Billionaire Ken Fisher made his name and fortune picking stocks. But over the years he’s also become a huge player in an arcane — and controversial — corner of Wall Street: exchange-traded notes.
With little fanfare, his Fisher Investments has come to dominate more than a quarter of the $22 billion market in ETNs, whose outsize risks and hefty costs have drawn scrutiny from federal regulators. ETNs are debt instruments issued by banks that can enable investors to make leveraged bets on investments including stocks, bonds and commodities.
Fisher has worked with banks such as Barclays Plc and Credit Suisse Group AG to issue about 20 notes and now has $6.2 billion invested. It’s the largest stakeholder in five of the six biggest ETNs.
These days, Fisher is under scrutiny for other reasons. The firm’s clients have pulled $3.9 billion since founder Ken Fisher was called out for making lewd remarks — such as comparing wooing clients to “trying to get into a girl’s pants” — at an Oct. 8 investment conference. Bloomberg has also reported that the company has an aggressive sales culture and has been the subject of more than 100 Federal Trade Commission complaints over its telemarketing, emails and mailings.
Now, some analysts fear the ETN market could suffer amid the exodus from Fisher and ask whether the manager should have been putting clients in the notes in the first place. Along with their cost, the products have the potential to lose 100 percent of their principal. About 5 percent of Fisher’s $115 billion under management is in ETNs. Yet, even with the leverage from those notes, Fisher’s investment results have been mixed.
“These things are meant to be sold but never bought,” said Larry Swedroe, chief research officer at Buckingham Strategic Wealth in St Louis, Mo., speaking about the overall ETN market. “You’re not getting compensated for the credit risk of the issuer, and you can be sure they are not taking the risk embedded in these ETNs.”
‘Added value’
John Dillard, a Fisher senior vice president, said the client defections won’t affect its ETNs because the company has kept growing over the past month through hundreds of new clients representing billions of dollars in assets under management. The ETN fees, which reflect market rates, flow to the banks that issue the notes, not Fisher, he said.
“We have been pleased with the performance and structure of the ETNs we designed in concert with our well-capitalized counterparties,” Dillard said in a statement. “For the time we’ve utilized them, they have broadly added value to client portfolios.”
Fisher Investments first dipped a toe into the little-understood part of the exchange-traded fund industry in 2012, when its private client portfolio had been trailing its benchmark.
To catch up, Fisher went all in on a selection of large-capitalization companies he viewed as set to benefit from the later stage of a bull market. He used exchange-traded notes as a way to leverage this bet. It was a “Hail Mary” to rescue the firm’s track record, according to one former employee who asked not to be identified discussing internal company matters.
“We’re biased in favor of big-cap growth right now, and this allows us to inject an extra quantity of big-cap growth into the portfolio,” Ken Fisher said in a telephone interview at the time.
Even with the shift to ETNs, the Fisher Global Total Return strategy for private clients has underperformed its benchmark annually more than half the time from 2013 to 2018.
For ETNs overall, it has been a painful few years. Once heralded as a great way for ordinary folk to invest, ETNs have shrunk to less than 1 percent of the $4 trillion ETF industry amid a slew of negative headlines.
In 2018, amateur investors were eviscerated when an ETN issued by Credit Suisse shuttered following the jump in the CBOE Volatility Index, sometimes called the Wall Street “fear gauge.” The year before, the Financial Industry Regulatory Authority censured Wells Fargo & Co. for “unsuitable recommendations” of certain ETNs to retail customers. The company accepted the penalty, without admitting or denying the agency’s findings.
