Rudy Luukko: Hi, I'm Rudy Luukko with Morningstar.ca. Joining us today to talk about trends in the fund industry in his new venture is Som Seif. He is the founder and CEO of Purpose Investments. Purpose, in September, launched its first funds which come in both mutual fund and ETF versions.
Som, there are now thousands of mutual funds and the several hundred ETFs in Canada, what is it that Purpose brings to the party?
Som Seif: Yeah. Well, thanks Rudy for having us here. So, there are a few things I'd say. One; look, no one needs another investment management company in this country, and, in fact, there are a thousands of investment funds. But what we're doing is pretty impactful. When I say that – it’s our goal is to change the industry, and this idea that you need to charge lots of fees to get good quality investment management. And it's very important when I say this concept of good quality.
So, I believe that fees matter; that fees ultimately are one of the key determinants of a good long-term net results on an investment fund. But at the same time it's not just about fees. It's not just about giving you the lowest cost, but giving you the lowest cost relative to the value. And so, what we're focused on is not just low fees but also high quality. And quality is an important concept around the investment discipline, the strategies that you use, the rules that you're using to actually invest. But then on top of that is the risk management.
This is the missing piece that I believe this industry faces, is that a lot of players today are just giving you market return betas. They're going up and down with the markets. Our focus is that – what really matters for clients is how do you protect clients from risk? How do you manage risk? How do you bring high-quality investments? But also reduce drawdowns; help investors compound the returns better.
Today, a lot of that thinking is actually in what we call the alternative space; the hedge funds community. And we think that there's some really important principles there, but most of them charge way too much for their trade, just like long-only money managers do, and our view is to bring that to the broader market and really bring risk-managed, high-quality deep investment philosophy with low fees, which is just unheard of in this country. And that's really what Purpose is about – we're changing the industry as a result of it.
Luukko: You've partnered up with Breton Hill. Tell me about that firm.
Seif: Yeah. Well, look, Breton Hill is probably – it's a firm that many people don't know about in this country. And it's because they're really focused on the big institution; the pension plan. But they're a global macro alternative shop based in Toronto, but they actually run money for – they were seeded and run money for CalPERS, the largest pension plan in the United States.
Luukko: In California.
Seif: In California, that's right. And what they ultimately do is they run money on a global macro basis across equities, bonds, currencies, commodities. And their focus is on risk management and on really focusing on asset class diversification and risk diversification.
Why approach them? Because I said, look, you guys are fantastic at what you do, I need to use this intellectual capital that you guys have and I want access to it, but you're focused on the big institution, we're focused on everybody else and we want to bring this to the broader market.
And we structured a really great relationship and I was able to negotiate such that they own an equity stake in Purpose. And as result, we're able to keep our costs really low, and deliver this phenomenal intellectual capital to the masses; to every investor, whether you're a small investor, an investment advisor and their clients, as well as a high net worth and family office small institution. And that's really our target market and it's been very powerful.
Luukko: Now, there are actively managed funds, there are market cap index funds, and there are – I think this is a hybrid somewhere in between, a rules-based. And what are some of the key rules, and do they tend to stick with those rules or do they deviate much, change the rules?
Seif: Well, Rudy, it's very important. I mean, so, I built my career, as you know, with Claymore. I started that firm and sold it really based on a very simple principle, which is that you can be thoughtful around your investment discipline. You don't need to be – you don’t need to be just benchmarks.
So, when we talk about; call it, the active-passive, what we care about is what makes passive really work – it's got its low fees, but it also has an unemotional approach to it. And what I've always believed in is that you can take the thoughtfulness of what really good active money managers do really well, the factors that they use to select and weight securities, the way that they do asset allocation – all the rest of it; and you can systematize it, you can quantify that.
And if you can take that down to set of rules, you can capture 80% of what great active money managers do. But by reducing the fee, you can outperform the majority of the market. And we've have proven that in the past with Claymore and now what we're doing with Purpose is even going deeper.
So, we are passive, but we don't have somebody picking one stock over another stock, but we use a bottoms-up fundamental approach to everything, and it's based on a set of rules. In fact, so example; in our dividend screens, dividend fund, we use quality and historical dividend consistency in growth as our core focus, and the factors that we use on quality is something that's very powerful.
It looks at the fundamental health of the company, the trends and the business, and what is the business doing right, and is it in a position not only to have historically done something right, but to continue to do something in the future. And that really adds a ton of value in screening for good, good quality companies and then companies that are going to perform not only giving you a good income and distribution but also good capital appreciation.
Luukko: As you know with any new start-up, it takes time to build a track record and Morningstar analysts generally look for at least three years and – how do you respond to that when people make the comment that this firm, this money manager, Breton Hill was just formed in 2010 and doesn't have a very long track record?
Seif: Well, it's all about intuitive decisions and transparency. So, I believe that when someone understands what you do and it's intuitive to them, then ultimately that's really what the principles are. Everything we do is fact-based. Everything we do is based on a set of rules that make sense, and then ultimately when you think about – when I ask people, how do you think about investment management? And when they look at this and they say, this is the way I think about it, this is the way I wish every money manager was disciplined. So, it's about those disciplines that are very important; it's about those rules that's intuitive.
The second thing is, look, it takes time to build a track record and it's very important, but as long as you're doing things based on – I believe in reversion to the mean, I believe that what works in history ultimately will generally work in the future. And I believe that the key is having the right fundamentals to how you actually invest. And if you do that and you prove that – I did it in the past with Claymore. I built Claymore based on a set of principles, intuitive thinking, and our products are some of the top quartile, top two quartiles funds in this country, and they've proved it over years, and Purpose is just going deeper and better, and that's really it.
Now, the question of Breton Hill – this is a very important point. So, Breton Hill as an organization has actually been around together as a team for over a decade. And the research that is behind everything they've done is actually over 20 years of research. Breton Hill is a standalone. They went off, they started a firm historically; a very successful diversified global asset management firm Diversified Global Asset Management Corporation (DGAM), very successful alternative shop in Canada back in 2004.
And the team just decided, look, we want to run our own shop; so they ended up breaking off in 2010 and they got seeded by CalPERS, which, respectfully, CalPERS is a very, very strong player and who do due diligence. This is the first firm in history that CalPERS has ever seeded publicly, and this is a big deal, and they even press released it, it was such a big deal, let alone a Canadian firm.
So, I think we've got a great partner. And the one thing I would say is that – just two months ago, in July, they were ranked as the number one Canadian overall hedge fund in the world by Hedge Funds Review, which is the major publication for hedge funds in the globe.
So, we are very proud to have a partnership with them, and we are excited about what we're bringing to marketplace. I think that's what it comes down to the, the fundamental rules and the factors that we ultimately are bringing all the products based on.
Luukko: Okay. Let's talk about fees. You said fees are important, but at the same time fees aren't everything. So, tell us about your positioning regarding fees. You are not channeling Vanguard here with this firm with the absolute lowest.
Seif: No. I don't believe the fees 10 basis points for a benchmark index is – well, I actually think benchmark investing is a very bad investment strategy when you think of it. And the problem, Rudy, is that if you look at why people are buying benchmarks it's because that they can't find good active money managers that are worth their trade for their fee. That's it. And to me it's great. I think indexing and the cost of benchmarking for traders, for people who want to get beta exposure, tactically all that stuff is great. And that's what Vanguard and iShares and players like that are really competing on.
We're not focused on that and have never been focused on that because I don't believe – my products are built for investors. For people who want to invest long-term and when it comes to that you better have really good fundamental thinking behind the way you select the security, the way you own an asset and the way you apply risk management. So, what we're doing around fees – so, our fees range from anywhere, from 45 basis points for our bond fund to 55 basis funds for our dividend fund up to 80 basis points and that sounds high.
But 80 basis points for our alternative hedge strategy, that's the same comparable to a Picton Mahoney or other long, short managers who are charging two and 20. So, 80 basis points versus two and 20, that's where we are competitive. And we look at the spectrum of the industry and our goal is not just to be 10 basis point betas. Our goal is to give you the best outcome for the lowest price point. It's about value for the cheapest fees. So, we'll never compete on fees. We're going to compete – what I mean by that is on the lowest price. We think fees matter, but the way you invest your strategy matters more.
Luukko: Just to clarify those fees that you quoted, those are the ETF fees and those are – do not include the advisor compensation, which is in line with the industry standards.
Seif: So, we believe – we have a management fee on our ETF that is accessible by every industry advisor, our F-Series, which is available for every investment and advisor on FundSERV and then our advisor A-Series which has a trailer embedded on the products as well, which is, so the fees. We are agnostic to how someone uses us because we charge the exact same management fee across all of our units, all of our series.
But what we care about is them using a defective book of business. It is actually one of the big novel things that we've done really. I think you made a comment about it. We believe that ETFs and mutual funds have gotten this, competitive thing about them and I think that's wrong.
ETFs are a mutual fund. It just happens to trade on an exchange and a mutual fund is on FundSERV. So what we cared about was bringing a product that is accessible by an advisor, the way they want to access it. So if they want to use us with their fee based accounts they can use our ETF or our FundSERV; if they want to use us for – with their trailer fee accounts, they can use us with their – in a Series A. But it's about their business and our product fitting into what they do, not about us telling them that an ETF fits here and a mutual fund fits there.
Luukko: We should also note that your funds come in a corporate class structure so that you can switch from one to the other without triggering an immediate capital gains event. that said, you have got your first five funds launched in September and that's not a lot of choices to do switching on, but I gather there is more on the way. What's next for Purpose?
Seif: Well, we have got a lot of things that we’re building. I mean we've – our goal is to bring really high quality product. We are not going to be everything to everybody. So, that's one of the key disciplines. I don’t – you will never see us having 50 or 60 investment funds in the marketplace. But we're going to bring quality. So we want to build products that are ultimately going to be in both the traditional space, the long-only, the alternative space so things are going to be much more focused on risk management and hedging out market risks.
And then on the absolute return portfolio size, we believe that absolute returns are the way clients really think and our portfolios are going to be designed around absolute returns. So, you are going to see a continuation of that kind of growth, so, around portfolio solutions, alternative solutions and then traditional long-only solutions. And we think we've got a great set of investment funds that are the first five [offerings] and they allow a client to build a really well-diversified portfolio.
And then outside of that, things that we are looking at, so we're launching a high interest savings cash ETF that will be not in the core, but it will be outside of the core. We're launching a short duration global bond ETF, very attractive global bond with a short duration term. And then a short duration emerging market bond ETF, that again will allow the investor to get exposure to a, global emerging market currencies and bond in interest rates, but without having to take the interest rate duration risk of those.
Luukko: Som, thanks very much for this, and thank you for watching.