CI adds ETFs

CI, with mutual fund assets under management (AUM) in the $107-billion range, dwarfs First Asset’s AUM of $3 billion. The transaction, expected to close Dec. 31, will create a mutually beneficial relationship that could see First Asset’s ETFs added to CI’s managed portfolios, and have CI’s active managers eventually made available to investors through the ETF structure.

The deal will allow First Asset to operate as an independent subsidiary under the CI umbrella, with the First Asset management team, including founder and president Barry Gordon, on board for the next stage of his company’s evolution. Gordon is a former securities lawyer who practiced at McMillan LLP before crossing over to the business side of money management by joining an earlier incarnation of First Asset in 1997 called Triax Capital Corp. of Toronto. Under Gordon’s leadership, the firm developed ETFs, closed-end investment funds and mutual funds. However, the ETF side of the business has dominated in recent years as the product has ridden a wave of popularity.

First Asset’s strategy is to offer “superior risk-adjusted returns” and its lineup has grown to 42 ETFs that offer value-added compared with the basic ETFs that dominate the industry and deliver exposure to broad market indices such as the S&P/TSX composite index. First Asset, instead of competing on cost with a me-too product, has focused on innovation and the firm’s ETFs target specific market niches with lower volatility or superior after-tax returns.

Call options

First Asset’s products include ETFs offering call option strategies to increase income, as well as specialized sectors such as convertible bonds, laddered strip bonds and emerging- markets bonds. Still, First Asset has introduced a handful of ETFs based on indices designed by Toronto-based Morningstar Canada; these ETFs focus on features such as dividends, momentum or value in their underlying stock exposure.

First Asset’s fixed-income solutions include ETFs that focus on what Gordon calls “barbell” strategies, using a mix of short-term and long-term securities to achieve an attractive combination of yield and low duration risk. This balanced approach walks a middle line that reduces risk relative to the overall market if interest rates rise.

“The [CI/First Asset] deal will result in economies of scale that are an important advantage in the investment fund industry, whether its ETFs or mutual funds,” says Rudy Luukko, investment funds and personal finance editor with Morningstar Canada.

MacPhail says the partnership also will strengthen CI’s penetration among the full-service firms that are members of the Investment Industry Regulatory Organization of Canada with a low-cost product that appeals particularly to fee-based advisors. ETFs also offer low management fees, an advantage at a time when the regulatory focus is on greater fee disclosure and clients are becoming more conscious of the effects of fees on their portfolio returns.

Core funds

MacPhail says it’s likely that First Asset’s small family of mutual funds, “which are not core to its business” ultimately will be consolidated and rolled into the CI fund family.

“Longer term,” he adds, “it’s possible that we could make some of CI’s active fund managers available through the ETF structure, but there are no immediate plans for this.”

Gordon foresees an opportunity to make deeper inroads with ETF products at CI-owned Assante Wealth Management (Canada) Ltd., and the potential of this distribution channel could increase if Assante develops a robo-advisor arm focusing on low-cost products. The next target in Gordon’s sights is $10 billion in AUM for First Asset.

Heavy lifting

“The heavy lifting has been done in building the company; our products are “best of breed”; and, with CI, we have a strong partner to take [First Asset] to the next level,” Gordon says. “The firms are philosophically aligned, but CI has not previously had a presence in the ETF space. For us, CI offers the best of all worlds – economies of scale, broader distribution and its reputation and high profile.”

There already has been some convergence in the financial services sector between mutual fund and ETF providers. Bank of Montreal and Royal Bank of Canada have made a commitment to the ETF business, viewing it as complementary to their large mutual fund operations. Toronto-based Invesco Canada Ltd., a competing investment fund provider, offers ETFs with $2.7 billion in AUM through its PowerShares Canada division.

“The banks and the independent fund companies are major competitors, and [getting into the ETF business] makes sense if the banks are getting in as well,” says Luukko. “Mutual funds are well established, but ETFs are growing faster and are gaining recognition and acceptance on the part of advisors and the public.”

Coming from the other direction, Toronto-based BlackRock Asset Management Canada Ltd., the dominant player in Canada’s ETF industry, has expanded into the mutual fund business with the launch of a family of funds investing in portfolios of BlackRock’s iShares ETFs.

Mutual funds holding ETFs are something of a hybrid vehicle. By packaging ETFs inside a mutual fund wrapper, the resulting product becomes accessible to a fund dealer channel that is not yet able to access ETFs through stock exchanges.

This kind of packaged product is another option that could appeal to CI as it looks for synergies with First Asset.

© 2015 Investment Executive. All rights reserved.