NexGen aims to build a better mousetrap

A year after ‘retiring’ from Mackenzie Financial. Jim Hunter has returned to the industry. He’s not back for another kick at the same can; he’s back to reshape the ways funds are structured. But will anyone understand what he’s trying to do?

Hunter is aiming to design products to alleviate the annual tax burden associated with traditional mutual funds when held in a taxable account. “Mutual administration and management is a good thing, but mutual taxation has not been a good thing and I wanted to solve that problem, and I have,” he says.

Still in his early-50’s, Hunter spent the last year working with tax lawyers and accountants to come up with a solution that would take the tax planning burden off the individual. As the former head of Mackenzie, Hunter is no stranger to innovation. In the ‘old days,’ as he likes to call them, he helped build clone funds to deal with the foreign content limitations and he built structures to enhance deferred loads. Innovations which no doubt helped Mackenzie grow under his watch from about $8 billion to more than $46 billion in assets.

“We’re having fun,” he says from his office, which neighbours Conrad Black’s former command centre on Toronto Street in downtown Toronto.

Oddly, this isn’t the first time a revolution has been fought on Toronto Street. The last one involved people who were associated with another Mackenzie — William Lyon instead of Mackenzie Financial. Steps away from Hunter’s new office there’s a plaque marking the spot where supporters of William Lyon Mackenzie’s ill-fated 1837 rebellion, including Samuel Lount and Peter Matthews, were hanged.

It’s early days, but Hunter’s venture, NexGen Financial L.P., doesn’t appear headed for the same fate. On Wednesday, NexGen announced that it had completed a private placement of $24 million through the Covington Group, money that will be used to form the partnership’s capital base. Not bad for a start-up.

The company’s 13 funds are already available for sale, although it will take some time before they find their way on to the product shelf.

The new funds are unique, to say the least. Hunter has even asked to have his approach considered for a methods and process patent in the U.S.

The funds allow individual unit holders to opt for the type of revenue stream that would be most tax advantaged to them. “What we are basically doing is doing sophisticated tax planning for people in mutual funds within the structure. They don’t have to do it individually other than to select the type of income they want,” he says.

In simple terms, it purifies the income streams. As Hunter points out, current fund have what he terms a “Heinz 57” of income distributions. Hunter uses a preference structure to match the type of distributions to the right client. NexGen will offer four types of tax-managed funds for each fund asset class, including: capital gains, return of capital gains, dividends tax credit and compound growth.

This type of planning is possible using existing funds, but it would be much more challenging.

But are these products too sophisticated for the market? “That is the major concern,” concedes Hunter. “To understand what we are doing in the structure you would have to be a tax expert.” And few who look at the funds fall into that category, since they’re intended for the general marketplace.

To address this, NexGen has hired someone who isn’t a tax expert to write the marketing materials for advisors. The plan is to provide a variety of straightforward cases that can help the advisor to match the funds to their clients. “It’s very simple to understand,” he says.

Based on focus groups, Hunter says it takes about an hour before the advisor really understands what NexGen is trying to do. The marketing materials should be ready by the end of summer, after which Hunter hopes to start to get advisors up to speed through a series of seminars and road shows.

High-net worth individuals will likely have the most interest in NexGen’s funds because taxes are more top of mind. Although Hunter adds these funds convey benefits to retirees, families with non-working spouses and education savings plans.

The funds will be managed by a combination of in house investment managers and sub-advisors. Selective Asset Management, led by Robert McWhirter and J. Zechner Associates, will act as sub-advisors on five and six mandates respectively.

NewGen’s investment team is led by newcomer Jeffrey Young, a CFA and a graduate of the investment management program at Simon Fraser University. Young has about 10 years experience working for with RBC and TD.

Front-end and deferred option structures are available for all funds. Fees for most investors range from 1 to 2%, with a discount for those who invest $10,000 and maintain their holding for five years.

Another plus for investors who get in early is NexGen’s “founder’s benefit,” in which investors will receive a notional option, along the lines of a customer rewards program, that allows them to participate alongside the success of the manager.

While Hunter is known for sitting on boards and participating in industry associations, he’s now devoting all of his time to getting NexGen off the ground. He’s stepped back from all of his duties save one, his seat on the advisory board of the Richard Ivey School of Business at the University of Western Ontario.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(05/11/06)

Mark Brown

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