Northwest Mutual Funds Inc. hopes to stand out in the fund industry by excelling in service and selection with its family of 13 mutual funds, which are being managed by top-drawer subadvisors.

With assets under management of $2.5 billion, the nine-year-old Toronto-based fund-management firm could be considered a boutique when compared with the large department-store giants that dominate Canada’s fund business. But, unlike the big players, Northwest isn’t trying to be all things to all people.

“Our goal is to provide meaningful and sustainable positive differentiation over the long term,” says Michael Butler, Northwest’s energetic president and CEO. “We definitely feel there is a big opportunity for a niche-oriented fund company that is offering funds that combine superior returns with lower volatility. If clients already have a few of the top mutual fund companies in their portfolios, advisors can differentiate themselves by adding a slice of a boutique firm such as Northwest.”

The firm’s strength is its equity funds, with about 90% of its assets in stock-related products. Funds include Northwest Canadian Equity, managed by Richard Fogler, managing director of Toronto-based Kingwest and Co. ; Northwest Specialty Equity, a small-cap fund managed jointly by Wayne Deans, partner at Vancouver-based Deans Knight Capital Management Ltd. and Peter Harrison, senior vice president of Montreal-based Montrusco Bolton Investments Inc. ; Northwest Specialty Innovations Fund, winner of the Science and Technology Fund of the Year at the Canadian Investment Awards for the past three consecutive years and managed by Robert McWhirter, president of Toronto-based Selective Asset Management Inc. ; and Northwest EAFE Fund, managed by Jennifer Witterick of Sky Investment Counsel Inc. in Toronto).

“Northwest is a small provider, but it has some interesting offerings,” says Mark Chow, senior fund analyst at Morningstar Canada in Toronto. “Some Northwest funds allow the small, retail investor access to interesting managers who normally would be available only to large institutions or big accounts.”

Northwest’s assets grew 25% in 2006, compared with average growth of 16% for the fund industry as a whole. The company’s major shareholder is Lévis, Que.-based Desjardins Group, although Butler is a significant shareholder, holding 5%.

“We have financial backing without institutional interference,” says Butler, who held senior sales positions at Mackenzie Financial Corp., Talvest Fund Management Inc. and Spectrum Investments prior to joining Northwest. “The company maintains its entrepreneurial spirit.

“Our investment philosophy is in our company name,” Butler continues, which stands for the northwest quadrant of the risk/return investment grid, representing funds that have attained high levels of return at low levels of risk.

Butler says the funds are managed with “a forward-looking value style” and invest in companies that are reasonably priced in relation to their future value.

“I’m a conservative investor, and I want superior returns with less downside risk,” he says. “We promise ‘northwest quadrant’ results.”

Part of achieving superior results is a reasonable management expense ratio. Northwest has been gradually notching down its MERs, Butler says, although it hasn’t yet achieved the size and economies of scale to bring MERs down to industry averages and still be able to match the standard industry trailer fees of 1% of fund assets annually.

The company’s largest fund, the $400-million Northwest Canadian Equity Fund, has an MER of 2.6%, which is slightly higher than the 2.34% median for comparable funds in Morningstar Canada’s Canadian anchored equity funds category.

“Price is an issue, but only in the absence of value,” Butler says. “We offer high-quality service and performance.”

Northwest wooed 320 new financial planners and 202 new investment advisors in 2006 to sell its products, he says, bringing the total number of advisors selling its funds to about 5,000, divided about half and half between brokers and planners. Northwest’s wholesalers carefully target active advisors in various regions across Canada, and approach them personally to introduce Northwest rather than doing blanket presentations and sales campaigns for an entire firm.

Butler likes to find original and intriguing ways to bring Northwest funds to the attention of advisors. For example, last Thanksgiving, the firm sent out a glossy Williams-Sonoma cookbook to 8,000 selected advisors, with one page of fund information attached to the cover. This was followed by a similarly adorned Christmas-season cookbook featuring recipes for appetizers.

“The purpose was to get our foot in the door, and we were looking for an idea that’s of interest to everyone,” Butler says. “First of all, a heavy package like a book gets opened and, second, everyone is interested in food. And even if advisors aren’t cooks, their spouses may be. We decided to take a high-end approach rather than sending something tacky that gets thrown into the garbage.”

@page_break@Butler says the Thanksgiving book had a 70% recall and response rate, while the Christmas book achieved 90%. Third and fourth Williams-Sonoma cookbook mailings are planned for the spring and summer.

Northwest recently embarked on a five-year sponsorship of a Canadian ski team, Alpine Canada, to increase its brand profile in the public domain. Northwest is sponsoring the Nor-Am Cup Series, a stepping stone for Canadian and U.S. athletes as they prepare for World Cup and Olympic competition, and the fund company’s name will be displayed at racing events at various ski locations.

“The sponsorship is a good opportunity to get exposure across Canada,” Butler says. “It’s designed to increase public awareness and create familiarity with the name ‘Northwest,’ so that it may ring a bell with a client when the advisor brings it up.”

Northwest has also done some advertising on Toronto’s 680News, an all-news radio station, sponsoring its popular traffic and weather reports. “We are employing small, strategic ideas that go a long way,” Butler says.

Already running 13 funds, as well as four multi-fund portfolios under the Quadrant name, Northwest is treading cautiously in adding to its product line. The firm could fill strategic gaps in foreign equity, in both the growth and income-producing asset classes, Butler says, but will not jump into “flavour of the day” products: “We look for opportunities in long-term trends such as global growth and investor demand for income.”

As part of a commitment to superior returns, Northwest closes off funds to new business when they reach a size at which it becomes difficult for managers to continue to employ a particular style because of liquidity issues. For example, rather than jeopardize performance, the top-quartile Northwest Specialty High-Yield Bond Fund, managed by Doug Knight, co-founder of Deans Knight Capital, is closed to new purchases. Northwest Specialty Equity Fund, managed by fellow co-founder Wayne Deans, was also closed for a year beginning in January 2005.

The latter fund reopened in early 2006, when some of the assets and management responsibilities were assumed by Montrusco Bolton, which uses a non-correlated small-cap style. The dual manager system allows Deans, who has managed the fund for 11 years, to continue with his stock-picking strategy on about a third of the fund’s assets, while Montrusco Bolton oversees the remaining portion of the $231-million fund. Northwest is committed to closing the fund again when assets reach $500 million, to continue to maximize small-cap returns for existing investors.

“Investors want quality,” Butler says, “and we are not prepared to sacrifice investment style and returns for our unitholders [in order to achieve] faster asset growth.” IE