John Kearns, CEO of Northwest & Ethical Investments LP, says one of the biggest challenges for the mid-tier mutual fund company he now commands is to stand out in a maturing market dominated by a few well-heeled heavyweights. Rather than trying to be all things to all people, the Toronto-based company, created by the 2007 merger of boutique fund companies Northwest Mutual Funds Inc. of Toronto and Ethical Funds Inc. of Vancouver, is counting on its two distinct brand identities to garner attention in their respective niches.

Although the two fund families are maintaining their separate investment philosophies under one roof, on the distribution side they are crossing over into each other’s traditional channels to take advantage of each other’s existing relationships and increase overall market penetration.

“We manage two different brands that complement each other and satisfy different needs in the marketplace,” says Kearns, 55, who came on board at Northwest & Ethical shortly after the merger. “We have the opportunity to be somewhere that other organizations are not.”

Ethical Funds was founded by Canada’s credit unions in 1992, and is Canada’s leading manager of socially responsible investment funds. Since launching the first SRI fund in Canada, the firm has grown to house a comprehensive list of funds incorporating all major asset classes, including Canadian income, balanced, Canadian equity and foreign equity. Although Ethical focuses strongly on the growth prospects of the companies in its portfolios, those companies also must be committed to Ethical’s environmental, social and governance standards.

NEW DISTRIBUTION FOR SRI

“There are a number of players in the SRI space, but we go one step further,” says Kearns. “As shareholders, we are actively engaged through proxy influence and lobbying in helping companies embrace best practices in environmental, social and governance areas. With Ethical’s fund assets [under management] at close to $2 billion, we hold sway with managers.”

Northwest Funds, with AUM of about $2.5 billion, has made its name by offering a family of funds advised by top-tier independent subadvisors and by focusing on superior service, primarily to the independent broker-dealer channel. Northwest’s approach to fund management is summed up in its name, which stands for the “northwest” quadrant on risk/return charts — representing funds with both a high level of return and low level of risk.

“One of the appeals of our combined offering is that we give access to 11 independent money managers through the two companies, and they are among the best in Canada,” says Kearns. “The advantage of subadvisors over in-house managers is that you can find the right ones for the job. But, because you’re not permanently attached to them, it’s easier to deal with any underperformance issues.”

After some consolidation and closing down of overlapping fund mandates resulting from the merger, Northwest & Ethical has 21 core funds, as well as 11 corporate-class funds and 15 multi-fund portfolios. At this point, the fund-of-fund portfolios combine funds from either Ethical or Northwest, but not both.

“Each company has its appeal,” Kearns says. “And by blending the two, we risk compromising the position of each.”

Kearns does want to see some overlap in the distribution area, with each of the fund brands taking advantage of the previously established relationships built by the other. Since the 2007 merger, Northwest & Ethical has been jointly owned (50/50) by the provincial credit union centrals and Desjardins Group of Montreal. Access to both brands’ distribution network, and those of the parent companies, will be a key contributor to the growth of both the Northwest and Ethical brands.

“The objective is for Ethical to penetrate more deeply into the independent broker-dealer channel, as well as Desjardins’ network of caisses populaires and its wealth-management channels — including insurance and brokerage,” says Kearns. “Northwest can branch out of the independent channel and distribute through credit unions and caisses populaires.”
@page_break@The distribution channel with the greatest short-term potential is the nationwide network of credit unions and caisses populaires, boasting 3,300 branches and more than 10 million customers.

“The credit union network is not as mature as the banking system, which has been tremendously successful in building the wealth-management business through its branch network,” Kearns says. “The credit unions have more than three million clients out there looking for opportunities beyond deposits.”

MINING DEEP EXPERIENCE

Kearns knows of what he speaks when it comes to banks. His career in financial services began in 1978, when he joined Canadian Imperial Bank of Commerce after graduating with an economics degree from Queen’s University in Kingston, Ont. He remained with CIBC for 21 years in a number of positions, including senior vice president of wealth management.

Kearns also has experience on the credit union side. After he left CIBC in 1998, he joined Credit Union Central of Ontario, for which he worked for three years as executive vice president of the financial services group. He came to understand the culture of the credit union system, he says, which is community-focused and member-owned, and in which management views itself as “sitting beside the client, not across from the client.”

Immediately prior to joining Northwest & Ethical, Kearns was president of the Canadian Scholarship Trust Foundation, Canada’s largest manager and distributor of RESPs.

The challenge, Kearns says, is that unlike the big Canadian banks’ oligopoly, the credit union movement is made up of independent, stand-alone entities that often have their own individual approaches to wealth management.

A big part of what was appealing about the merger of Northwest and Ethical, he says, was Northwest’s robust sales and marketing capabilities and proven expertise in customer service within the independent broker-dealer channel. There is an extensive wholesaler network, with offices in Vancouver, Toronto and Montreal, and the teams are now working to strengthen relationships in the credit union network.

“The Northwest team has traditionally been good in establishing intimate rapport in its relationships with financial advi-sors, and that is a real positive in its culture,” Kearns says. “We are trying to bring that to bear across the entire company, with more proactive involvement with those credit unions that have the most potential.”

In addition, Northwest & Ethical’s SRI fund family has not reached its full potential in the independent broker-dealer channel, Kearns says, and this is another prong for growth as investors become more aware of sustainability issues. According to a 2007 GlobeScan Inc. survey, 84% of Canadians think financial analysts should incorporate social and environmental performance when they value a company’s shares. With about $592 billion in fund AUM, as measured by the Investment Funds Institute of Canada, says Kearns: “The math would support a huge opportunity.”

Kearns says there has been a false perception that investing by SRI standards means compromising on returns: “The opposite is true. Investing in companies that meet high standards in the environmental, social and governance areas presents less risk and, in the long term, has led to improved returns for shareholders relative to market indices.”

Another advantage of the Northwest and Ethical merger, he says, is the deep pockets of the parent companies; that cash could come in handy if there are acquisition opportunities. The provincial credit union centrals have $130 billion in AUM, including cash, securities and loans, while Desjardins Group has $160 billion.

Outside of work, Kearns is an avid outdoorsman and maintains a log home in Algonquin Park near the town of Dorset, Ont., which he describes as a “labour of love.” It is off the electrical grid and runs off solar power, and is a place that he, his wife and three children use as a family retreat. IE