Quebec-based finan-cial giant Desjardins Group is joining forces with Ethical Funds Co., the Vancouver-based socially responsible investing pioneer, to create a national investment fund company that will serve credit unions across the country as well as the advisor channel and institutional clients.

The new Toronto-based company is to be formed jointly by Desjardins-controlled fund subsidiary, Northwest Mutual Funds Inc. of Toronto, and Ethical Funds, which is owned by Canada’s provincial credit union centrals. Both companies’ funds will continue to be offered under their own corporate banners; but, there will be opportunities to create new products as well as multi-fund portfolios that combine Ethical’s broad selection of 15 socially responsible funds with Northwest’s strong performing lineup of 13 funds.

“The joining of forces will add considerably to each company’s distribution network as well as create economies of scale,” says Rudy Luukko, investment funds editor at Morningstar Canada in Toronto. “It joins the two major credit union movements in the country, which both have a cultural tradition that favors social responsibility and community values.”

The new national investment firm will have $5.5 billion in assets under management; it is expected that the transaction will receive regulatory approval by yearend.

With $2.7 billion in managed assets, Ethical Funds is the largest company in Canada devoted to SRI; its lineup encompasses equity, balanced, fixed-income and global mandates. Although public and advisor interest in SRI is picking up, 85% of Ethical Funds’ sales are made through advisors based in credit unions — and the firm would like to have a bigger share of the independent broker/dealer network. Northwest, on the other hand, has been growing rapidly in recent years, to $2.8 billion in assets, as its strong fund lineup and emphasis on customer relationships have found favour with the advisor network.

With assets of $143 billion and 5.8 million individual and corporate members, the more than century-old Desjardins is the largest co-operative financial group in Canada. Although the company has made some inroads in Ontario and other provinces, it has a massive presence in Quebec. With the deal giving each company access to each other’s distribution arms, the newly created firm will have a strong national presence through relationships with both credit unions and the broker/dealer channel.

“We have the products, and this deal significantly enhances our distribution,” says Don Rolfe, president of Ethical Funds, who will also act as CEO of the new entity. “Northwest has great fund products and great relationships in the advisor community, and this deal also broadens its distribution.”

Rolfe is also excited about the deal’s potential to expand Ethical Funds’ presence in the institutional market. Desjardins has a large institutional business including the management of group RRSPs and pension plans — and, as a result, Ethical Funds could gain a foothold on some of these platforms.

“Growth has picked up with the growing public interest in ethical investing, but we are looking for ways to be even bigger,” Rolfe says.

Growing environmental concerns and corporate governance issues have helped stimulate growing public awareness of ethical investing, and this new mindset has come to the attention of the competition, including Canada’s major banks.

Within the past few months, both the Royal Bank of Canada and TD Canada Trust have introduced funds that specialize in SRI. The entry of the banks onto this turf could help make the overall pie bigger, Rolfe says, as they increase public awareness and confidence in SRI in the same way as they popularized mutual fund investing for the masses several years ago.

The Desjardins/Ethical Funds strategic partnership will create a network that will be a formidable challenge to the banks, he says. With close to six million customers at Desjardins and another five million represented by Canada’s provincial credit union centrals, that adds up to more than 10 million people — or almost one in three Canadians.

Michael Butler, president of Northwest Mutual Funds and chief operating officer of the new fund company, says he is “thrilled” and “absolutely ecstatic” about the arrangement with Ethical Funds. With packaged fund-of-funds taking up an increasing share of Northwest’s sales, Butler is excited about the potential of mixing Northwest’s “better returns, less risk” philosophy with Ethical Funds’ multi-asset class, socially responsible funds to create portfolios that combine the best of what both firms have to offer.

@page_break@Northwest has strength in equity funds managed by well-known subadvisors, and several funds have a specific sector or geographic niche. Its stable includes Northwest Special Equity, a small-cap fund managed jointly by Vancouver-based Deans Knight Capital Management Ltd. and Montreal-based Montrusco Bolton Investments Inc., and Northwest Specialty Innovations Fund, managed by Robert McWhirter, president of Toronto-based Selective Asset Management Inc.

The Specialty Innovations Fund has been the winner of the Science and Technology Fund of the Year award at the Canadian Investment Awards for the past three consecutive years. Northwest’s assets grew 25% in 2006, well ahead of the industry’s 2006 growth of 16%, as measured by the Investment Funds Institute of Canada.

“Ethical Funds is at the cutting edge of a huge groundswell of SRI investing,” says Butler. “SRI is not a short-term trend; we see it as a mainstream investment philosophy during the next 10 or 20 years. It’s not just about feeling good about not buying tobacco stocks — it’s about influencing societal change by the way you invest.”

Although most of Northwest’s assets have been sold through the broker/dealer channel, $800 million of its assets have come through the Desjardins channel. Under the banner of the new firm, Butler anticipates increased penetration in Desjardins and non-Desjardins credit union branches throughout the country. The marketing budget will also be increased with the combined financial heft of Ethical Funds, Desjardins and Northwest, which will further increase public awareness and market penetration.

“There has also been tremendous interest on the part of pensions and other institutions to add SRI to their portfolios,” Butler says. “They’re recognizing what the public wants, and so are the banks. Investors are concerned about the future of the planet and want to be responsible with their investment dollars.”

Although Desjardins has had a couple of ethical funds in its lineup for several years — the $119-million Desjardins Environment Fund and the $18-million Desjardins Ethical Canadian Balanced Fund — the arrangement with Ethical Funds gives Desjardins a full complement of funds. In addition, it helps unite the co-operative movement in Canada by linking major credit union organizations.

“People want to spread their investments across the various asset classes, and Ethical Funds has all of them,” says Marc Dubuc, director of product development at Desjardins Funds. “We will be offering the complete portfolio of products through the advisor network.

“ As well,” he adds, “part of our strategy is to get closer to the credit unions across Canada and work together to position ourselves as a solid alternative to the big banks, and to support the values that our clients believe in.” IE