Taking ETFs into the future

He believes ETFs are riding a powerful wave of growth, with advances in technology and innovation bringing sophisticated investments strategies into the hands of ordinary investors at extremely low fees.

“If mutual funds can be likened to the Sony Walkman of the investment industry, then ETFs are the iPod,” says Hawkins, age 47.

Hawkins, who also is the chief investment officer (CIO) at Horizons, and Taeyong Lee, co-CEO and executive chairman, were appointed as twin leaders of the company earlier this year. The joint appointment was announced after the top job was left vacant by the departure of former CEO Adam Felesky, one of the company’s original founders.

Lee serves as president of the global business unit at Horizon ETF’s parent company, South Korea-based Mirae Asset Global Investments Co. Ltd. He spends much of his time in New York and Korea and manages the global aspects of Horizons’ business.

Hawkins, who has been with Horizons since 2009, is charged with oversight of the firm’s Canadian-based activities, such as operations, investment management, reporting and product development.

“As [Phase 2 of the client relationship model] comes into place in Canada,” Hawkins says, “clients are getting wise to the fees they are paying, and realizing there are cheaper options. We foresee that interest in mutual funds will decline and [that] ETFs, particularly actively managed ETFs, will grow.”

Like active mutual fund portfolio managers, managers of active ETFs apply their decision-making skills to selecting and trading securities, and deciding how much cash to hold. Unlike the majority of plain-vanilla ETFs, active ETFs are not restricted to duplicating a broad market index or tied to a “smart beta” strategy that follows a customized, rules-based formula.

The actively managed segment of the ETF market is gaining ground, with assets under management (AUM) of about 10% of the $84.4-billion ETF market.

“We expect active ETFs to be the next wave, in both fixed-income and equities,” says Hawkins. Active ETFs account for 51% of Horizons’ $4.6 billion in AUM, he adds, making Horizons a pioneer in this segment of the market. More than half of this AUM is in fixed-income products.

In 2014, Horizons was recognized for its innovation at the Morningstar Canadian Investment Awards; Horizons Active Global Dividend ETF won the award for best equity ETF and Horizons Active Preferred Share ETF won for best fixed-income ETF.

Horizons’ active ETFs business is contained within subsidiary AlphaPro Management Inc., which also includes a suite of alternative strategy ETFs providing access to managed futures and hedge fund strategies. Hawkins and Lee also are co-CEOs of AlphaPro.

“We see actively managed ETFs as the single area with the largest growth potential. And, ultimately, we expect them to replace mutual funds,” Hawkins says. “Mutual funds had it good for a long time, but their fees are too high.”

Hawkins expects that the best-performing active portfolio managers in the mutual fund arena will increasingly become available in ETF format as the demand for low-cost product increases. He says numerous mutual fund companies have approached Horizons to talk about product development, and Hawkins anticipates that some mutual fund companies will develop their own ETF platforms.

If mutual fund dealers are allowed to sell ETFs in the future, that will further increase client interest in ETFs, including the actively managed products run by mutual fund portfolio managers who are already familiar to these dealers, Hawkins says.

Competing ETF providers, such as First Asset Investment Management Inc. and BMO Global Asset Management Inc., both based in Toronto, also are increasing their focus on actively managed ETFs, Hawkins says.

“ETFs are a better delivery mechanism for investment strategies,” Hawkins says. “I’m passionate about ETFs, I’m immersed in ETFs and the industry keeps me smiling every day. I like the challenges in creating new ETFs. It’s fun to brainstorm new products and create from scratch.”

Hawkins says Horizons is not placing a lot of emphasis on developing plain-vanilla ETFs that track broad market indices, although the company does have a suite of those products. But even with those broad-benchmark ETFs, Horizons competes as an innovator, offering a derivatives-based strategy for index exposure that is more tax-efficient than regular ETFs; these Horizons products represent actual ownership of shares in all the companies in the underlying index.

Also “high on the agenda” for Hawkins is working with Mirae, Horizons’ parent company, to develop two-way synergies. Mirae acquired an 85% stake in Horizons in November 2011. Mirae is a unit of Mirae Asset Financial Group, an Asia-based global investment-management firm with US$64 billion in AUM.

Hawkins says Horizons would like to piggyback on the success of some of Mirae’s global investment mandates and bring some of the parent firm’s global products to Canada, particularly those offering Asian and emerging markets exposure.

There also is an opportunity to distribute some of Horizons’ made-in-Canada products to other Mirae subsidiaries, including Australia-based BetaShares Capital Ltd.

“Emerging-market ETFs have recently been the fastest-growing asset class in Canada, and that’s where the performance has been,” Hawkins says. “Canadian markets are heavily skewed to financial and energy, and they’ve been hit hard.”

Hawkins has had an affinity for the investment business ever since a summer job right out of high school, when he worked as a mailroom runner for a predecessor firm of BMO Nesbitt Burns Inc. of Toronto.

He later took a year off university, in 1987, to work on the trading floor of the Toronto Stock Exchange, relaying orders to the floor traders.

This led to jobs on the operations side for various brokerage houses. Then, in 1994, Hawkins became the compliance officer at Altamira Management Ltd. He joined First Asset Investment Management Inc. in 2000, for which he served a dual role as CIO and senior vice president of compliance and risk management.

Beginning in 2006, Hawkins worked in roles that included product development, investment management and compliance for various subsidiaries of Toronto-based Jovian Capital Corp., a multi-pronged financial services empire. At the time, Jovian held a stake in a Caribbean-based holding company that eventually morphed into Horizons. That holding company focused on hedge funds initially, then became BetaPro Management Inc. of Toronto, when it introduced leveraged and inverse closed-end funds and ETFs in Canada.

Hawkins’ responsibilities with Horizons grew as the product line expanded to include index-based, sector and actively managed ETFs. When Jovian sold its stake in Horizons to Mirae in 2011, Hawkins retained his role as CIO of Horizons.

Hawkins works long hours, but he also likes to play. He and his wife and their three boys, ages 15, 17 and 20, enjoy a cottage in Newfoundland and Labrador. The family finds pleasure in sailing and motorboating, as well as scuba diving excursions in exotic locales.

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