New mutual funds designed to provide benefits of hedge funds without the shortcomingsBy Susan Yellin | March 12 2013 08:59PM
“Ongoing volatility” has become almost a standard description of the financial markets these days, causing great discomfort among most investors. But ONE Financial CEO Jeffrey O’Brien believes some innovative product structuring at his Toronto-based firm can make investors smile even when times are bad.
“We always try to structure products that make investors take on less risk for the kind of reward they’re pursuing,” says Mr. O’Brien. “Now we have the only mutual fund family where investors can get excited when the stock markets fall.”
Mr. O’Brien is referring to his company’s new line of investments called the All-Weather Profit Family. The 10 mutual funds, six wrap portfolios and two protected portfolios offer upside potential when markets both rise and fall, basically providing the benefits of hedge funds. But while hedge funds are not regulated and often are not liquid, they do provide one major advantage. “The big benefit of hedge funds is that when everyone else is getting massacred from the markets tanking, hedge funds have the ability to go short and have the ability to take advantage of the markets going down. What we’ve done is try to address all the shortcomings of hedge funds by offering long/short mutual funds that are fully regulated, fully transparent, fully audited and offer daily liquidity so you can cash in or out any time you want.”
While long-short funds are not new, they have been previously available only to institutions, pension funds and ultra-high net worth individuals, while the new fund line has a minimum of $500. Withdrawals in the family are taxed at a capital gains rate and there are monthly income options.
ONE Financial launched the new line in November and Mr. O’Brien expects to meet the company’s goal of $1 billion in assets in the new family’s first three years.
He is particularly proud of the fact that all ONE Financial funds are focused on absolute returns rather than relative returns, as is the case with most long mutual funds. “We don’t compare our performance to any index because we don’t think investors care if you outperform the index if your portfolio is down 20 per cent. If the index went down 25 per cent and your advisor tells you he did a great job because your fund only went down 20 per cent, I don’t think your clients think you did a great job. So that’s the entire premise for our offering.
“It’s our job to deliver positive returns. That’s not saying there won’t be some months that aren’t down months, but over a reasonable period of time, on an annual basis, we should be delivering positive returns.”
Mr. O’Brien, who started ONE Financial in 2001, is the epitome of entrepreneurialism. In high school, he started a street vending company with 15 of his friends selling peanuts around what was then called the Skydome. In university, he began a landscape construction company, raking in $1 million in revenue in just one summer.
After graduating at age 22 from McMaster University in Hamilton with a degree in business, he worked for RBC Dominion Securities for three years, earned his CFA, then sold his book of business and founded ONE Financial.
“Asset management is definitely my life’s work,” says Mr. O’Brien, 37. “The exciting thing is getting to react to market conditions, create new developments in the investment markets and create products that capitalize on opportunities and provide investors with better ways to invest.”
With a tagline of “wealth through innovation,” ONE Financial set out to find new products to satisfy investors during times of lingering uncertainty.
When he first started his company, Mr. O’Brien took the premise of segregated funds with their upside and principal guarantee and translated them into Principal Protected Notes (PPN). The PPN market in Canada was sparse in 2002 when ONE Financial brought in the first PPN available to all advisors and investors. Within the next few years, the company had raised just over $300 million in PPNs. Others soon caught on and today the entire PPN market in Canada is around $30 billion, said Mr. O’Brien.
“ONE Financial was always a pioneer in that space and we brought new structures that brought new benefits that hadn’t been available in Canada. We also launched the first PPN that provided a coupon – an income stream – whereas previously all PPNs paid out at maturity. And we launched the first PPN that guaranteed daily profits and not just the original principal. So we brought a lot of new structures that were well received by markets. They were always copied by the big banks and so the space got very popular, very quickly.”
The company then began a real estate fund and over the following five years raised $50 million in transactions for its condo development company.
“Given current market volatility and uncertainty, it’s important for advisors to ask themselves what they are doing for their clients to position them in case we have a downturn in the markets,” says O’Brien. He notes that with inflation, investors are losing purchasing power by putting their money into GICs or bonds.
“So what’s important is to figure out ways to protect the downside without sacrificing their upside return potential. That’s what our products are designed to do – provide the upside return potential that you might get from the stock markets when they’re in the double digits – but also to provide the potential to make money when markets do turn down.”