Altamira investment Services Inc. became the newest entrant into the rapidly growing mutual fund wrap market, with the launch of its Meritage Portfolios in September. Designed largely for the broad-based market, Meritage is one of the few wrap programs in Canada that do not include any funds offered by the program manager.

Each of the 12 Meritage Port-folios includes 100% third-party funds offered by 10 fund companies that have solid long-term track records. The portfolios are designed for investors seeking income, a balanced approach to investing and exposure to the domestic and global equity markets. Essentially, the portfolios are suitable for investors with risk profiles ranging from conservative to aggressive. The portfolios seek to offer optimal diversification by asset class, geography, market capitalization and management style using a fund-of-funds wrap structure.

The 12 portfolios include five income (conservative income, moderate income, balanced income, growth income and equity income), five investment (conservative, moderate, balanced, growth and equity) and two equity (Canadian equity and global equity).

The income-based portfolios are designed to provide “current income” — each pay a fixed monthly distribution — while all the other portfolios, with the exception of the Canadian equity and the global equity, pay annual distributions.

Meritage Portfolios include funds offered by Beutel Goodman & Co. Ltd., Brandes Investment Partners & Co., CI Investments Inc., Dynamic Funds Management Ltd., Fidelity Investments Canada Ltd., Guardian Group of Funds Ltd., Mackenzie Financial Corp., RBC Asset Management Inc., Saxon Mutual Funds Ltd. and TD Asset Management Inc.

Each portfolio comprises funds managed by three to eight managers and may include more than one fund offered by the manager. For example, Meritage Con-servative Income Portfolio includes nine mutual funds offered by seven managers, while Meritage Equity Portfolio includes 10 funds offered by six managers.

Charles Guay, president and CEO of To-ronto-based Altamira, says the Meritage program is better than all existing wrap programs because of its design, the fact that it utilizes purely independent, third-party funds and its competitive fees.

“There are no Altamira or National Bank of Canada funds in the portfolios,” he says. (National Bank is Altamira’s parent company.) “Of the approximately 100 fund wrap programs that currently exist, more than 98% include at least one proprietary fund.”

Why would Altamira not include any of its own funds in the wraps? Guay says the company wanted to create an independent product without any biases or potential conflicts of interest. “If the performance of an existing Altamira fund was on par with a third-party fund, we opted for the third-party fund,” he says.

Typically, similar mutual fund-of-funds wraps — such as Scotia Partners Portfolios, RBC Select Choices Portfolios or CI Portfolios Series — use either proprietary funds only or a combination of proprietary and third-party funds in their portfolios.

Meritage Portfolios were created using a disciplined screening process, says Guay. Altamira chose 17 funds from a list of 5,000 using a quantitative selection process. It then used its proprietary “select rating system” — a multi-stage, quantitative fund selection process — to arrive at a list of 250 funds, from which the final 17 funds were chosen.

Among the screening criteria are: minimum historical performance, an active management mandate and third-party funds in a trust structure.

The quantitative model analysed and observed variables such as value added by manager, risk analysis of returns, downside risk analysis, style consistency, correlation between funds and management continuity, among other factors.

The select rating system was reviewed by Toronto-based Aon Consulting Inc. , which has validated the screening criteria, the quantitative model and final fund selections, adding credibility and independence to the structure of the portfolios. Aon will also review any major changes made to the portfolios.

Meritage Portfolios will be actively managed. Each portfolio will be automatically rebalanced to adhere to initial selection criteria and to prevent overexposure to any specific asset category. Rebalancing will occur if the market value of a specific fund within a portfolio deviates by more than 2.5% from its original target. Some competing fund wraps may have a deviation of up to 10%, Guay says.

Meritage Portfolios are offered exclusively through independent brokers and financial advisors — marking a further shift in Altamira’s distribution strategy; Altamira started out as “direct to investor.”

The portfolios are sold as either front-end load, low-load, back-end load or Series F (for use in other wrap programs).

@page_break@Advisors using the front-end load option get an up-front commission of 0%-5% and a trailing commission of 0.75%-1.25%.

The low-load commission for all the portfolios is 2.5%, while the trailer is 25 basis points for the conservative and moderate portfolios and 50 bps for all other portfolios for Years 1 to 3. The trailer for Year 4 and beyond is 50 bps for the conservative and moderate portfolios and 1% for all other portfolios.

With the deferred sales charge option, the up-front commission is 5% for all the portfolios; the trailer is 25 bps for the conservative portfolios and 50 bps for all other portfolios.

The minimum initial investment is $5,000. Additional investments can be at least $50, although $25 can be made for systematic investment plans. These minimums are in line with similar programs and are considerably lower than those for higher-end wraps, whose minimums are typically $25,000 or more.

As with all fund wraps, investing in Meritage Portfolios comes at a price. The management fee of portfolios ranges from 1.75% for the conservative and moderate portfolios to 2.25% for the equity portfolio.

The management expense ratios, on the other hand, range from 2.1% to 2.65%. Arguably, the weighted average MER of the individual funds in the portfolios are much lower than those of the Meritage wraps, meaning it would be cheaper for investors to own the funds individually than in the portfolios.

The MER premium on Meritage Portfolios runs about 60 bps-80 bps. The management fee for the Series F option is 1% for all the portfolios.

“The Meritage MERs are competitive with similar programs and, in many cases, lower,” says Guay.

Given the variation in wrap programs, which range from high-end to mass market, fee comparisons are complex. But a review of fees for similar programs on PalTrak and other proprietary sources indicate that the MERs of the Meritage wraps are competitive. For example, the MERs for Scotia Partners Portfolios and RBC Select Choices Portfolios run to 2.19%-2.75% and 2.17%-2.52%, respectively.

Arguably, investors participating in wrap programs pay higher fees for the convenience of holding a single investment. On the other hand, wraps reduce the work of advisors, who are able to provide a tailor-made solution while getting paid for doing less work.

Even though these concerns remain, an increasing number of investors are heading into wraps. According to Investor Economics Inc. ’s Winter 2006 Fee-based Report, the three-year compounded average annual growth rate of wraps is 28.6%, compared with 10.7% for stand-alone funds. Wrap assets currently account for about 20% of total mutual fund assets.

Altamira’s foray into independently managed mutual fund wraps complements the firm’s Managed Portfolios, which use only proprietary funds. And its evolving distribution strategy represents a dramatic shift from Altamira’s traditional no-load model. IE