Ken McCord, recently appointed president of Toronto-based AlphaPro Management Inc., is creating a line of actively managed exchange-traded funds offering a stable of top portfolio managers that he says will compete with traditional fund companies’ lineups.
“My goal is to create a line of ETFs that would rival that of any fund company,” says McCord. “We would have everything that a fund company has, including fixed-income and balanced products.”
AlphaPro, an affiliate of BetaPro Man-age-ment Inc. and a subsidiary of Jovian Capital Corp. , both of Toronto, is the only company in Canada specializing in actively managed ETFs. Instead of tracking a specific stock market index or a predetermined basket of securities like traditional, passively managed ETFs do, AlphaPro ETFs offer access to investment portfolios managed by a small group of high-profile money managers such as Frank Mersch, chairman of Front Street Capital; Vito Maida, founder of Patient Capital Management Inc.; and Dennis Gartman, U.S.-based author of The Gartman Letter.
Essentially, the same kind of active management skills that have long been accessed by retail investors through traditional mutual funds are being offered by AlphaPro through ETFs with lower management expense ratios.
“Actively managed ETFs have the potential to be a game-changer for advisors and investors,” says McCord. “[These ETFs] will change the way advisors advise and inves-tors invest.”
McCord believes that what AlphaPro has created since it was launched in early 2009 is a better delivery mechanism for the talents of active investment managers. Unlike passive ETFs, actively managed ETFs might outperform market indices but could also lag them, depending on the skills of the managers. Active managers also have the potential to offer reduced volatility relative to the index.
“What people are buying is content — a portfolio manager and his or her investment philosophy, style and process,” says McCord. “[Investors] should want to buy it in the most cost-effective and flexible package that they can. And, in my opinion, that’s the ETF, not the mutual fund.”
He compares the concept to buying music over the Internet vs the traditional compact disc. Rather than going to a store and purchasing a CD, McCord finds it more convenient to download music instantly from iTunes on the Internet, and he also likes the flexibility of being able to store that music on his computer or his portable music player.
The investment stars of today — like music stars — are best purchased in the most cost-effective and flexible format, McCord says. Prior to AlphaPro launching its family of active ETFs, Canadians could not get “rock stars” such as Maida, Mersch or Gartman by buying an EFT, he says, although these money managers have been available through institutional and private accounts, as well as mutual funds.
AlphaPro, which has assets under management of $162 million across nine funds, is the only Canadian provider of actively managed ETFs, although U.S.-based Pacific Investment Management Co. has entered the market, and Putnam Investments has indicated it is considering it.
Unlike mutual funds, ETFs trade on stock exchanges and offer intraday liquidity, giving their unitholders the flexibility to get in and out quickly in response to rapidly changing events. ETFs are priced continuously as the market value of their underlying holdings changes. Mutual funds, on the other hand, are priced only at the end of the trading day, based on the closing price of all the securities in their portfolios, and are sold and redeemed at this daily net asset value by their sponsoring companies.
AlphaPro’s latest active ETFs, launched earlier this year, include Horizons AlphaPro North American Value ETF, managed by Maida; and Horizons AlphaPro North American Growth ETF, managed by Steve Rogers, formerly a longtime manager at AGF Investments Inc. and now vice president of AlphaPro affiliate JovInvestment Management Inc. In addition, AlphaPro has launched Horizons AlphaPro Dividend ETF, managed by Leon Frazer & Associates Inc.
All three of these new funds charge an MER of 0.7%, considerably less than the average MER of 2.4% charged on international equity funds. For the North American Value and North American Growth ETFs, AlphaPro also charges a performance fee equal to 20% of the amount by which the funds outperform the S&P 500 index of U.S. large-cap stocks. This fee is payable quarterly, and is only applicable if the funds’ returns are positive in any given quarter. If the fund’s performance lags the S&P 500, performance fees will not be resumed until it once again surpasses the S&P 500.
@page_break@The AlphaPro ETFs don’t pay trailer fees to advisors, a key reason why the MERs are lower, McCord says. The products are ideally suited to fee-based advisors, who can levy their own advisory fee, typically based on a percentage of investor assets. “The lower ETF management fee reduces the potential for criticism of the advisor based on underperformance,” McCord says. “We’ve gone through an awful decade for U.S. equity performance, with the S&P 500 in negative territory between 2000 and 2010. If the next 10 years are a continuation of difficult equity markets, every little bit of return will count. If advisors want to deliver good performance to their clients, the lowest-fee products have an advantage.”
McCord has absorbed information about the investment business since he was a young boy, watching his stockbroker dad read the Wall Street Journal or watch investment shows on television. McCord Jr. began his career in retail banking with Toronto- Dominion Bank, but quickly moved to the bank’s asset-management arm and worked on the sales and marketing side, promoting the sale of mutual funds through the bank’s extensive branch network.
McCord acquired his chartered financial analyst’s designation along the way and moved to fund company GT Global (Canada), climbing the ladder as the firm was acquired by Aim Funds Management Inc. and later evolved through acquisition into Invesco Trimark Investments Inc. His roles there included a stint as president of Invesco Canada, the institutional arm of Invesco Trimark. McCord also worked at First Asset Management Inc. and was later president and co-founder of fund company Webb Asset Management Canada Inc. for about four years immediately prior to joining AlphaPro.
McCord relishes being in on the ground floor at a young company such as AlphaPro. “The company does its best to escape bureaucracy, politics and over-processing,” he says. “It’s small, flexible and energized. We think outside the box, we’re nimble and decisions can be made quickly.”
That energy also shows up in his personal life. He maintains a high level of fitness, exercising at the gym, mountain biking and skiing with his two daughters, ages eight and four. IE
ETFs: The next generation
Ken McCord is betting that more investors will opt for ETFs managed by top pros
- By: Jade Hemeon
- March 8, 2010 February 2, 2019
- 11:43