Two rival portfolio management products made their debut this month, each hoping to cash in on the market's infatuation with so-called "wrap" accounts.
BMO Nesbitt Burns Inc.'s "unified managed account" program creates a customized portfolio for each client, which combines a mix of asset classes, including mutual funds, exchange-traded funds and hedge funds. The program promises simpler account management with one fee and one statement.
Meanwhile, Assante Corp., the financial advice firm owned by CI Fund Management Inc., is marketing its "institutional managed portfolio," a product with four fund management pools with different investment objectives. A core investment focus means clients will pay lower fees than Assante's own Optima Strategy program, a wrap with a broader financial planning mandate.
"It's an enormous opportunity to bring down fees of the product and pass that on to the investor," said Joe Canavan, Assante president and chief executive officer.
The two products, both chasing clients with at least $150,000 to invest, are the latest sophisticated takes on the so-called "wrap" or managed account, a blended pool of funds and assets designed to meet a range of investor needs.
Wraps have become the success story of the recovering fund business. Currently, more than $90-billion is invested in high-end and mass market wrap accounts, up from less than $15-billion in 1996 and about $52-billion five years ago, according to financial consulting firm Investor Economics.
"There has been a plethora of growth in products," said Larry Herscu, vice-president in charge of AGF Funds Inc.'s $1.2-billion Harmony program. He estimates there are more than 150 wraps on the market competing for attention.
When Harmony was launched in 1997, there was little appetite in the booming bull market for risk-averse wraps. Tastes have changed and today "it's all about managing risks," Mr. Herscu said.
While wrap choice has ballooned, the catch for investors is that the wrap world has become very complex. For example, Toronto brokerage First Asset Advisory Services Inc.'s Legacy product has nine programs that offer a staggering 80 different mandates. Tracking down detailed information about wraps can be a tricky business. The bulk of products and managed accounts do not file a prospectus with regulatory authorities.
The emergence of the wrap has meant a change in the traditional role of financial advisers. They have largely abdicated their role as fund-picker to a team of third-party professionals. On the upside, wrap oversight is rigorous, investment goals closely monitored and asset allocation automatically rebalanced. The right wrap program will "free up an adviser's time" so more energy can be spent focusing on client-specific needs, including estate planning, insurance and tax issues, said Dan Richards, a Toronto fund marketing consultant.
On the downside, some industry observers fear wraps mean some advisers are actually doing less work on behalf of clients, yet are continuing to receive a hefty chunk of the wrap's management expense ratio (MER), the annual cost paid by investors to manage their money.
"It all depends on if the broker is acting with fiduciary duties or is acting to buy a Porsche," said Gene Hochachka, an Edmonton-based financial analyst.
Costs are a common concern, too, and investors are well advised to determine who earns what from their wrap account. In a March study, Investor Economics found mass market wraps catering to accounts worth $25,000 or less have an average MER of 2.4 per cent. When the Toronto firm constructed similar portfolios using stand-alone funds, the average cost came in at 2.01 per cent. That's a significant 39 basis points lower than the average wrap fee.
Wraps "are very appropriate for the client in terms of what the adviser is trying to do," said Brent Hubbs, a senior consultant at Investor Economics. "But we kind of wonder if the cost could become an issue when you are looking at performance longer term. Could that mean that clients will be disenchanted or could that actually mean that the providers are going to have to lower some costs?"
Hedge funds in doldrums
This is looking like a mediocre year for hedge funds.
Returns in the alternative asset class were essentially flat in the first half of 2005. Standard & Poor's Corp.'s hedge fund index was up a slender 0.13 per cent for the first six months ended June 30.
Corporate debt was behind the slim returns, industry observers said. This spring, fixed-income hedge funds took a bath when corporate bonds of Ford Motor Co. and General Motors Corp. were downgraded to junk status, affecting $453-billion (U.S.) in obligations held by the two auto makers.
Clone funds on death watch
The clones are under attack.
The long-awaited passage of the federal budget has eliminated the foreign property rule barring retirement savings plans and pension funds from holding more than 30-per-cent foreign content.
After months of waiting on Ottawa, fund companies are now in a mad dash to blow out their RRSP-eligible clone funds that duplicate the returns of international funds. Assets have or will be transferred to the equivalent non-RRSP portfolios, driving down operating costs and fees paid by investors.
Fidelity Investments Canada Ltd. was the first major fund company out of the gate, winding down its 17 RSP clones on June 24.
The pace picked up this month, with Mackenzie Financial Corp., Northwest Mutual Funds Inc. and Dynamic Mutual Funds Ltd. sending RRSP clones to the grave.
Altamira Investment Services Inc., AGF Funds Inc., Guardian Group of Funds Ltd. and the Fédérations des caisses Desjardins du Québec all have their clone funds on an August death watch.
On or before Sept. 3, Assante's three Artisan RSP Portfolios will be terminated. By month's end, Investors Group Inc. aims to kill six global series RRSP funds and consolidate assets in their six corresponding foreign equity funds.
© 2007 The Globe and Mail. All rights reserved.
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