First Asset opts for “evolutionary” change

“It’s evolutionary rather than revolutionary,” he says. “The separate brands were creating more confusion than a single recognized brand.”

Previously, the First Asset product name had applied only to the company’s family of closed-end funds, which still makes up the bulk of the firm’s business, with $2.2 billion in AUM. Now, the $650-million mutual fund division, Criterion Investments Inc., will be called First Asset Mutual Funds. The $100-million ETF division, launched just a year ago as XTF Capital Corp., has been renamed First Asset Exchange Traded Funds.

“The recent rebranding will streamline the message,” says John Gabriel, an ETF analyst with Morningstar Inc. in Chicago. “First Asset has the lineup in place; [it] now need [s] to establish brand recognition and get the snowball rolling down the hill in terms of sales.”

The First Asset brand has been around since the company’s first closed-end funds were introduced in 2000, Gordon says. Looking forward, he expects the fastest growth will be in the ETF category. With ETFs, First Asset is marrying traditional ETF characteristics, such as liquidity and transparency, with a more active investment strategy than the simple replication of broad market indices. First Asset’s strategy involves “intellectual beta” through the construction of ETFs based on customized indices rather than on the popular indices, which are based simply on the market capitalization of the underlying securities.

Gordon also sees growth opportunity in the mutual fund space, particularly for “high-conviction active management,” which he describes as the opposite of “closet” indexing: “We are observing a bifurcation between the worlds of active and passive management. If you’re an active manager who, in reality, is just a close indexer, you’re in danger of the curtain being pulled back on the wizard.”

First Assets’s philosophy, he says, is to offer “superior risk-adjusted returns” throughout its product line or “greater return per risk taken” _ and this is not achieved through replication of broad market indices.

Instead, First Asset’s funds typically have a more sophisticated mandate, such as targeting a specific market niche, providing tax advantages that increase overall returns, or reducing volatility. High volatility can be a severe “value eroder,” Gordon says, pointing out that an investment that falls by 50% in value must earn 100% to get back to break-even.

“It’s rarely about price,” Gordon says. “It’s about providing value in what you deliver. A fund with tax advantages may not reduce volatility, for example, but will allow people to keep more of the return in their pockets _ and it therefore has a better risk-adjusted return profile.”

Gordon describes a basic ETF that delivers exposure to a broad index such as the S&P/TSX 60 as a “highly commodified” product in which cost is a key point of competition. These broad market index ETFs were the first to catch on with investors, and are the mainstay products of giant suppliers in the Canadian ETF business, such as Toronto-based Vanguard Investments Canada Inc. and BlackRock Investments Canada Inc.’s iShares division.

“When ETFs were first introduced,” Gordon says, “the only way to compete was to be the lowest-cost provider in a generic marketplace. And, for us, that would have been a recipe for blowing our brains out.”

First Asset’s lineup of 15 ETFs includes ETFs that employ call-option strategies to increase income, as well as others focusing on specialized sectors such as Canadian convertible bonds and technology giants. First Asset has introduced five ETFs based on indices designed by Toronto-based Morningstar Canada, including dividend, momentum, value, U. S. dividend and Quebec-based companies. All of First Asset’s ETFs offer advisor-sold versions that pay trailer fees.

“First Asset offers a different twist on existing exposures,” says Morningstar’s Gabriel. “[The firm is] adding its own flavour. The proof will be in the pudding. If [First Asset’s ETFs] live up to their billing and provide better risk-adjusted returns than other products on the market, you would expect assets to flow their way.”

Among First Asset’s mutual funds, the specialized funds include Canadian Convertible Bond, Canadian Energy Convertible Debenture, Diversified Commodities Currency Hedged Fund, Global Dividend Currency Hedged Fund, REIT Income Fund and Utility Plus Fund. The firm’s closed-end funds have the largest selection, with 17 funds ranging from a convertible bond fund to a pipeline and power income fund.

“We gravitate to certain financial instruments and strategies that fit our profile of better risk-adjusted returns,” Gordon says. “For example, convertible bonds, on average, have two-thirds of the upside of a typical equity security and one-third of the downside.”

Three new ETF income products were launched in June, based on indices that track government bonds, corporate bonds and a mixed bond portfolio. These funds employ what Gordon calls “barbell strategies” with a mix of short maturities at one end and long maturities at the other to achieve a combination of yield and reduced duration risk.

“It’s a smart way to own bonds if you’re entering the market now with interest rates near the ?oor,” Gordon says. “Rates can’t go lower, but they’re unlikely to soar quickly. A balanced, risk-adjusted approach like the barbell is consistent with our strategy.”

Although Gordon expects to see growth from all three prongs at First Asset, he projects the ETF division will grow the fastest, followed by mutual funds. The mutual fund division has increased to $650 million in AUM from $120 million when Criterion was bought in 2009. Gordon says the First Asset product line is broad enough that there are funds for both “core” and “explore” strategies, with the dividend and value-based strategies well suited to be stable core holdings.

Says Gordon: “I’m ambitious enough to set our sights on $10 billion or more in [AUM] in five years.”

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