In the crowded world of structured products, Claymore Investments Inc. of Toronto is launching a product with innovations that it says will appeal to investors and advisors alike.
For advisors, Claymore plans to sell its new Canadian Financial Dividend and Income Fund, which has two classes of units, based on how advisors are remunerated. There will be units appropriate for both fee-based and transaction-based advisors — a first in the structured-product world, Claymore says, although different classes of units have been common in the mutual fund universe for some time.
From the investor’s viewpoint, fund managers will have the flexibility to invest in all forms of securities of financial services firms, including corporate debt and three forms of equity — preferred shares, common shares and units of income trusts. Such a mix of debt and equity is rare in this type of structured product, which tends to invest mainly in common shares and income trusts.
The prospectus shows the portfolio is expected to be invested in common shares (52.6%), income trusts and REITs (26.5%), corporate debt (10.5%) and preferred shares (10.4%.)
Claymore’s Chicago-based parent set up a Canadian operation in Toronto last year. The Canadian arm has already raised about $400 million of capital in three previous structured-products deals. MFC Global Investment Management is the investment advisor on Canadian Financial Dividend and Income Fund, which is slated to run until the end of 2016.
The Class A units are expected to be sold to brokers and financial planners whose compensation is geared toward collecting fees from doing transactions. These units come with 5% agents’ fees — meaning $9.50 of each $10 investment makes its way to the fund. Of the 5% total fee, 2.2% flows to the underwriter and 2.8% is split between the financial advisor and his or her employer. If an advisor is on a 50/50 grid, he or she would receive 1.4% of the agents’ fees and the employer would get the balance. The Class A units carry a 40-basis-point service fee, the norm in the business.
The Class B units are expected to be sold by advisors whose business is based on collecting a fee based on assets under management. The issuer won’t pay a fee to the advisor for buying the fund; instead, the employer will receive the standard 2.2% fee. In return, the advisor will receive a higher trailer fee of 1% a year. “The structure will help advisors annuitize their businesses and create long-term fee businesses,” notes one advisor.
The structure means more of the proceeds from selling the B units will flow to the fund: the fund will receive $9.78 for each $10 unit that is sold. But the two different sets of agents’ fees mean the two units will have a different net asset values upon closing.
In the prospectus, the issuer shows the fees paid by Class A and B investors over a 10-year period under certain assumptions: the deal raises $100 million, split equally between the two classes of units; the issuer posts an annual return of 8%; the fund borrows 15% of the total assets and the starting NAVs per $10 unit are $9.43 for the A units and $9.71 for the B units. (The NAV also reflects the issuer’s offering expenses.) In that scenario, the fees for the A units end up at $183.85, which is lower than the $212.33 in fees paid on the B units. The lower trailer fee paid on the A units is the key reason.
Some issuers hope the new compensation arrangement may stem the cycle of large redemptions followed by a new offering to make up for the lost assets. “It may help with the churning and flipping because it’s part of the trend to fee-based business,” says one person whose firm has an issue in registration.
Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc. , a fee-only investment counselling firm, says the Claymore concept is interesting, but “the fund has to fit in with the client’s overall asset mix.”
One benefit, he notes, is more proceeds from the issue will be put to work: “Higher net proceeds allow the manager to do what he does best — namely, pick stocks.” IE
Structured product covers many bases
Units tailored to both fee- and commission-based advisors; investors will appreciate the debt/equity mix
- By: Barry Critchley
- February 3, 2006 October 30, 2019
- 10:29