Celebrating the massive growth of ETFs…
We’re continuously evaluating the value that we offer our clients. A key evolution in the investment industry has been the massive growth of exchange-traded funds (ETFs) and the steady decline of expensive mutual funds. ETFs are passive investment securities that combine low-cost index tracking with the trading ease and convenience of exchange-listed stocks. In 2017, ETFs saw record growth and took in over $460 billion globally (see below).
… and the decline of expensive mutual funds
BlackRock (iShares), Vanguard and State Street Global Advisors are the global leaders in ETF offerings. ETF fees are significantly lower than those of mutual funds and can be easily traded on stock exchanges. One could easily buy a US equity ETF at less than a 0.10% management expense ratio (MER) compared to the average US equity mutual fund that is now priced at 1.13%, according to Morningstar.
In Canada, the average mutual fund MER is even higher at 2.35%, costing the average Canadian household $323,654.50 over an investor’s life. Canadian banks, insurance and mutual fund companies have gotten away with it because true fee disclosure of the cost of mutual funds only started early last year for investors who own mutual funds.
Canadians have been hesitant to move away from the once-comforting model of the bank branch advisor attempting to grow their wealth. Unfortunately this historical relationship with bank branches included the massive conflicts of interest in mutual fund sales commissions. Canadian investors are now beginning to understand that mutual funds are not free, and come with significant costs and conflicts of interest compared to other alternatives.
Our business is evolving to broader wealth management
As our business has grown over the last eight years, it has transformed from a single investment fund model to a segregated account model where:
- Our clients each have full transparency of what they own at all times, through the NBIN online portal.
- Fees are transparent and shown on each monthly statement, and at all times, through the NBIN online portal.
- Liquidity is immediate (allowing for the two-day settlement period for listed securities).
More importantly, in client relationships where we were historically managing just the equity portion of their portfolio, those relationships have evolved. In many cases, we now manage entire client portfolios with the equity portion comprised of our actively managed portfolios, while layering in fixed-income ETFs based on the risk profile of the client. These ETF hybrid options were launched in 2016.
With the launch of our new ETF-only portfolios, we have reduced the noise of the active vs. passive money management debate. This allows us to focus on asset allocation and better manage each client’s unique needs.
Launching five new ETF-only portfolios
To create even more value for our clients, we are launching five new ETF-only portfolios. We’ve carefully researched the best ETFs and constructed five portfolios. Referring to the graph below, our five new ETF-only portfolios (Conservative, Moderate, Balanced, Growth, Aggressive) offer solid, risk-adjusted returns. For example, our Balanced model portfolio has a 7.03% 3-year annualized return (before AFINA management fees) versus the Fidelity Canadian Balanced Series B Fund (our benchmark) at 4.55%. However, the volatility of these two balanced portfolios is similar demonstrating that our Balanced-ETF model portfolio has been able to produce stronger returns with less risk.
AFINA ETF Model Portfolios Overview
(3-year Annualized Return vs. Standard Deviation)
Source: Y-Charts, AFINA Capital Management Inc.
Returns are shown on a total return basis for the period ended September 30, 2018, assuming monthly distributions are reinvested. Returns do not include AFINA management fees and will depend on each client’s portfolio size. For example, a $2 million portfolio invested in the Aggressive model portfolio with a 0.65% AFINA management fee (plus HST) would have netted a 9.71% annualized return over the past three years (10.44% – (0.65%*HST) = 9.71%).
Diversification globally and across asset classes
Our ETF-only model portfolios are also hedged to Canadian dollars, which reduces currency risk and transaction costs. Furthermore, our five portfolios offer global diversification across equities, fixed income and real estate. This global and asset class diversification is an offering that currently does not exist with our two actively managed portfolios that generally only provide exposure to North American equities and is subject to USD/CAD currency fluctuations.
Costs are more attractive than mutual funds
When compared to the egregious costs of mutual funds, our ETF-only model portfolios have an average cost of just 0.25% (plus AFINA management fee). For example, a $2 million portfolio invested in the Aggressive model portfolio with a 0.65% AFINA management fee (plus HST) would have netted a 9.71% annualized return over the past three years (10.44% – (0.65%*HST) = 9.71%).
Optimizing the use of ETF portfolios through the full cycle
The holdings in each of these five ETF portfolios will remain static as this will provide clients with a clear view of each model’s historical performance metrics as shown above. However, over a full economic cycle and based on a client’s time horizon and risk profile, we will shift clients between portfolios. For example, near the end of an economic expansion we might shift a client from the AFINA Aggressive model portfolio to the AFINA Balanced model portfolio. We have put our model portfolios through analytical tests to gauge how each performs under varying economic conditions that will assist in our advice to clients regarding portfolio allocation under varying economic environments.
Updating our fee structure
With the release of the new AFINA ETF model portfolios, we are standardizing our fee structure based on our client’s family assets under management by AFINA. We are standardizing our fees to make it simpler and easier to understand for clients, regardless of whether we believe it is advantageous for our client to be invested in our ETF model portfolios or actively-managed model portfolios.
Effective December 1, 2018, the following fee structure will take effect:
|Family Asset Level||Management Fee|
|$200,000 - $750,000||1.35%|
|$750,000 - $1 million||1.15%|
|$1 million - $2 milllion||0.95%|
|Over $2 million||0.65%|