Five Questions: Will McGough of Stadion Money Management

At over $5 billion in assets under management in mutual funds and separate accounts, Stadion Money Management is one of the largest managers of exchange-traded funds and related products. Stadion has quietly grown its business from a headquarters in Watkinsville, Georgia, since launching in 1991. In June of 2011 private equity firm TA Associates acquired a controlling stake in the firm. Institutional Investor contributor Andrew Barber recently sat down with Will McGough, a portfolio manager at Stadion, to pick his brain about what 2013 holds for the ETF industry, and how asset management firms like his will adapt to the changing landscape.

1. What are some of the big stories that you see developing for the ETF market in 2013?

One of the most interesting developments is the Fidelity news that they have recently filed for a series of actively managed bond and equity ETFs. The proliferation of actively managed ETFs had been primarily focused among smaller managers at first. If the Fidelitys of the world are willing to let everyone see their daily holdings, though, it may be a game-changer, signaling more entries by big fund families to come. The success of the Pimco Total Return ETF may be causing a broad reassessing of business plans. We very much look forward to new ways to access different strategies for our portfolios through these new offerings.

2. What do you think about the prospects for the fixed income ETF market in 2013?

Everyone has been waiting for the bond bubble to pop. Animal spirits on the hunt for yield have been crowding certain sectors like high yield via the ETF market for a while now. QE4 was announced the other day and in that announcement the Fed further defined limitations on how long they are willing to keep the foot on the pedal. People looking for yield need to understand the risks that come with it, because eventually the bond markets will turn, and when they do, that riskier paper will be hit first and hardest.

3. Another popular space in ETFs has been emerging markets, both fixed income and equity. What are your firm’s thoughts on allocating there in the coming year?

We’ve seen a lot of what the emerging markets have to offer in terms of growth prospects and, in some cases, positive demographic inflections. The developed world is largely following Japan’s lead with rapidly aging populations and economies that are groaning under debt levels of historic proportions. With these severe economic drags, the investment opportunities in emerging markets could become increasingly attractive for tactical shifts away from domestic allocations during cyclical bull moves.

4. What about the ETP industry itself? Do you see any changes coming for the makeup of the competitive landscape?

I don’t really see much change in the issuers at the higher level. You’ll always have the iShares, SPDRs, and Vanguards and such. Things are getting tougher for midtier players like First Trust, however, and they will have to be really focused on developing products that have significant demand but are still niche enough to justify higher-than-index fee structures. The really small guys will definitely have a huge battle ahead trying to capture investor attention in such a saturated market.

5. Speaking of fees, do you anticipate further fee contraction in the coming year?

Yes, absolutely. Just look at what iShares is doing with fees on their core lineup. In the institutional world, where fee disclosure is critical, it’s imperative that commoditized beta offerings have lower costs to compete. Basically the fee is the tracking error at that stage, given equal fund structure and portfolio manager expertise. This trend of fee compression for commoditized products can only continue as more institutional interest develops for these products.

If you think about it, that is really the root cause of Vanguard’s move away from MSCI for their index products. Sure, there have been some outflows as investors that need to track specific indices go away, but for the most part, the expense ratio is of paramount importance to the institutions that are becoming an increasing part of this market audience.