PTFS: Where are they now?

Over the past three years, platform-traded funds (PTFs) have demonstrated that they are a viable alternative for processing transactions in mutual funds as well as other managed investments. Compared with traditional back-office platforms, PTFs create efficiencies for fund companies and their distributors and potential savings on management fees paid by clients.

What have proven to be elusive for PTFs, which trade on the NEO Connect platform owned and operated by Toronto-based Aequitas Innovations Inc., are widespread acceptance and popularity among both fund sponsors and dealers. As the second quarter began, only seven firms had created PTFs. The only major mutual fund sponsor among them is Toronto-based Invesco Canada Ltd.

“When you change things, when you come up with new approaches, as we all know, there’s always fear of change, reluctance to change,” says Jos Schmitt, president and CEO of Aequitas Innovations. “But what we have seen is a steady pickup since the beginning, with the dealers connecting to [NEO Connect and] manufacturers using it, and we now start to notice an acceleration.” As of May 1, 14 dealer firms – all of which must be registrants of the Investment Industry Regulatory Organization of Canada to be eligible – were signed up to use NEO Connect.

Invesco created the PTF concept, launching its first 22 PTFs in October 2015 on its own platform, which was then handed off to Aequitas once the NEO platform became operational in May 2016. Invesco’s PTF assets totalled roughly $500 million as of mid-April, well over half of the total assets of all seven issuers.

Forty-five of the 63 listings of PTFs were Invesco funds. Invesco’s PTF lineup consists of 31 retail funds, of which 12 also have U.S.- dollar PTF listings, and two non-retail Invesco pooled funds. Most of the six other providers of PTFs are firms whose funds are sold via offering memoranda to accredited investors or institutional clients. The only other prospectus-offered mutual funds with PTF versions are a pair of sector-themed funds sponsored by Toronto-based Ninepoint Partners LP.

The second-most active issuer is Toronto-based Provisus Wealth Management Ltd., which in February launched nine PTFs.

Distributing funds via NEO Connect enables fund managers to reduce costs because of an omnibus account structure. Instead of keeping records of each individual purchaser of a fund, the fund companies need only one account per PTF for each dealer firm. The number of accounts the fund companies need to manage goes down dramatically, Schmitt says.

Fund companies can choose to share their savings with investors in the form of lower management fees. Invesco’s management fees for its PTFs range from 0.40%-0.75% and are typically about 26% lower than the corresponding Series F for fee-based accounts, according to Invesco.

PTFs also create administrative efficiencies for dealers. With the NEO Connect platform, financial advisors can make a single bulk trade and then allocate fund units to specific clients, rather than having to make multiple trades. Unlike conventional transactions in mutual funds, which require a separate system, NEO Connect enables advisors to view client holdings and execute transactions in stocks, ETFs and PTFs on the same screen.

“All the reporting that the dealer gets is integrated, so you don’t have separate reporting for your ETFs and your stocks on one side, vs your funds on the other side,” says Schmitt. “The dealer is the holder of the book of records of the clients and has the full view of the client, what their positions are across the board.”

One satisfied PTF user is Marc Dalpé, portfolio manager with Montreal-based DalpéMilette Group, which operates under Richardson GMP Ltd. of Toronto. He and his colleagues switched client holdings in several Invesco mutual funds over to their corresponding PTFs, which they found to be “simpler and better investment vehicles” to obtain access to the same fund managers – and at reduced fees. Dealing in conventional mutual funds is more cumbersome for the firm, says Dalpé, citing administrative processes and separate computer systems “that don’t talk to each other.”

Although PTFs trade daily at net asset value just like other mutual funds, there are minor quirks. One disadvantage is that orders must be executed in full units, not fractional ones, so it’s not possible for an investor to specify a dollar amount to invest.

A potential pitfall, which applies to switches from other mutual fund series within non-registered accounts, is that a switch to a PTF is deemed to be a taxable event. The deemed disposition arises because the fund company must redeem the units that are transferred to the dealer’s omnibus PTF account. As a result, the fund company no longer has records of the beneficial owners.

Tax considerations won’t impede further PTF expansion – not when there are savings to be had for fund managers, their distributors and investors. Undaunted by the slow pace of growth to date, Schmitt says PTF assets are “slowly but surely” heading to their first $1 billion, “which is not bad for a brand-new offering in the market with a learning curve.”