to regular people,” Mason says. 2008 saw the firm become a registered investment adviser and it then spent the following 10 years distributing products through friends and family. In 2016 it became a SEC registered adviser and now has USD1.5 billion under management, principally in its Target Drawdown Professional Series of separately managed accounts (SMAs).

It is the conversion of those products into ETFs which has caused the sudden increase in ETF assets, as Cabana’s clients said ‘yes’ to the ETF structure over the admin heavy managed account structure that carried none of the tax advantages of the ETF.

Cabana’s new suite of Target Drawdown ETFs, based on the managed account products, seeks to limit downside risk and position for upside growth based on investor outlook and risk tolerance – from conservative to aggressive – covering funds that seek to provide long-term growth, within targeted risk parameters, from peak to trough, of 5 per cent; 7 per cent; 10 per cent; 13 per cent and the most racy of all them at 16 per cent.

Each fund has a total annual fund expense ranging from 0.93 per cent to 0.95 per cent, and net expense ratios, after contractual fee waivers, of 0.67 per cent to 0.69 per cent.

“We have been offering the same strategy for many years,” explains Mason. “How much you might lose when things get tough is always top of mind for investors and these portfolios cover the general spectrum of losses deemed acceptable based on individual risk appetite.”

The strategy is based on an algorithm designed to allow the manager to allocate assets across the business cycle and to keep the portfolios within the predetermined target drawdown limits. It is entirely based on underlying ETFs, so effectively a fund of funds.

“We had a lot of success in being able to navigate difficult markets,” Mason says. “There’s been a real recognition in the pond in which we play of what we can do, so we have had a lot of exponential growth with advisers.”

The point for Mason is that as a tactical manager, they have to trade, and in the managed account format, they were subjecting themselves to capital gains taxes, which he describes as ‘the Achilles heel’, of trying to be active in a managed account structure.

The ETF rule has changed all of this, allowing the basket creation and redemption process to be applied to taxable ETFs.

“It’s a home run for us to offer our portfolios in the ETF structure,” Mason says. “It’s a more liquid, transparent and more efficient structure that removes multiple layers of cost,” he says.

“We had been talking to our partners and our job is to provide them with the best product and solution so we have been working hand in hand with our advisers, providing them with what they need.”

“And we believe it opens up a whole other line of business for them as its tax efficient and you can grow assets indefinitely.”

Another advantage for Cabana is that it can now use its own proprietary ETFs inside the managed account, in conjunction with other ETFs. “We believe this will result in a premium product with excess performance,” Mason says. “We are really proud that the space we play in is looking for the best solutions for our clients.”

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Beverly Chandler
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