Mackenzie to allow shorting

One of Canada’s best-known mutual fund companies is giving its managers the green light to engage in “a limited amount” of short-selling. Mackenzie Investments is sending out a notice to its clients, informing them of the change.

“We are now offering our mutual fund managers a new investment tool by allowing a limited amount of short selling across our funds,” the mailing says. “We believe short selling is an important investment option that may enhance your returns and reduce volatility in your portfolio.”

Effective April 2, 2012, managers will be allowed to short up to 20% of the value of their fund; no single short position can exceed 5% of the fund’s value.

“This was about standardizing the shelf and ensuring that all of our eligible fund managers had access to the full range of investment tools provided by fund law,” says Brad Gerster, senior vice-president, product and marketing at Mackenzie. “We had a few funds that couldn’t use securities lending or derivatives.”

Mackenzie’s chief investment officer—currently Charlie Sims—must approve the use of short selling by a fund, and it is monitored by the Mackenzie compliance department.

“There are a wide range of ways that short-selling can be used,” Gerster points out. “It can be used to enhance returns, it can be used to control risk—ultimately its use will be subject to the limits that apply, but within those limits, at the discretion of the manager of the fund.”

Each fund is required to hold at least 150% of the total market value of the shorted security in collateral deposited with an IIROC registered dealer. A foreign dealer can also hold the collateral, provided it has a net worth of more than $50 million and is a member of a stock exchange that requires the dealer to be audited.

The collateral level rises and falls with the direction of the underlying asset. A short-sale investment dollar requires $1.50 in collateral, but if the shorted security rises 10%, the collateral requirement for that initial dollar rises to $1.65.

The regulators have been issuing exemptive relief for fund companies to engage in shorting since 2003, and the language has become boilerplate, Gerster says. Proposed amendments to NI 81-102 will codify these exemptions, making short-selling the “new normal” for mutual funds.

The change affects all Mackenzie mutual funds offered under the simplified prospectus dated September 30, 2011.

Four funds will not be allowed to short: Mackenzie Sentinel Canadian Short-Term Yield Class; Mackenzie Sentinel Cash Management Fund; Mackenzie Sentinel Money Market Fund; and Mackenzie Sentinel U.S. Short-Term Yield Class.

Staff

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