With nearly 300 Canadian-listed exchange-traded funds (ETFs) now available, there’s little need for more conventional index ETFs. New entrants like Toronto-based Purpose Investments Inc. — which this week is rolling out five actively managed ETFs and five corresponding mutual-fund versions — must therefore dare to be different.

Purpose is indeed different, with its distinct active mandates and some bells and whistles in its prospectus offerings. Purpose’s founder, majority owner and CEO is Som Seif, who headed the former Claymore ETF family and earned a reputation as an innovator.

The firm’s closest resemblance to a core equity mandate is Purpose Core Dividend Fund, one of two funds launched Tuesday. It will invest in an equally weighted portfolio of about 40 North American stocks, selected according to a rules-based quantitative approach that can be revised at any time by the portfolio manager.

In the alternative-strategies camp is today’s other launch, Purpose Tactical Hedged Equity Fund. It will hold North American stocks while, through the use of index-futures contracts, hedging up to 75% of the fund’s market exposure. The idea is to try to add value through individual stock selection, while reducing market risk.

All five of the new funds are managed by Breton Hill Capital Ltd., also based in Toronto. Formed in 2010, Breton Hill has no track record of managing retail funds, and very little in the way of a track record in the exempt market.

A search of Morningstar’s global database turns up only one Breton Hill-managed fund — the US$233-million Breton Hill Master Fund LP — formed in August 2011 and is classified by Morningstar as a global macro mandate.

During its short history, this hedge fund has produced positive absolute returns in a rising market while lagging its market benchmark, the S&P 500 total return index as measured in U.S. dollars. From its inception to the end of July, the fund’s 5.5% return lags its benchmark by five percentage points.

Privately-held Breton Hill is run by four partners and specializes in quantitative investing. The investment team, headed by chief investment officer and managing partner Ray Carroll, seeks to identify macroeconomic trends and make tactical shifts to take advantage of market opportunities while preserving capital. This is complemented by individual securities selection based on quantitative models designed to identify strong fundamentals and stock-price inefficiencies.

The other team members are managing partner and head of research Simon Griffiths, managing partner and head of trading Frank Maeba and chief operating officer and partner John Aloisio.

Purpose’s three other new funds are:

Purpose Total Return Bond Fund to be launched on Sept. 4. It will invest primarily in North America in a broad range of securities, including high-yield debt. This fund may also invest outside North America. Currency hedging for this fund, and all others, will be at Breton Hill’s discretion.

Purpose Monthly Income Fund, to be launched on Sept. 5. It’s a tactical balanced fund that will invest mainly in North America in a wide range of asset classes, including stocks, bonds, “inflation-sensitive securities” and cash.

Purpose Diversified Real Asset Fund, to be launched on Sept. 6. It will invest in commodities and other hard assets or securities that have a positive correlation to inflation. Holdings may include gold bullion or gold-mining stocks, commodities and related equities, real-return bonds and real estate investment trusts, among others.

A prospectus that covers both fund structures is a first for Canada, though this is more noteworthy for securities lawyers and compliance officers than for investors. You can’t switch from a Purpose ETF to a Purpose mutual fund, nor vice versa.

By offering a choice of an ETF or mutual-fund structure, Purpose broadens its potential distribution. The mutual funds can be sold by fund dealers, who do not have access to the Toronto Stock Exchange.

Investors, assuming that they have a brokerage account, have a choice between Purpose ETFs or F Series mutual funds that have no embedded advisor compensation, and higher-fee Series A mutual funds that do. (Series F is available only through fee-based advisors.)
Purpose’s pricing strategy for embedded compensation is to match the going rate payable to commissioned brokers and dealers by the major advisor-sold mutual-fund firms.

For four of the five funds, the trailer commission payable to dealers for Series A is 1% annually, and the management fee for this series is correspondingly higher than for Series F and the ETF series. For the bond fund, the fee gap is half that amount, since the trailer fee payable on Series A is 0.5%.

Purpose’s management fees for its ETFs range from a low of 0.45% for the bond fund to 0.80% for Purpose Tactical Hedged Equity. These fees are roughly double to triple what low-cost ETF providers charge for conventional index funds in core categories. If you want low index-fund ETF fees, take a pass on Purpose’s actively managed funds.

All five funds are share classes of Purpose Fund Corp., a multi-class corporate structure. As is the case with many other similar mutual-fund structures, this enables investors shift from one share class to another without triggering a taxable event. The new twist at Purpose is that this tax-deferring switching can also be accomplished with ETFs.

Fund and symbol ETF mgmt fee Series A mgmt fee

Purpose Core Dividend (PDF) 0.55% 1.55%

Purpose Monthly Income (PIN) 0.55% 1.55%

Purpose Tactical Hedged Equity (PHE) 0.80% 1.80%

Purpose Diversified Real Asset (PRA) 0.60% 1.60%

Purpose Total Return Bond (PBD) 0.45% 0.95%

Source: Purpose Investments Inc.