Jovian Capital Corp. of Toronto’s move to sell its 58% controlling stake in BetaPro Management Inc., the fast-growing exchange-traded fund provider, to South Korea-based giant Mirae Asset Global Investments Co., will provide BetaPro with a deep-pocketed step-parent at a time when competition in the ETF arena is ramping up.
“We need to get bigger faster,” says Howard Atkinson, president of Toronto-based BetaPro. “We are repositioning for both international expansion and a bigger piece of the industry in Canada. Mirae has large financial resources and a global footprint. ”
BetaPro, together with its subsidiary, AlphaPro Management Inc., manages the Horizons family of 71 ETFs, which are listed on the Toronto Stock Exchange and have approximately $3 billion in assets under management. The deal also gives Mirae an indirect controlling interest in AlphaPro, which specializes in actively managed ETFs, and a minority interest in BetaShares Holdings Pty. Ltd., which is expanding its ETF business rapidly in Australia.
Mirae is South Korea’s largest mutual fund manager, and has wide-reaching global tentacles. In total, Mirae manages US$53 billion in AUM in Asia, Latin America, Britain and the U.S. In the ETF business alone, Mirae has US$1 billion in AUM listed in Korea and Hong Kong, and is looking to expand globally.
Mirae has strong investment expertise in emerging markets, Atkinson says, and this could be an area of new ETF development for BetaPro. With the acquisition of BetaPro, Mirae could offer a more diversified product lineup to its investment and insurance clients throughout its worldwide network. Some of the income-producing ETFs — particularly the actively managed ETFs that use “covered call” strategies — are experiencing a warm reception in Canada, Atkinson adds, and could meet investor needs globally as investors search for yield.
However, if BetaPro ETFs are introduced in global markets, they would need to be customized or modified. For example, some ETFs hedge the Canadian dollar against other currencies, which would not work in other countries.
The deal also gives Mirae a leg up in Australia, an important element in its Asia strategy. The Australian ETF business is still in its infancy, with only US$5 billion in AUM but rapid annual growth rates in excess of 50%.
“Mirae is intrigued with our Australian asset [BetaShares Holdings],” says Atkinson, “and it’s right in its geographical realm.”
In Canada, the financial resources of Mirae will enable BetaPro to compete with industry giants when it comes to launching and marketing new products, and also could help finance any mergers or acquisitions.
Recently, the ETF industry has attracted new competitors such as Royal Bank of Canada, which plans to enter the fray with a family of eight corporate-bond ETFs and has just filed a preliminary prospectus. Invesco Ltd. of Toronto recently launched five income and equity-based PowerShares ETFs in Canada. And another new entrant to the scene is Toronto-based First Asset Management Inc. , with its new ETF family — XTF Capital Exchange Traded Funds.
As well, U.S.-based investment funds giant Vanguard Group Inc. has officially opened its doors in Canada and will be offering a line of products before yearend that could include ETFs.
AUM in Canada’s ETF business has grown at an average annual pace of 27% over the past five years to about $41 billion. Currently, the largest Canadian player is iShares Funds Canada, a division of BlackRock Asset Management Canada Ltd. , which is followed by Claymore Investments Inc. , BetaPro and Bank of Montreal.
The entry by other big Canadian banks into the ETF arena is considered likely, and their participation would increase the pace of ETF growth, just as bank participation had fuelled the rise of the mutual fund industry in its heyday, says Atkinson. Non-bank competitors will need substantial financial resources to compete head-on.@page_break@The sale to Mirae values BetaPro at about $150 million, with Jovian receiving about $87 million for its 58% piece. Minority shareholders such as Atkinson and BetaPro CEO Adam Felesky are selling some of their stock but will retain ownership stakes and continue to work at the firm.
“Part of the deal is that existing senior management will run the business,” Atkinson says. “Mirae wanted the people as much as the business assets.
“Jovian has made a heck of a return for its investors, but the sale is somewhat bittersweet,” he continues. “There’s a lot more upside left in the ETF industry. But Jovian’s role is to finance and grow companies in the financial services industry, and it’s now taking the opportunity to cash out.”
Originally, BetaPro had started with a limited family of funds that allowed investors to double the daily returns of a variety of indices or commodities, from broad market averages to gold, oil and grains. These funds come in “bull” as well as “bear” versions; a.k.a. “inverse” versions, that rise by double the amount of the daily loss in the underlying index or commodity.
Other BetaPro products have since gained higher profiles, such as BetaPro S&P TSX 60 ETF, which was launched in September 2010 and now has $281 million in AUM. It is Canada’s lowest-cost ETF, with an MER of seven basis points.
Dan Hallett, vice president and director of asset management at HighView Financial Group of Oakville, Ont., says this product had “riled” competitors by making fees an area of aggressive competition.
Also popular is Horizons’ corporate-bond ETF, launched a year ago and which has more than $365 million in AUM, as well as ETFs investing in dividends, preferred shares and floating-rate bonds.
“Money goes to the asset classes that are currently popular with investors,” Atkinson says. “People are looking for products that produce an income stream, and it’s not surprising that’s where the action is.”
BetaPro’s fastest-growing product is Horizons AlphaPro Enhanced Income Equity ETF, launched last March, which has grown to $80 million in AUM. This ETF holds a portfolio of the 30 largest Canadian stocks and uses a covered call strategy to enhance returns by writing call options on those stocks to earn options premium income.
Currently, the portfolio is yielding more than 10%, including dividends and the option premium income. Normally, option premiums are treated as income for tax purposes; but, due to the ETF structure, most of distributions are in the form of capital gains.
A similar call option strategy is employed by the recently introduced Horizons AlphaPro Enhanced Income Energy ETF and Horizons AlphaPro Enhanced Income Gold Producers ETF.
“These ETFs take a complex strategy,” says Atkinson, “and make it easily available to all investors.”
BetaPro’s AlphaPro subsidiary was a pioneer in launching the first actively managed ETFs in Canada. AlphaPro’s AUM has grown to $800 million in 15 funds, covering the equity, fixed-income, balanced and specialty categories.
Instead of tracking a specific stock market index or a predetermined basket of securities the way traditional ETFs do, AlphaPro ETFs offer access to investment portfolios managed by a small group of high-profile fund managers, including Vito Maida, founder of Patient Capital Management Inc. of Toronto, and Dennis Gartman, author of the U.S.-based Gartman Letter.
“The actively managed category,” Atkinson says, “has huge upside potential as more [money] managers become accessible through ETFs.” IE
BetaPro wants to get bigger faster
Acquisition of controlling interest by South Korea-based firm gives Canadian ETF company more financial muscle
- By: Jade Hemeon
- August 2, 2011 October 30, 2019
- 09:51