A handful of season-ed fund industry executives, including a few who once hung their hats at Mackenzie Financial Corp., have decided that retirement is not for them.

Led by former Mackenzie president Jim Hunter, a team that includes Laurie Munro, former head of sales and marketing at Mackenzie, and Patrick Lincoln, former president of Cartier Partners Financial Group Inc., is venturing into the highly competitive Canadian mutual fund market with NexGen Financial LP and its new family of 13 funds.

“We enjoy the asset-management business and find it stimulating,” says Munro, NexGen’s president. “We’re relatively young — Jim is 53, I’m 51 and the rest of the team is younger — and we like working. We’ve cultivated a lot of relationships over the years.”

A preliminary prospectus describes some unusual features for the new fund family, including various classes of funds with different taxation features that allow investors increased control over what Munro calls their “taxation destiny.” In addition, NexGen is promising to discount fund management fees, depending on the size of the investment and the length of time it’s held.

Drag on performance

“There’s a lot of focus on MERs in the marketplace, but taxation can actually be a much bigger drag on fund performance,” Munro says.

NexGen is, therefore, separating its 13 funds into a tax-efficient corporate-class structure for taxable investors and a trust structure for non-taxable investors who are holding their funds within a registered plan such as an RRSP.

The entire family of equity and fixed-income funds is available in either structure. The corporate funds are further divided into four tax classes with varying taxation features, and investors can choose the version that best suits their individual tax circumstances. There is tax-free switching among the tax classes, including:

> Capital gains class. The funds’ objective is to increase value through capital appreciation. The funds would be suitable for investors with tax losses from previous years that they wish to carry forward and for the portfolios of minor children who have funds held in “in trust” accounts for them by adults. With “in trust” accounts, capital gains are taxable in the hands of the minor child and not the adult.

> Return of capital class. The funds will provide fixed monthly distributions consisting primarily of return of investor capital, as well as some dividend income. Return of capital is not taxable in the year received, but it does lower the cost base of the original investment, affecting the capital gain or loss upon sale.

> Dividend tax credit class. Monthly distributions consist primarily of dividend income, which receives preferential tax treatment.

> Compound growth class. The objective is to maximize long-term growth while minimizing the amount and frequency of all types of taxable distributions.

Although the minimum investment for its funds is $2,500, NexGen is introducing a discount for investors who put $10,000 or more into the funds under the front-end load purchase option — to encourage loyalty and reward long-term investors. After five years, the funds will be transferred automatically to an account with a lower management fee. Reduced fees are offered immediately to clients who qualify as “high net-worth” and are investing between $500,000 and $1 million. Further discounts are available to people investing more than $1 million.

NexGen has recruited two outside advisors to manage its equity funds: Robert McWhirter, founder and president of Selective Asset Management Inc. ; and John Zechner, president of J. Zechner & Associates Inc.

Industry observers say the new entrant in the fund scene will face challenges finding space on a crowded product shelf.

And although NexGen’s key selling point is tax-efficiency, some of the fund features may be redundant if the Conservative federal government follows through on its proposals to introduce tax reform relating to capital gains.

“If you don’t have a tax problem, there’s no need for a tax solution,” says Dan Hallett, president of Windsor-based Dan Hallett & Associates Inc. “Granted, there are a lot of uncertainties about what the new government may change.”

But, he says, some advisors and their clients may wait until the tax picture is clear before committing funds to NexGen. If the product’s uniqueness “hinges on tax minimization” and the landscape changes, the new tax rules could affect the fund’s growth prospects and have an impact on investors already in the funds, he says. IE

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