TUESDAY, FEBRUARY 18, 2020 | THEGLOBEANDMAILO B9
GLOBEINVESTOR
REPORTONBUSINESS|W
ithout much fanfare,
Canada’s securities regu-
lators last year re-
vamped the rules for mutual
funds and exchange-traded
funds, allowing for the creation
of liquid alternative strategies
that utilize many of the tactics
wielded by hedge funds for
wealthy investors.
It has been a year since the
“liquid alts” were approved for
fund investors and their intro-
duction and take-up by retail in-
vestors was slow in 2019 because
equity markets were strong.
That looks to be changing.
“We seem to have kind of
rounded a corner in terms of the
product development around al-
ternate assets,” says Daniel
Straus, vice-president of ETFs and
financial products research at Na-
tional Bank Financial Inc.
According to the Canadian As-
sociation of Alternative Strate-
gies and Assets, investors have
put a total of $5.27-billion into 82
funds as of Sept. 30, 2019. That fig-
ure includes both alternative mu-
tual funds and ETFs, and is
dwarfed by the $1.63-trillion in
mutual funds and $205.1-billion
in ETFs in Canada at the end of
2019.
Easing of rules concerning
concentration, leverage and uti-
lizing long and short positions,
allow for the creation of funds
that are “not a stock, not a bond,
but uncorrelated from both and
an ingredient that would help im-
prove an overall portfolio,” Mr.
Straus says. “It really allows a new
generation of hedge fund style
mutual funds and ETFs to be born- and fund issues have followed
up with dozens of filings.”
The Toronto-based ETF strate-
gist points to a number of new al-
ternative asset ETFs that are
available to investors that utilize
a hedge fund approach.
Those include four alternative-
asset ETFs from Picton Mahoney;
the Picton Mahoney Fortified
Multi-Strategy Alternative Fund
ETF (PFMS), the Picton Mahoney
Fortified Market Neutral Alterna-
tive Fund ETF (PFMN), the Picton
Mahoney Fort Income Alterna-
tive Fund (PFIA) and the Picton
Mahoney Fortified Active Exten-
sion Alternative Fund (PFAE).
The funds are intended to reduce
downside exposure, while build-
ing wealth over the long term re-
gardless of overall market condi-
tions – hence the term “market
neutral” – according to the firm.
“They are a very storied asset
manager that has a track record
of successfully managing hedge
fund style investments,” Mr.
Straus says. “So seeing if they can
deliver what they are known for
in an ETF form is something that
we are excited to observe.”
Mr. Straus also singles out AGF
Management Ltd., which
launched a trio of liquid alterna-
tive funds in October: the AGFiQ
US Market Neutral Anti-Beta
CAD-Hedged ETF (QBTL); the
AGFiQ US Long/Short Dividend
Income CAD-Hedged ETF
(QUDV), and the AGFiQ US Long/
Short Dividend Income CAD-
Hedged Fund.
Last year, National Bank
launched a liquid alternative
fund, the NBI Liquid Alternatives
ETF (NALT), designed to generate
a positive return with a low corre-
lation to global equities and with
lower volatility. Since its launch
at $20 a unit last year, the ETF has
attracted approximately $35.5-
million and is currently trading
around $21.
“That one uses futures to
mathematically track a very di-
versified set of underlying asset
classes to create a kind of diversi-
fier or market neutral profile,”
Mr. Straus says. “We consider it an
active alternative style mutual
fund available as an ETF.”
He also points to Calgary-
based investment firm, Acceler-
ate Financial Technologies Inc.,
which last year rolled out three
hedge-fund style alternative ETFs
that, instead of having manage-
ment fees, collect a performance
fee if they beat set benchmarks.
“The idea behind these ETFs is
that the managers are signalling
to potential investors that their
success is very much tied to in-
vestors’ success,” Mr. Straus says.
“If the ETFs don’t perform, they
make no money.”
The firm’s slate includes: the
Accelerate Private Equity Alpha
Fund (ALFA), which uses deriva-
tives and cash for its short and
long strategy for U.S. equities; the
Accelerate Enhanced Canadian
Benchmark Alternative Fund
(ATSX), which aims to beat the
broader Canadian equity market
with a long-short approach; and
the Accelerate Absolute Return
Hedge Fund (HDGE), which in-
vests primarily in equities expect-
ed to outperform the Canadianequity market and while selling
short some equities it expects to
lag the market.
Alternative ETFs that take a
market-neutral approach appear
to have had “the most success to
date,” according to Mark Raes,
head of product with BMO Global
Asset Management in Toronto.
Investors understand the ben-
efits that an alternative asset
fund can offer, he says, but the
funds have been slow to accumu-
late capital because equity mar-
kets have been buoyant.
“People understand the value
proposition first and foremost,
differentiated returns, therefore
better for your portfolio. It’s just
going to take a little bit of time for
these products to build a track re-
cord and [their popularity is de-
pendent] on what the market is
doing,” he says.
That thirst among investors for
alternative ETFs is apparently
building. Toronto-based CI In-
vestments Inc. recently intro-
duced ETF versions of three liq-
uid alternative mutual funds, cit-
ing investor demand.
“Even though there were mu-
tual fund versions of these prod-
ucts that have existed for about a
year now...a lot of advisors want-
ed an ETF structure as well,” says
Peter Tomiuk, senior vice-presi-
dent of ETF strategy at CI First As-
set, a division of CI Investments.
CI’s new ETF roster is com-
prised of: the CI Lawrence Park
Alternative Investment Grade
Credit ETF (CRED), which invests
mainly in widely traded securi-
ties and investment-grade debt of
institutions in the developed
world and promises a consistent
return with a low correlation to
equity and fixed income mar-kets; the CI Marret Alternative
Absolute Return Bond ETF
(CMAR), which invests in debt
and other income-producing se-
curities internationally and relies
upon a “combination of top-
down macroeconomic analysis
involving the assessment of eco-
nomic, political and market
trends, complemented by a bot-
tom-up company and security-
level analysis;” and the CI Munro
Alternative Global Growth ETF
(CMAG), which invests mainly in
international equities and uses a
long-short equity strategy.
Investors can expect more al-
ternative ETFs from CI Invest-
ments and other investment
firms to continue to experiment
with hedge fund style ETFs. To
date, CI Investments has attract-
ed $1.1-billion for its liquid alter-
native funds. The CI Lawrence
Park Alternative mutual fund
(CIG2190) had a one-year return
of 5.8 per cent and about $433.9-
million in assets under manage-
ment (AUM) as of Jan. 31, while
the CI Marret Absolute Return
Bond fund (CIG4191) saw a return
of 7 per cent and $137.3-million in
AUM and the CI Munro Alterna-
tive Global Growth fund
(CIG2192) had a one-year return
of 13.2 per cent and AUM of
$605.8-million.
“I think it is safe to say that just
with the assets that have been
raised in this space and the de-
mand for – once again where we
are in the market – we do see op-
portunities for growth in the
space,” Mr. Tomiuk says. “We do
look at it as a very exciting space
and are very happy to be early
adopters as well.”SpecialtoTheGlobeandMailTheseETFsofferhedgefund-styleinvesting
Easingofregulations
allowsforcreation
ofassetsthatare‘not
astock,notabond’
PAUL BRENT
H
ealth-care stocks in the
United States have been on
the mend after ailing last
year because of political head-
winds and opioid-related litiga-
tion.
Although political rhetoric
from Democratic Party candi-
dates vying to run in November’s
U.S. presidential election can still
batter stocks, market watchers
still see attractive opportunities
within this diverse sector.
“I’m certainly more bullish this
year because the sector trades at a
significant discount to broader
market and political headwinds
are receding,” says Dean Orrico,
president and chief investment
officer at Middlefield Capital
Corp.
Health-care stocks are typically
viewed as defensive because con-
sumers will still buy these compa-
nies’ products and services during
tough economic times, but they
can also be sensitive to changes in
government regulation.
The sector was hurt last year
partly by Democratic Party con-
tenders, including Senators Ber-
nie Sanders and Elizabeth War-
ren, who champion lower drug
prices and a Medicare-for-all pro-
gram that would eliminate pri-
vate health coverage.
Health care, which lagged the
S&P 500 Total Return index last
year, was the second-worst per-
forming sector after energy. Still,
health care rose by 20.8 per cent
versus 31.49 per cent for the over-
all index thanks to a rebound that
began in October.
Political jitters are likely “going
to be much more modest this year
even though we are in the election
year,” Mr. Orrico says. The sector’s
recovery, he notes, coincided with
Ms. Warren slipping in the polls
and backing away from a full-
blown Medicare-for-all plan.
While “continued banter on
trying to control drug prices” has
hurt the drug makers, hard data
indicate they have not been hik-
ing prices. Rather, it’s the middle-
men who are capturing a lot of
that increase, he says.
The best-performing health-
care segment last year included
companies involved in medical
equipment, life-science tools and
diagnostics because “they’re not
in the crosshairs of Democratic
[Party] politicians,” Mr. Orrico
says.
“Over the past three or four
years, we have continued to over-
weight medical technology,” he
says, referring to his firm’s three
health-care offerings, including
Middlefield Healthcare & Life Sci-
ences ETF (LS-T).
He likes Stryker Corp. (SYK-N),
which offers implants for hip and
knee replacements; Intuitive Sur-
gical Inc. (ISRG-Q), maker of ro-
botic surgical equipment; and Ed-
wards Lifesciences Corp. (EW-N),
which specializes in artificial
heart valves.
Acquisition activity should
continue as big drug makers look
to biotech firms to replenish their
pipeline and get exposure to
emerging areas such as gene-edit-
ing and immuno-oncology (can-
cer therapy), he says. “In gene-ed-
iting, we own CRISPR Therapeut-
ics AG (CRSP-Q), which we think
has promise and could be a take-
out candidate.”
The health-care sector, which is
largely absent in Canada’s stock
market, is also attractive over the
medium and longer terms, says
Paul MacDonald, CIO and portfo-
lio manager at Harvest Portfolios
Group Inc.
Tailwinds include an aging
population, technological inno-
vation among medical device and
drug makers, and potential for
growth in developing markets, he
says.
“We like the large-cap pharma-
ceutical sector – particularly com-
panies focused on innovation –
and because of [attractive] valua-
tions we see there,” says Mr. Mac-Donald, who oversees Harvest
Healthcare Leaders Income ETF
(HHL-T). “We like companies that
spend a lot of their revenue on re-
search and development.”
He favours companies such as
Pfizer Inc. (PFE-N), which has
teamed up with Britain-based
GlaxoSmithKline PLC to combine
their over-the-counter businesses
into a joint-venture to focus on
higher-margin, prescription med-
ications. He also likes Merck & Co.
Inc. (MRK-N), which also plans to
spin off some assets into a new
company to focus on growth driv-
ers, such as its Keytruda cancer
drug.
The medical device and diag-
nostics areas are also compelling,
but investors need to be mindful
of the lofty valuations for some
stocks, Mr. MacDonald notes. “We
like Stryker, Boston Scientific
Corp. (BSX-N) and Medtronic Inc.
(MDT-N).”
Shares of managed-care com-
panies, which provide medical in-
surance but also own pharmacy-
benefits managers and offer other
health-care services, tend to get
volatile amid talk of Medicare-for-
all, he says. However, he likes
UnitedHealth Group Inc. (UNH-
N) because it’s well run and
should continue to be a dominant
player.“Any volatility driven by politi-
cal noise are entry points into the
sector,” he suggests.
If there’s a Democratic sweep in
the U.S. elections this November,
“we could have [more] volatility,”
but chances for major structural
changes in the health-care system
are low, Mr. MacDonald argues.
“There is huge divergence in pol-
icy perspective, not just between
the Democrats and Republicans
... but within each of the parties as
well.”
Soo Romanoff, a health-care
equity research analyst at Mor-
ningstar Inc., remains cautious
because of the election and con-
tinuing litigation, but says there
are some bright spots.
“I view litigation as probably
three-quarters of the way
through, but if you look at last
year, it was a huge negative factor
for a lot of the distributors, some
retail pharmacies and a lot of ge-
neric manufacturers,” Ms. Roma-
noff says.
The health-care information
technology segment is appealing
because it offers “more innova-
tion and growth prospects,” she
says.
In this space, Ms. Romanoff
likes Cerner Corp. (CERN-Q), a
provider of electronic health re-
cords. It has a wide moat becausehospitals or specialty health-care
providers are unlikely to switch to
a competitor as they have spent
tens to hundreds of millions of
dollars to set up their medical-re-
cords systems.
Veeva Systems Inc. (VEEV-N),
which provides cloud-based soft-
ware to help drug companies do
everything from collecting trial
data to managing sales and com-
plying with industry regulations,
is also compelling, she adds. Giv-
en its high valuation, “we would
suggest picking it up opportunis-
tically.”
She sees Israel-based generic
drug giant Teva Pharmaceutical
Industries Ltd. (TEVA-N) as a con-
trarian play. Its stock has plunged
to the US$12-a-share range from
almost US$70 in 2015 as it ac-
quired more debt for an acquisi-
tion, faced opioid-related law-
suits and struggled with falling ge-
neric prices that began stabilizing
only recently.
Teva’s new management has
been shedding low-margin prod-
ucts and adding more specialty
drugs, but smaller, generic com-
panies are valued a lot higher, Ms.
Romanoff notes. “Teva trades on-
ly at about four times forward
earnings.”SpecialtoTheGlobeandMailAttractiveopportunitiesinrecoveringU.S.health-caresector
SHIRLEY WON
Vermont Senator Bernie Sanders is seen at a pharmacy in Windsor, Ont., last July. The U.S. health-care sector was hindered last year partly by
Democratic presidential candidates including Mr. Sanders, who champions lower drug prices and a Medicare-for-all program.BRITTANYGREESON/NYT