Platform-traded funds (PTFs) are slowly showing up in more investors’ portfolios amid growing pressure for financial advisors to offer low-cost investment funds with an active management component. Yet, the relatively new hybrid investment fund still needs time to prove itself – and a wider selection of products – to attract more interest from financial professionals and investors.
PTFs launched in mid-2016 as hybrids between mutual funds and exchange-traded funds (ETFs). PTFs are now offered by 23 investment dealers and 11 asset managers in Canada with total assets under management of about $600-million, according to Toronto-based NEO Connect Inc., which operates the namesake investment fund distribution platform on which PTFs trade exclusively. (NEO Connect Inc. is a sister company of NEO Exchange Inc, which operates the namesake stock exchange.)
While there are no exact statistics on PTF market penetration in the Investment Industry Regulatory Organization of Canada (IIROC) channel, a conservative estimate is that about 5 to 7 per cent of IIROC-licensed advisors are using PTFs, says Jos Schmitt, director, president and chief executive officer at NEO Connect. He adds that sales of the product through the Mutual Fund Dealers Association of Canada channel are “just starting to ramp up.”
Last summer, Montreal-based Peak Investment Services Inc. became the first mutual fund dealer to offer advisors direct access to PTFs on NEO Connect. In addition, NEO Connect has announced a steady stream of new PTF participants in recent months, including the first Shariah-compliant PTF launched by Halal mortgage lender Manzil, which follows all guidelines for Shariah governance established by the Accounting and Auditing Organization for Islamic Financial Institutions.
PTFs are designed for fee-based investors who work with either discretionary or non-discretionary advisors. The key attraction is the fund’s management fees, which are lower than those of traditional mutual funds.
That’s because PTFs transact and settle similar to ETFs, for which orders can be placed through an equities trading platform using a ticker symbol. However, unlike ETFs, PTFs have no minimum investment requirements and orders are filled at end-of-day net asset value. This provides investors with better pricing by avoiding bid-ask spreads.
As PTFs continue to gain traction, Mr. Schmitt says that on top of the current offerings, advisors are looking for more passive products, including those following classic indexes such as the S&P 500 index or the Euro Stoxx 60 Index.
He also expects to see more private-fund PTFs in 2020, which raise money under an offering memorandum rather than a prospectus, with a focus largely on accredited investors.
“Private fund manufacturers seek greater access to the dealer community and their advisors. And dealers are much more open to open up their investor network to private funds under the PTF format,” Mr. Schmitt says, citing efficiencies of the PTF platform over traditional manual processes.
Toronto-based Stone Investment Group Ltd. created a PTF series for four funds, one of which, Stone Dividend Growth Class, went live in October.
Jason Stone, Stone Investment Group’s vice-president of national accounts, says his firm is monitoring the growth of PTFs and plans to go live with the other three PTFs in the future. He says PTFs are still largely unknown in the investment industry and more work needs to be done to educate advisors and investors about their benefits.
For example, he says the fee for the firm’s current PTF is almost 30-per-cent cheaper than the Series F mutual fund equivalent – or 65 basis points versus 95 basis points. That’s because NEO Connect processes the orders and takes care of the settlement, which means fewer expenses for fund companies.
“That’s not me taking a haircut,” Mr. Stone says. “That’s me ... passing the savings on to investors based on the efficiencies that NEO Connect has been able to drive with this fund.”
His firm plans to roll out PTFs for his full product suite likely in two or three phases in the coming years. First, he needs to see more adoption at the advisor level.
“The first step is the education of PTFs inside the advisor community. As we start to drive some communication and education, you’ll start to see that adoption rate [increase], which would turn into AUM growth,” Mr. Stone says.
Todd Campbell, owner and president of RBA Financial Group in Meaford, Ont., and an investment advisor with Aligned Capital Partners Inc., has been using PTFs in his clients’ portfolios since they launched almost four years ago.
Not only do PTFs have lower fees than mutual funds, but he says they “give me the advantages of an ETF with pure active management that’s still under the daily care of a professional mutual fund manager.”
For Mr. Campbell, it also means sticking with many of the same mutual fund managers he’s relied on during his more than 20 years in the business.
“I have become very comfortable with their processes and personalities,” he says.
Mr. Campbell doesn’t use ETFs because he likes to know the fund managers. He believes more advisors should be looking at low-cost products like PTFs to stay competitive.
“Advisors who choose not to integrate lower-cost products into their practices will not survive,” Mr. Campbell predicts.