Tom Faust is worried about NextShares' distribution woes. Like with so much else in life, the devil is in the details when it comes to launching a new fund structure.

Wednesday on Eaton Vance's [profile] Q3 2018 earnings call with analysts (transcribed here by Seeking Alpha), the Boston-based mutual fund firm's CEO spoke candidly about what has hampered the growth of Eaton Vance's new exchange-traded managed fund structure known as NextShares. The Boston Business Journal picked up on Faust's concerns.

On the one hand, some asset managers are testing the waters. Faust confirmed that seven fund firms (including Eaton Vance) have launched 18 funds using the NextShares structure. And the structure is working, he says, singing its praises.

"Expected benefits to fund performance from use of the NextShares structure are being demonstrated and NextShares' novel NAV-based trading mechanism continues to function smoothly," Faust told analysts on the call.

Yet AUM growth "continues to be slow, with sale success still hampered by very limited distribution access," Faust said. A big broker-dealer, the wirehouse at UBS, did make NextShares available starting in 2017, but there's a catch.

"Despite UBS' commitment to supporting NextShares at our initial launch in last November, sales of NextShares through UBS financial advisors have to date been quite modest," Faust said. "Our biggest challenge is that NextShares are available for purchase at UBS only through brokerage accounts and through their Strategic Advisor non-discretionary advisory platform. Without access to UBS' substantially larger and more broadly appealing discretionary advisory program, known as the Portfolio Management Program or PMP, it has been difficult for us to gain the necessary attention of UBS financial advisors to achieve meaningful sales."

Later on the call, in response to a question from J.P. Morgan analyst Ken Worthington, Faust dug deeper. He noted that UBS FAs who want to use NextShares are required to take a half-hour quiz first. And it turns out that getting on that PMP platform is going to be tricky: UBS doesn't want PMP to be too big of a percentage of the AUM of any product on the platform.

"There's a requirement that no more than X percent, don't know what that number is exactly, but there is some percentage threshold that they are not willing to own of any fund, NextShares or otherwise, in that program," Faust said. "So it makes it very hard for us to use PMP as a way to jumpstart this business ... It was not good to learn of this policy change at UBS over the last really couple of months we've been hearing this."

So getting store shelf space is key, and so is getting on the right shelves at that store.

Looking ahead, Faust is weighing options.

"Given the slow progress at UBS, over recent weeks we have redoubled efforts to pursue other paths to commercialization," Faust said. "Where this leads is hard to say. We are open to a variety of arrangements but we'll be guided by our obligation to act in the best interest of Eaton Vance shareholders."

In response to a question from Credit Suisse analyst Ari Ghosh, Faust confirmed that Eaton Vance is trimming its NextShares expenditures, from about $2 million per quarter (i.e. $8 million per year).

"We have been able to pull that down a bit," Faust said. "So the run rate I think is more in the range of $5 million to $6 million we'll say."

Yet Faust even indicated that an extreme option is one of those on the table, if they can't "break that logjam" on the distribution side.

"We need to figure out what we're going to do here ... One of the options would be to shut it down," Faust said. "If no one wants to buy NextShares, we don't want to spend $5 million or $8 million a year." 

Edited by: Neil Anderson, Managing Editor


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