Fundcos offering ETF access to MFDA advisors

By Mark Noble | September 18, 2008 | Last updated on September 18, 2008
4 min read

(September 2008) The idea that exchange-traded funds can be used within an active investment portfolio is getting a big push from some of the country’s best-known actively managed mutual fund firms. Some fund companies believe ETFs are the most efficient way to offer some alternative asset classes, and by offering them within a mutual fund solution, MFDA-licensed advisors can get access to those ETFs.

The latest name throwing its hat into the ring is AGF Mutual Funds, which is the first of the big fund companies to offer a fund of funds that is exclusively made up of underlying ETFs.

The Harmony Non-traditional Pool will give investors access to global non-traditional investments such as infrastructure, water, agriculture, oil sands, mining and real estate in a managed assets program. In trying to replicate a portfolio similar to the asset allocation strategies of successful institutional funds, like the Yale Endowment Fund, AGF and the wrap-program’s sub-advisor, Wilshire Associates, concluded ETFs were the most efficient way to construct the portfolio.

Each of the underlying sectors is covered by an index-lined ETF offered through Claymore Investments. While the ETFs themselves are passive investments, Wilshire will tactically rebalance the pool to protect against downside risk. In effect, the pool’s strategy is active — but even still, AGF concedes it was a difficult decision to choose ETFs over actively managed funds.

“Right now in some of these non-traditional asset classes that we want to bring to the marketplace — things like water, infrastructure, oil sands and real estate — getting active managers for these is not really as practical as going the ETF route,” says Randy Ambrosie, president of AGF Funds. “That’s a tough decision for a firm like ours to make because we so passionately believe in active management.”

The pool offers two advantages over trying to construct the portfolio on its own. First, investors get the benefit of professional portfolio oversight that Wilshire provides and secondly, it gives many advisors in the MFDA channel, and therefore not licensed to deal in ETFs, a way to use them with clients.

“The biggest issues we as investors face are the convergence of correlations of different assets. Your traditional equities and emerging market strategies just aren’t cutting it anymore because the convergence of different markets is so high,” says Som Seif, president of Claymore Investments. “What we’ve seen at the big institutional level is movement toward adding and seeking non-correlated assets for risk diversification for your portfolio. What AGF is doing is bringing this strategy to the broad marketplace in a simple, clean single kind of fund basis.”

Bringing more ETFs to the MFDA channel was one of the reasons Invesco Trimark included some of the Invesco PowerShares ETFs in its Retirement Payout Portfolios, which the company launched in June.

“There is need to offer a more holistic product offering to their clients. In many cases, ETFs are better suited for certain types of asset classes and parts of the world,” says John Ciampaglia, vice-president of product development for Invesco Trimark. “[MFDA Advisors] are saying ‘we are really interested in this idea of putting ETFs inside of mutual funds so that we can gain access to some of these parts of the world and compete against our IIROC-licensed counterparts.'”

The challenge for mutual fund firms is to improve awareness about how ETFs can be used in a client’s portfolio to enhance returns, Ciampaglia notes.

“Because ETFs are not a product they are licensed to sell, there is a huge education gap with the MFDA,” Ciampaglia says. “You’re going to continue to see more innovation and a lot of new ideas. We are trying to build on that with our professional development road show that we are taking across the country right now. One of the presentations is about the institutionalization of the retail marketplace and talks about ideas that start concepts in the institutional markets, such as endowments, foundations and defined benefit pension plans.”

Ambrosie doesn’t quite agree. He believes the demand for these types of solutions are already well developed. He says the new Harmony pool is already generating significant interest from both the IIROC and MFDA channels, even though the product just launched.

“From the early feedback, I don’t think advisors are struggling to understand the benefits of this,” he says. “For starters, they are very tuned in to the big macro-global trends. They are tuned in to the areas that are very topical, such as water infrastructure. These things are at the top of mind for many clients as well. I think advisors of all stripes really understand the idea of non-correlated assets. They like the fact that the non-traditional asset pool is very much in line with where pension management is going globally.”

Seif expresses concern, though, that as these strategies become more popular, some mutual fund dealers might try to double dip on the fees they charge clients.

“There are other players doing this. I always say that you ensure the fund of ETFs is not double-counting on the fees. In the case here of AGF, the fees you’re paying actually include the ETF fees underlying it. There is no double-counting; it’s not a management fee plus the ETF fee,” he says. “That’s a nice thing about this. The strategy is brought to the marketplace in a simple way, but the costs don’t increase dramatically.”

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Mark Noble