Payout vehicle brings PowerShares to Canada

Continuing its message that there’s more to the company than Trimark Investments, AIM Trimark has launched a new line of retirement income portfolios that will feature a number of prominent investment names owned by its parent company Invesco, including exchange-traded funds.

The company announced the launch of the Invesco Trimark Retirement Payout Portfolios on Monday. It’s a non-guaranteed retirement income product — similar to those launched recently by Fidelity and BMO — that combines Trimark, AIM and Invesco mutual funds with PowerShares ETFs.

Investors can choose from four portfolio horizon dates (maturing in 2023, 2028, 2033 or 2038) and have the option of receiving tax-efficient monthly cash flow from their investment. As with any other target-date program, the long-dated portfolios are weighted more heavily towards equities, rebalancing to a more conservative fixed-income based portfolio as the maturity date nears.

What differentiates the Invesco offering from the growing field, is the inclusion of ETFs in the portfolio. PowerShares is one of the largest players in the U.S. ETF space. Its entrance into Canada, albeit limited to this portfolio, should pique the curiosity of advisors and ETF enthusiasts.

John Ciampaglia, vice-president of product development for AIM Trimark, says the ETFs in the payout portfolios are not the traditional cap-weighted index funds; they employ fundamental indexing instead, with an eye toward outperforming the main index.

“We think that these kinds of strategies work well when they are paired with the right active managers. What we’ve done is try to look for certain ETFs that have very low overlap of holdings with their asset managers and very good correlations with our active managers,” he says. “This way they are really behaving differently at different points in the cycle.”

The ETFs also fall in line with the heavy foreign investment mandate of the portfolios. Some of the ETFs include the FTSE RAFI US 1000 Portfolio and FTSE RAFI Emerging Markets Portfolio. These are complemented by non-Trimark investment mandates, such as the Invesco Global Real Estates Fund. The portfolios are currency-hedged to reduce volatility.

“Our global real-estate team is one of the largest real estate managers in the world,” Ciampaglia says. “It really reflects where our organization is moving towards, which is a more global platform, versus the past when where we were a more ‘siloed’ organization.”

Industry analyst Dan Hallett, president of Dan Hallett and Associates, doesn’t see the real benefit in having the PowerShares in these portfolios because he doesn’t see the cost benefit being translated on the fund’s final management expense ratio.

“The big benefit of passive investments and buying ETFs like that are the fact that they are cheap. It’s a repeatable strategy and requires virtually no human intervention, so it’s cheap to do,” he says. “Those cost savings are not being passed down from what I can tell, based on the management expense.”

Ciampaglia refutes this criticism, saying the standard MER for the longest-time horizon fund for an investor with less than $100,000 would be about 2.25%, a competitive rate particularly compared to guaranteed minimum withdrawal benefit products (GMWBs) offered by insurers.

The Invesco portfolios are being positioned not as a competitor to GMWBs, but as a means to save for discretionary expenses in retirement.

Ciampaglia concedes the ETFs only reduce the management expense marginally.

“Underlying management fees will be helped by the ETFs, but the reason for the ETFs is not to get the lowest cost-point model. We are not talking about the traditional passive ETFs where lowest cost-point is the law,” he says. “They help, but this is mostly about the diversification story.”

Hallett contends fundamental indexing is not much more expensive to do than regular passive indexing.

“Fundamental indexing is still looking at all of the stocks in the index. The only thing that changes is the weighting; it’s weighted on fundamental characteristics instead of just market-cap. You’re still buying all the stocks in the index,” he says.

Hallett says when advisors are opting for these new target-date portfolio products they are primarily doing so because of the convenience of having an asset manager design them. He says it is possible to create customized retirement income portfolios for clients. He also notes advisors have to plan for longevity risk.

“The prospectus makes a point of saying there is no guarantee and this should be used as only a part of an overall retirement planning strategy,” he says. “You don’t know when you’re going to die, so having all of your assets paid out in a defined time frame from day one is just not something that is feasible. Or if it’s done you still don’t know how you’re going spend that money, because you’re not sure how long you’re going to be around. You can’t just decide to use these products for your retirement and end of story.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/02/08)

Mark Noble