Harvest seeks greener pastures in ETFs

Firm adds one new equity offering and converts a closed-end fund.

Rudy Luukko 23 June, 2017 | 10:00PM
Facebook Twitter LinkedIn

Two actively managed exchange-traded funds made their debut this week on the Toronto Stock Exchange as Harvest Portfolios Group Inc. continued its strategic shift away from closed-end funds in favour of ETFs.

Global REIT Leaders Income (HGR) opened for trading today on the Toronto Stock Exchange. This followed the transformation a day earlier of Tech Achievers Growth & Income (HTA), the latest closed-end fund to be converted to an ETF by Harvest.

This brings to six the number of ETFs managed by Oakville, Ont.-based Harvest. They join the original four, which started out as closed-end funds but were converted to ETFs in October 2016. Together, ETFs now account for three-quarters of the firm's $450 million in managed assets, with most of the rest in the remaining four closed-end funds, and about $33 million in a pair of mutual funds.

"Our main focus from this point forward will be the ETF market," Harvest president and CEO Michael Kovacs told Morningstar in an interview. Though he doesn't rule out creating structured funds, he doesn't expect that the firm, which he founded in 2009, will ever again launch another closed-end fund.

Harvest obtained unitholder approval on April 28 for the Tech Achievers conversion, with investors endorsing management's pitch that the ETF structure offers a reduced management fee, greater market liquidity, and potential benefits from economies of scale through the continuous offering of units.

One of the benefits to investors -- a lower fee -- is immediate. The management fee has been reduced to 0.85%, down from the closed-end fee of 1%. (This does not include expenses.) The new Global REIT Leaders also charges 0.85%, as do Health Care Leaders Income (HHL) and Energy Leaders Plus Income (HPF). The remaining two ETFs -- Brand Leaders Plus Income (HBF) and the newly renamed U.S. Equity Plus Income (HUL) -- are priced at 0.75%.

At 0.75% to 0.85%, Harvest's fees are much higher than those of market-cap-weighted index ETFs, and they are somewhat more expensive than the prevailing norms for strategic-beta ETFs that rely on rules-based quantitative methods.

The Harvest ETFs have much in common with the strategic-beta genre, based on their quantitative stock-selection criteria and regular rebalancing provisions that are outlined in the prospectus. For instance, Global REIT Leaders Income's strategy is to invest in a portfolio of 20 to 30 real estate investment trusts that have market capitalizations of at least $2 billion and that have exchange-listed options on their securities that are listed in a developed market. Most of the holdings will be non-Canadian.

The selection criteria for the holdings of REITs will be based on fundamentals that may include price-to-funds from operations; price to net asset value; enterprise value to earnings before interest, taxes, depreciation and amortization; price to cash flow; distribution yield; return on equity; debt to equity and debt to cash flow, and various growth forecasts. The portfolio will be reconstituted and rebalanced quarterly. The limit for each individual security is 6% of assets at the time of investment or immediately after rebalancing.

The newly converted Tech Achievers Growth & Income, as with all Harvest ETFs except for the new Global REIT Leaders, also has a U.S.-dollar version (HTA.U). The strategy is to invest in shares of 20 equally weighted technology companies that have market capitalizations of at least US$10 billion and that have exchange-listed options on their securities.

Stock selection for this ETF is based on fundamental criteria including below-average forward price-earnings and price-earnings to growth (PEG) ratios, and above-average returns on equity. The portfolio is reconstituted and rebalanced quarterly, as are those of all the other ETFs except Healthcare Leaders Income, which has semi-annual rebalancing.

What sets the Harvest ETFs apart from their strategic-beta competitors, as Kovacs explains, is the scope of decision-making afforded to the team of three portfolio managers led by chief investment officer Paul MacDonald.

The managers can rebalance more frequently, in the event of a merger or other corporate development. They can make judgment calls to tweak the stock-selection process if, for instance, the quantitative screening results in having the portfolio too heavily weighted in a particular industry within a sector. And for all ETFs except for U.S. Equity Plus Income, the managers employ call option-writing to generate additional income.

In another news at Harvest, U.S. Equity Plus Income's name is new as of June 22, from its previous name U.S. Buyback Leaders. The ETF retains the same ticker symbols for the Class A units and the U.S.-dollar units (HUL.U). Though share buybacks are a key element of part of the stock-selection criteria, Kovacs said the former name "didn't give enough credit to the overall stock portfolio choices being made and the overall quality of the portfolio."

Facebook Twitter LinkedIn

About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility