INVESCO CANADA LTD. HAS taken innovation to a new level with the launch of a system for the purchase and sale of mutual fund units, streamlining the trading and administrative process and shaving management costs for unitholders.
Ultimately, the platform could be expanded across the mutual fund industry to include the funds of competing providers, thus multiplying the benefits to clients.
“This innovation is another example of the downward pressure on fees occurring across the fund industry,” say Rudy Luukko, investment funds and personal finance editor with Toronto-based Morningstar Canada. “With lower returns in financial markets, there’s growing focus on product costs.”
Invesco has introduced a line of 22 platform-traded funds (PTFs) derived from existing Invesco-sponsored mutual funds, and more PTFs are expected. The products are aimed at clients who have discretionary or non-discretionary accounts with fee-based financial advisors – and the PTFs’ fees are considerably lower than Series F funds, says Peter Intraligi, Invesco’s president and chief operating officer.
For now, PTFs are available only to firms that are members of the Investment Industry Regulatory Organization of Canada (IIROC). If regulations are changed to allow mutual fund dealers access to exchange-traded funds (ETFs), those firms also may be able to access PTFs, Luukko says.
PTFs utilize the same equities trading systems that dealers already use to trade stocks and ETFs. Each Invesco PTF has a trading symbol, much as a stock or an ETF does. PTF transactions are settled like those for a security, but PTFs aren’t listed on a stock exchange.
Instead, buy and sell orders are entered on each dealer’s securities trading system throughout the day by advisors on behalf of their clients. The net total of all fund trades is settled only once, at the end of the trading day, based on each fund’s net asset value (NAV).
Instead of multiple orders being channelled through Toronto-based FundSERV Inc.’s system on behalf of individual clients, Invesco considers each participating securities dealer to be a single consolidated account, which makes the trading more efficient and less costly.
Invesco acts as the “guaranteed counterparty,” working with the back office of each participating IIROC firm, Intraligi says. This direct relationship avoids the myriad costs associated with a public listing of securities on an exchange. Orders go directly from each firm’s retail trading desk to Invesco’s order-management system.
“The regulatory environment is evolving, with regulators focusing on access, transparency and choice,” Intraligi says. “With initiatives such as [the second phase of the client relationship model], there is growing awareness of fees on the part of clients.”
As a result, there has been “staggering growth” in fee-based accounts in Canada, he says, with assets under management growing to $300 billion from $120 billion during the past five years.
PTFs give clients access to “high-quality active management,” but at a price that makes PTFs more competitive with the low-cost index-based strategies that ETFs offer, Intraligi says. Fee-based advisors can combine PTFs and ETFs within client accounts, using PTFs when paying more for a superior active strategy makes sense and using ETFs when low-cost, broad-based index exposure is best.
“The simpler, more streamlined process eliminates unnecessary layers of cost,” Intraligi says. “We have deconstructed the delivery of active money management to create a process that is far more efficient.”
Because PTFs do not trade during the day, there are no trades at bid and ask prices representing a premium or discount to NAV. After Invesco consolidates all the orders on behalf of each firm each business day, Invesco has three business days to deliver either payment or fund units to the ordering firm’s account.
“One of the drawbacks of the PTF platform is that Invesco will only see a single order from each firm every trading day, and [Invesco] will know nothing about the individual trades,” Luukko says. “It will not be collecting information on who the clients are, the size of the order or the type of account in which the funds will be held, such as whether it’s a registered account such as an RRSP. There will be a loss of market intelligence concerning who the ultimate client actually is.”
The PTF platform could be expanded to include the products of competing fund firms. Interest has already been expressed, Intraligi says.
“We are trying to find ways to reduce costs to consumers,” he says. “Can other firms participate on this platform? The answer is yes.”
Invesco has filed for a patent on the PTF concept and has trademarked the PTF name, which could make duplicating the system difficult for competitors, Intraligi says. The PTF process has been under development for 18 months and was a surprise to many participants in the industry, including executives with FundSERV, which processes the majority of fund transactions in Canada.
On average, the management expense ratios (MERs) of PTFs are about 28% lower than comparable Series F mutual funds, which are used by fee-based advisors. Savings range from 10 basis points (bps) for two fixed-income funds to as high as 45 bps on some equity and balanced funds. Typically, though, savings are 30 bps-35 bps.
For example, Trimark Global Dividend Fund PTF, sponsored by Invesco, has an MER of 0.9% compared with 1.34% for the category’s average MER, as measured by Morningstar Canada. Every unitholder will benefit from the same lower MER.
There are no minimum investment requirements for the PTFs and bulk trading is available. The PTFs are available only through the dealers that have signed on with Invesco; Intraligi will not disclose those firms’ names, but he expects their numbers to grow.
“We are live, but still in the rollout phase, and should be able to offer [PTFs] to all dealers by mid-November,” Intraligi says. “It’s a new kind of transaction and requires co-operation with the various dealer back offices.”
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