Former Claymore head launches new venture

This venture consists of two prongs: a privately held investment-management company, called Purpose Investments Inc.; and a publicly traded investment fund firm called NexC Partners Corp., which will invest in a portfolio of dividend-paying stocks as well as hold a stake in Purpose. Both firms are based in Toronto.

“It’s important to have a sense of purpose in what you do,” says Seif, who has already proven to be a financial innovator in building Claymore’s family of ETFs. “My goal is to create a business that adds value to society; that has a positive social utility. I want to change the industry – to create a legacy – by offering Canadians better investment products with moderate fees.”

THE CYMBRIA MODEL

His business model is similar to that of Cymbria Corp., a publicly traded investment fund that owns a 21% stake in mutual fund manager EdgePoint Wealth Management Inc., both of Toronto. In a fashion similar to Cymbria’s, NexC’s portfolio will include a piece of Purpose. The amount of Purpose held by NexC will depend on the success of NexC’s $10-a-share initial public offering, expected to close in mid-February. The stake in Purpose could be as high as 30% if NexC raises $700 million and could drop as low as 2.5% if less than $100 million is raised.

Seif hopes to raise at least $100 million and will be putting in $1 million of his own money. If NexC raises $100 million, the stake in Purpose would be 7.5%. Seif expects the Purpose holding will be profitable for NexC.

Purpose will be launching a family of open-ended investment funds, from which it will derive management fees. But, unlike Cymbria, Purpose won’t be an active fund manager. Instead, like Claymore, Purpose will employ an investment philosophy that combines aspects of both passive and active investing by developing a “rules-based” strategy for securities selection that is focused on fundamental attributes such as dividends and price/earnings ratios.

Aside from the stake in Purpose, NexC will be investing in its own portfolio of North American, dividend-paying equities, using the same active/passive, rules-based approach.

Stocks that meet the criteria or fit with the predetermined composition of customized securities baskets will automatically be included in the Purpose portfolios and sold when they no longer qualify.

For NexC, the rules have been designed to create a portfolio with equally weighted investments in 40 high-quality stocks that have shown the ability to pay consistent or growing dividends during a five-year period. Holdings must have a history of healthy net income and share buybacks.

@page_break@The NexC portfolio will pay quarterly cash distributions, initially targeted at 5% annually. To boost income, the portfolio manager may write covered-call options on up to 25% of AUM.

The publicly traded NexC portfolio also comes with a feature that will allow shareholders the right to redeem twice a year at the net asset value (NAV) of the underlying investment portfolio. This allows shareholders to realize full value, Seif says, even if the shares are trading in the market at a discount to NAV.

NO EMOTION

Much like index investing, the rules-based, semi-passive approach takes the emotion out of stock-picking. But, Seif says, it is more intelligent and profitable than ordinary index investing, which simply imitates the portfolios of broad market benchmark indices but applies no discretion to stock-picking.

In the case of Purpose, the judgment and decision-making will be applied at the outset, when the rules of each Purpose portfolio are designed; after that, implementation is automatic. This rules-based strategy, Seif says, offers low turnover, tax minimization and transparency, along with high-quality investments. It also allows for lower fees, a feature that is increasingly relevant in the current environment, which is characterized by investors scrutinizing costs more closely and increasing competition from inexpensive ETFs.

“Canadians need high-quality investment strategies with moderate fees,” Seif says. “Anyone can charge a low fee. But it is important to deliver a superior investment strategy. We are not trying to be the lowest-fee provider around. You can drop the fee to almost nothing and deliver simple indexing through a benchmark-based strategy, but that isn’t what we are doing.”

Purpose, in order to manage its investment product line, has partnered with Toronto-based Breton Hill Capital Ltd. Purpose will focus on three broad investment strategies: semi-passive, long-only strategies using equities, fixed-income and commodities; high-quality alternative investment strategies; and broad asset-allocation portfolio solutions.

Purpose will have four core distribution arms: registered investment advisors; high net-worth, family office and independent discretionary investment managers; institutional investors; and self-directed retail brokerage investors.

“Purpose has a great team of individuals behind it, and a culture of passion and focus,” Seif says. “Employees will own shares in the company and will act and feel like owners. Their interests will be aligned with clients to build a successful investment company.”

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