Legg Mason Turns to Debt ETFs With Equity Funds in SEC Limbo

(Bloomberg) -- Legg Mason Inc. has a proactive approach to regulatory uncertainty: move onto something else.

The $754 billion asset manager is considering starting its first debt-focused exchange-traded fund as it waits for news from the Securities and Exchange Commission on whether an innovative structure it wants to use for equity ETFs can go ahead. The debt fund will start in the first half of next year -- pending a nod from regulators, according to Tim Gilligan, an ETF product specialist at the money manager.

Legg Mason is expanding its ETF business as investors shift more money away from mutual funds and into their cheaper, more tradable cousins. The Baltimore-based asset manager entered the ETF market in 2015 and has 11 equity-focused funds managing about $610 million. The company now plans to repackage some of its existing fixed-income strategies into ETFs and wants affiliates Western Asset Management Co. and Brandywine Global Investment Management to run them, according to Gilligan.

“It makes sense to start with those strategies you have today that have done well, that seem to solve real world problems, and then just take that strategy to the market in a different chassis,” he said. “But at the same time we want to be open to new ideas.”

The company filed for permission to start the Western Asset Core Plus Opportunities ETF in August. This actively managed fixed-income fund can put up to 30 percent of its assets in junk debt and up to 20 percent in non-government asset-backed securities. A similarly named mutual fund run by Western Asset, which will sub-advise the ETF, manages $20.8 billion.

But Legg Mason isn’t giving up on gaining SEC approval to start an actively managed ETF that -- unlike conventional funds -- keeps its daily holdings hidden. The firm owns a stake in Precidian Investments, which has designed the new structure, and expects to hear back from the regulator by the end of the year, said Gilligan. A thumbs up would allow the company to build further equity products.

“If you look at the next 12 months, a lot of it’s going to be dependent on the news coming out of the SEC on Precidian as to whether or not that gets approved,” Gilligan said. “If it does, that obviously opens up a lot of doors for us to really expand our active equity ETF lineup.”

To contact the reporter on this story: Rachel Evans in New York at revans43@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Eric J. Weiner, Brendan Walsh

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