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Wrap programs gain ground in sales

'One-ticket solution' gets push from boomers who no longer have tolerance for volatile returns

FUNDS REPORTER

Like packaged tours to the travel industry, wrap programs have become sexy in the investment fund industry.

Wraps, which bundle funds and asset management services like rebalancing for one fee, have been gaining traction in recent years as opposed to standalone mutual, pooled or segregated funds.

"It's convenient - a one-ticket solution" for both investors and financial advisers, said Iassen Tonkovski, senior analyst at Investor Economics.

Figures from the Toronto-based financial services research and consulting firm indicate that wraps climbed to 22 per cent of the $793.4-billion investment fund industry in 2007 from 13 per cent of the industry in 2002.

And wraps are expected to mushroom to 33 per cent of the $1.9-trillion industry by 2016, the firm forecasts.

The trend is getting a push from aging baby boomers who no longer have a tolerance for volatile returns, Mr. Tonkovski suggested.

"Canadians are getting older. They are also getting wealthier. The time frame for them to recoup any losses due to a market downturn is becoming shorter and shorter."

Wrap programs, which typically don't include specialty funds and have different portfolios geared to risk tolerance, are "not as volatile as standalone funds," he said.

Investors have also been leaning toward balanced funds or wrap programs after sustaining "steep losses" in technology-oriented funds during the Internet bubble in 2000, added Dan Hallett, an independent fund analyst.

Fund companies are also rolling out wraps with different bells and whistles.

Claymore Investments Inc. offers one using exchanged-traded funds. Some wrap programs use mutual funds run by in-house and external managers. Altamira Investment Services has a proprietary fund wrap as well as its Meritage Portfolios using external managers.

But it is the proprietary fund wraps that have garnered about 75 per cent of the market share and is growing at a faster rate, Mr. Tonkovski said.

Acuity Funds Ltd. last fall launched Alpha Portfolios, its first wrap product and one using internal managers. Dynamic Mutual Funds Ltd., which had its Marquis program using mostly external managers, recently launched its DynamicEdge Portfolios.

"We are probably a little behind other companies getting into this type of [in-house] wrap program," said David Whyte, president of Goodman & Co., which runs Dynamic funds. "But this is our opportunity to put out a very strong wrap product ... with all the options that people seem to be looking for in a portfolio. From a pricing point of view, it's cheaper than a number of them."

DynamicEdge, he said, also offers options for non-registered plans like a corporate-class structure to allow investors to switch between different portfolios without triggering a taxable gain, and a T-class version enabling investors to receive a monthly tax-deferred payout mainly in return of capital.

Morningstar Canada analyst Mark Chow said wraps are useful for investors who don't want to research their own mutual funds, but their fee tends to be more expensive than the underlying funds.

But wraps have become popular among advisers because they take away the burden of putting together portfolios for clients, he said.

"It allows them to focus more attention on selling as opposed to researching individual funds."

Acuity, Scotia Securities Inc. and AGF Management Ltd. also pay a higher-than-average 1.25-per-cent annual trailer fee on the front-end load version of their in-house wrap programs to advisers.

But AGF's Elements program, whose assets have surged to $3.1-billion since 2005, has also gained momentum because of its performance-linked guarantee in the form of a rebate of extra units, Mr. Hallett added.

Still, he is not a big fan of wrap programs generally because they can hold too many funds, and that tends to "dilute any value-added from the managers."

Peter Loach, manager director of fund research at BMO Nesbitt Burns Inc., said he questions the wisdom of holding wraps that use only in-house managers.

"No fund company has the best-of-breed in every single sector," he said.

Sample of mutual fund wraps

Proprietary wraps have the lion's share of the market

Minimum MERHighestCorporatePerformance-
PrograminvestmentRangeTrailer feeClasslinked rebate
Acuity Alpha Portfolios$10,000 2.60%*1.25%nono
AGF Elements$5,000 2.20% to 2.59%1.25%noyes
Altamira Managed Portfolio Service{Dagger}$5,000 1.12% to 1.91%N/Anono
CI Portfolio Series{Dagger}{Dagger}$500 1.92% to 2.35%1.00%nono
DynamicEdge Portfolios$10,000 2.09% to 2.27%*1.00%yesno
Franklin Templeton Quotential$25,000 2.00% to 2.63%1.00%yesno
Fidelity Managed Portfolios$25,000 2.10% to 2.39%1.00%yesno
GGOF Solutions$500 1.99% to 2.49%1.00%nono
Mackenzie STAR$2,500 2.28% to 2.69%1.00%nono
Scotia Selected Portfolios$2,500 1.77% to 2.33%1.25%nono
RBC Select Portfolios$5,000 1.65% to 2.03%1.00%nono

*Estimated MER; Rebate of 90 basis points of management fee in extra units if portfolio underperform benchmarks over three years;

{Dagger} only available to Altamira clients; {Dagger}{Dagger} CI Portfolio Select Series has corporate class mutual funds and a $50,000 minimum

DOUGLAS COULL/THE GLOBE AND MAIL 66 SOURCE: COMPANIES

© 2007 The Globe and Mail. All rights reserved.

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