Doubling down on smart beta

First Asset launched its first ETFs in 2011, diversifying beyond its original family of closed-end funds and mutual funds and sparking a higher pace of growth. Currently, the firm’s total AUM stands at $4 billion. This is concentrated in 45 ETFs, but also includes $720 million held in other types of investment funds.

The firm has distinguished itself as an innovator in smart beta (a.k.a. factor-based) ETFs that aim to provide a superior risk/return compared with ETFs that simply match the performance of broad market indices. As First Asset’s relationship with its new parent, CI Financial Corp. of Toronto, evolves, First Asset is introducing ETFs with a higher degree of discretionary active management.

“We want to do more than ‘buy the market’ indiscriminately,” Mehta says. “ETFs are an efficient vehicle for a broad spectrum of solutions. We’re competing in the area of active strategies, and we will continue to differentiate ourselves and ‘build a moat’ around the business.”

Mehta, age 40, joined an earlier incarnation of First Asset in 2009, when the firm acquired the mutual fund family of Toronto-based Criterion Investments Inc., for which he was in charge of national sales.

Mehta spent the next several years as right-hand man to former First Asset president and founder Barry Gordon, gaining deep knowledge of the evolving investment fund industry and a front-row seat watching the rapid rise of ETFs. Gordon left First Asset this past May, passing the torch to Mehta, who was executive vice president of distribution and strategy before stepping into his current role.

To create the protective “moat” and keep First Asset on a growth trajectory, Mehta strives to make the firm a leader in products and services. Those services increasingly involve a growing component of financial advisor education, as well as helping advisors with detailed product analysis and client portfolio construction.

Achieving scale is another goal for Mehta, as this will create cost efficiency. But rather than competing with firms seeking to be the lowest-cost providers, First Asset focuses on product innovation.

“[Our business] is about providing value for an appropriate price,” Mehta says. “The transparency of ETFs allows clients to measure the value they receive for the price paid.”

First Asset’s product line includes ETFs that offer call option strategies to increase income, as well ETFs focused on specialized sectors such as convertible bonds, laddered strip bonds and emerging-markets bonds. First Asset also introduced a handful of ETFs based on indices designed by Toronto-based Morningstar Canada that focus on features such as dividends, momentum and value. The product lineup also addresses niches such as corporate trend leaders or companies with active share buyback programs.

“First Asset gained a foothold by launching factor-based ETFs in a less crowded market,” says Daniel Straus, analyst, ETFs and financial products, with National Bank Financial Inc. in Toronto. “[First Asset] was an early entrant in the game, with a broad and deep suite of products.”

CI’s acquisition of First Asset in the autumn of 2015 brought together an entrepreneurial innovator (First Asset) with a deep-pocketed wealth-management giant (CI) looking for a fast way to enter the booming ETF business. First Asset operates as an independent subsidiary of CI, but is able to utilize CI’s extensive business resources and stable of portfolio managers.

CI’s $140 billion in AUM is spread across several respected fund-management teams, including Signature Global Asset Management, Marret Asset Management Inc. and Cambridge Global Asset Management. CI’s recent acquisition of Sentry Investments Corp. of Toronto brings another partner into the fold. CI also owns Assante Wealth Management (Canada) Ltd., putting First Asset in close proximity to a giant distribution force.

“Our approach and philosophy is shared with CI,” Mehta says. “We believe in active strategies, and strive for better risk/return outcomes.”

Since CI acquired First Asset, eight ETFs have been introduced and are managed by CI’s active teams, including products focusing on global equities, U.S. equities, global and European financials, preferred shares and bonds.

In September, First Asset launched First Asset Cambridge Global Dividend ETF and First Asset Enhanced Short Duration Bond ETF, the latter of which offers a mix of investment-grade and high-yield bonds. A year ago, First Asset Investment Grade Bond ETF was formed from the conversion of an existing closed-end fund, and its AUM has jumped to $270 million from $70 million.

“Launching active strategies in ETF format is emblematic of a shift in the industry as the lines blur between mutual funds and ETFs,” Straus says.

There has been intensifying investor interest in actively managed, fixed-income ETFs, Mehta says, as investors search for ways to achieve yield as interest rates begin to rise. About 60% of new inflows at First Asset are destined for fixed-income products.

“We’re at the end of a 30-year decline in interest rates,” Mehta says. “Advisors and clients want products in which an experienced [portfolio] manager can make decisions on credit and duration and help navigate a volatile interest rate environment.”

With proposals in the works for new industry regulations that could make alternative strategies such as hedging and short-selling more accessible to ordinary investors through ETFs and mutual funds, First Asset may consider products that incorporate these strategies, Mehta says.

“People are looking for solutions that can capture the upside when markets rise,” Mehta says, “and provide defence when they go down.”IE

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