TORONTO -- Som Seif has put the mutual fund industry on notice.
The president of Claymore Investments Inc. says the sector is about to face a wave of new competition from low-fee exchange-traded funds that can post better returns than actively-managed mutual funds.
"We have very lofty goals," Mr. Seif said at a press briefing. The fund industry is "a $600-billion market . . . we think it's inefficient and could be structured better."
On Friday, the unit of Chicago's Claymore Group Inc. launched three new ETFs on the Toronto Stock Exchange:
Claymore Canadian Dividend and Achievers ETF (CDZ-TSX) will generate income by investing in blue-chip companies that have a record of sustaining and growing distributions in the Mergent Canadian Dividend and Income Achievers Index. Mergent Inc. is a U.S. financial firm providing data on publicly listed companies.
Claymore BRIC ETF (CBQ-TSX) will invest in the emerging economies of Brazil, Russia, India and China. The ETF will be based on the BNY BRIC Select ADR Index, an index launched in June by the Bank of New York.
Claymore U.S. Fundamental Index ETF (CLU-TSX) will provide exposure to the U.S. market on a currency-hedged basis through investments in the FTSE RAFI U.S. 100 C$ Hedged Index. FTSE refers to FTSE Group, a manager of stock indexes that is owned by the London Stock Exchange and the Financial Times newspaper, while RAFI stands for Research Affiliates Fundamental Indexation, in honour of Research Affiliates LLC, the company that created the indexing strategy used in the fund.
Claymore described its funds as semi-actively managed, employing a more intelligent stock-picking formula than a traditional index-linked ETF, Mr. Seif said. Claymore funds determine their stock holdings on the basis of the revenues, cash flow, dividends and book value of companies in their sectors.
In February this year, the firm launched the Claymore Canadian Fundamental Index ETF (CRQ-TSX), an ETF that has attracted about $25-million in investment funds. Much like the S&P/TSX composite index, the fund is basically flat over the last six months.
Canadian investors have embraced ETFs in recent years, a market dominated by Barclays Global Investors Canada Ltd. About $20-billion is invested in the asset class on the Toronto Stock Exchange, a group of 23 ETFs that include Claymore's latest offerings. The money manager plans to launch another three funds by the end of this month focusing on Japan, the U.S. and the Alberta oil sands.
Mr. Seif expects the heady rate of growth will continue as investors learn more about the asset classes' superior returns and low fee structure. Transaction-driven financial advisers have largely shunned ETFs and Claymore is doing all it can to win them over. For the first time, the Claymore ETFs will be sold in two classes: traditional common units for individual and institutional investors with an annual management fee of about 60 to 65 basis points; and new adviser class units that will include a 75-basis-point commission for advisers. (A basis point is 1/100th of a percentage point.)
The financial advice community is closely monitoring developments but remains wary of risk.
"ETFs are good to keep costs down, but there is no active management to reduce risks," said Chris Reynolds, president of Investment Planning Counsel Inc. of Mississauga. "ETFs have the same risks as indexes, in that a few sectors or stocks could increase the risks. At peaks in the markets, when one or two sectors are pulling the returns, people tend to think it's easy and that the value of an active manager is not needed; however, this is exactly when you need it most.
"ETFs have a place in an all over portfolio, but should not be the primary holding," Mr. Reynolds said.
RBC scores in August
August belonged to RBC Asset Management Inc.
The fund arm of Royal Bank of Canada, the nation's largest bank, reported a stunning $738-million in net mutual fund sales last month, leaps and bounds ahead of the $104-million in net sales reported by the month's second-best performer, CI Financial Inc.
In fact, RBC's performance trumped the entire industry. August was a weak month with 21 firms reporting a combined tally of about $640-million in net sales, about $100-million shy of the bank's performance. Eight fund companies reported net redemptions, led by $272-million in customer losses at AIM Funds Management Inc.
Money market funds were behind August's strong performance, said David Richardson, RBC's vice-president of communications and enterprise sales, a role that co-ordinates fund business across the bank's 1,200 branches. About $626-million was parked in the bank's money market funds last month while long-term funds reported $112-million in net sales.
Investors are in a cautious mood and holding off on making major investment decisions, he said. "There is a lot of uncertainty in the market. We have had a very volatile summer."
Nevertheless, August represents the bank's 36th consecutive month of net sales of $100-million or more. Portfolio solutions, so-called "wrap accounts" that blend a mix of mutual funds, continue to be the bank's top selling product. Keith Damsell is editor of GlobeinvestorGOLD
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