Seif’s new firm launches suite of funds

The funds include Purpose Core Dividend Fund, Purpose Tactical Hedge Fund, Purpose Total Return Bond Fund, Purpose Diversified Real Asset Fund and Purpose Monthly Income Fund. Each fund is available in both an ETF format and in three mutual fund classes, including Series A, Series F and Series I. The Series A mutual funds have embedded advisor compensation through trailer fees that are added to the underlying management fee; the Series F mutual funds are designed for fee-based advisors; and the Series I are for institutional investors.

Purpose, by offering the choice of either an ETF or mutual fund for each investment strategy, is able to access all distribution channels, including mutual fund dealers who do not have access to stock exchanges, says Rudy Luukko, investment funds and personal finance editor with Morningstar Canada in Toronto.

A new type of ETF

“The similarities between mutual funds and ETFs,” Luukko says, “are more significant than the differences, except for an active trader who may be doing intraday trading.”

Each fund type is part of a separate corporate class that allows investors to switch between funds in the same class without triggering a capital gain or loss until they exit the class entirely. Purpose is the first company in the world to launch a corporate-class structure for ETFs.

Seif developed a reputation for innovation when he built Toronto-based Claymore to more than $8 billion in ETF assets under management (AUM) in seven years before selling that firm to New York-based ETF giant BlackRock Inc.

“We start with a blank piece of paper and build according to what the client wants,” Seif says. As a result, Purpose will be offering an “intelligent investing” approach in its family of funds.

Unlike traditional index investing, in which the mutual fund or ETF simply mimics the portfolio of a broad market index, Seif’s funds offer a rules-based, semi-active approach that takes the emotion out of stock-picking and does not require the analysis and decision-making of an active mutual fund manager. In Purpose’s case, the active decisions are applied at the outset, when the rules of each portfolio are designed; thereafter, the implementation and security selection are automatic.

This rules-based strategy offers low turnover, tax minimization, transparency and risk management along with smart investment strategies, Seif says. Because the portfolios are not actively managed, they are available for lower fees than are found in regular mutual funds – although Purpose ETFs’ fees are higher than for passive ETFs based on broad market indices.

For example, the management fee on Purpose Core Dividend ETF is 55 basis points (bps). By comparison, Canada’s largest ETF, the passively managed $11.2-billion iShares S&P/TSX 60 Index Fund, sponsored by BlackRock Asset Management Canada Ltd. of Toronto, is simply based on a broad market index and has a management fee of 15 bps; while the rules-based iShares Dow Jones Canada Select Dividend Index Fund, which has a more active strategy and invests in the 30 highest-yielding Canadian companies, has a management fee of 50 bps.

A focus on lower fees

“We are priced in line with the competition, but we add value through our securities-selection process,” Seif says. “We are not offering just dividend-paying companies; we are screening for the highest-value dividend companies.”

Purpose’s management fees range from a low of 45 bps for the bond fund to 80 bps for the tactical hedged equity fund. For four of the five funds, trailer commission payable to dealers for the Series A is 1% annually – and this cost is added to the management fee. For the bond fund, the annual trailer fee is 50 bps. None of Purpose’s funds offer a deferred sales charge option, but all offer dollar-cost averaging, dividend reinvestment and systematic withdrawal plans.

Seif says it’s hard to beat benchmark indices after the 2% or so in management fees that are charged by traditional mutual funds – but is easier with the lower fees charged by his rules-based funds.

“If you’re good at what you do, you can add value in the portfolio-management process,” Seif says. “Fees are one of the biggest determinants of who outperforms, particularly in lower-return environments.”

The five Purpose portfolios are managed by Breton Hill Capital Ltd. of Toronto. Other portfolio managers may be hired as new products are developed, Seif says, and some of these could employ fully active strategies. Purpose has filed preliminary prospectuses for three more funds to be introduced this autumn – including a high-interest savings fund, a short-duration emerging-markets bond fund and a short-duration global bond fund. These proposed funds will tend to follow the direction of market interest rates and, therefore, will be more attractive in a rising rate environment than long-duration products are.

Seif is aiming to have $250 million in AUM in Purpose products by yearend, and hopes to have $1.25 billion-$1.5 billion after three years. At Claymore, it took four years to get to $1 billion in AUM, but just another three years to get to $8 billion.

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