Morgan Creek’s veteran investor Yusko partners with EXOS Financial to launch SPAC ETF
Seasoned investor Mark Yusko, former CIO of the University of North Carolina Endowment, and current CEO and CIO of USD1.5 billion Morgan Creek, has joined forces with EXOS Financial, a NY-based fintech company helmed by Brady Dougan, the former CEO of Credit Suisse, to launch his first ETF, the Morgan Creek – Exos SPAC Originated ETF (SPXZ).
Yusko is not a fan of passive ETFs that mirror an index, in part because of his self-confessed stance as a ‘value guy’.
“The idea that you buy more of something as it becomes more expensive seems counter intuitive to me,” he says. “It works well in a bull market and not so well in a challenging market.”
However, active ETFs have proved a revelation for him. “The ability for us to have an active strategy in an ETF structure is a wonderful solution for the investor, whether individual or institutional,” he says.
“What’s really unique about the ETF markets, and what’s been years in the making is the idea of specialisation in the ETF world.”
Early ETFs simply replicated a leading index such as the S&P 500. “ETFs offered an easy, cost-efficient way to get exposure to the market.”
And then along came new ideas such as the cyber security ETF, HACK, which went to assets of over a billion.
“This idea to communicate a strategy, to implement an idea around a segment of markets, is a very useful tool for investors. What I like about ETFs is that they are a very flexible structure that is pretty elegant in its design and in terms of ease of use, as well as tax advantages, but most importantly for me is the innovation around active ETFs.”
The firm’s first ETF is based on special purpose acquisition companies, SPACs, which have had some notoriety over the years but are currently enjoying a bit of a boom. “Ultimately, while people push back on SPACs saying they are bad or in a bubble, every legal structure, from an ETF to a mutual fund, a stock or a bond, will always have really good practitioners and management teams and, any time money is involved, will attract unsavoury types as well,” Yusko says.
“To me, that’s the real argument for active management - not just picking the winners but the key to long term success and investing is avoiding the losers truncating the downside.”
Yusko comments that his team attempts to do that by leveraging the deep experience and knowledge Exos has acquired in the SPAC market and SPAC product, where they have been active for a number of years.
“There are six decades of collective experience and knowledge between EXOS and Morgan Creek,” he says. “It’s like anything in your life – if you have seen something once, you are not a great judge, 100 times and you are a better judge but at a 1,000 you will become a pretty good judge.”
Choosing SPACs as an underlying investment for the first ETF is a bold move and one that perhaps typifies Yusko’s approach. “The reality is the origins of SPACs is actually worthy of some of the disdain and doubt and criticism,” Yusko says. “35 plus years ago the structure was formed as a means for companies who were locked out of the traditional Wall Street IPO process to get into the public markets and so they were dominated by industrial companies and financial sellers who may have been trying to unload some of their less impressive businesses on unsuspecting buyers.
“Then what happened is people started to realise that operating companies and managers that sponsored SPACs did much better than the financial sponsors, so during the Nineties, there was a migration to find people who knew what they were doing.”
In 2015 the regulations changed on disclosure on what companies could say about forward-looking statements. “This was a very important change as it moved the SPAC structure, the legal structure, from one that was a blank cheque company to acquire businesses that had no other alternatives, to a structure that now with this change is the optimal way for a high growth innovative company to go public,” Yusko says.
“It’s less costly, more flexible and you can align the interests of the management team and investors better. Most importantly, you have this ability to tell stories as opposed to point at a historical track record and, as my first boss told me, no truly new idea can, by definition, have a track record and the best investors are overweight innovation.”
Yusko sees innovation as an asset class in itself, as it requires creating new ideas which lead to businesses that can have stocks, bonds, currencies and commodities.
“Companies of the future will prefer going public via SPACs, and if you want to own SPACs in an active portfolio, then this is what SPXZ is all about.”
The ETF is actively-managed and targets pre- and post-merger SPACs with an equal weight approach, and has an expense ratio of 1.00 per cent. The fund expects to hold approximately two thirds of its capital in an equal dollar weighted portfolio of the largest companies to have completed SPAC mergers over the past three years, and approximately one third of its capital in an equal dollar weighted portfolio of pre-combination SPACs.
Yusko set up Morgan Creek in 2004, bringing his endowment background to the wider investment world.
“We focussed on individuals, families and smaller institutions that didn’t have the staff offering asset allocation manager selection, portfolio construction and then we built a fund of funds business, and a range of special purpose vehicles.”
2008 saw Yusko open an office in mainland China, in Shanghai, that focuses on growth capital investing in China. 2018 saw Yusko open Morgan Creek Digital which focused on digital assets and blockchain technology. It was through Morgan Creek Digital that the firm first worked with EXOS, initially making an investment in its venture capital fund, before launching two private funds in partnership with them, the SPAC+ fund and the risk-managed bitcoin fund.
Mark Yusko is speaking at the first of the etfLIVE Spotlight events in March on Physical and Digital assets. Please register to attend here.