Investment manager Emerge Canada Inc. will wind down its lineup of exchange traded funds by Dec. 20, after a last-ditch effort to sell the company fell through.
Six months ago, regulators found that Emerge Canada did not have enough working capital and suspended its operating licence.
“Emerge Canada has worked tirelessly to seek to resolve these deficiencies but has been unable to do so,” the company said in a release Thursday. “As a result, Emerge Canada has decided it is in the best interest of investors to terminate the ETFs.”
The Toronto-based company spent the past several months in discussions with a handful of potential buyers including several Canadian asset managers, according to two sources familiar with the matter. The Globe and Mail is not identifying the sources because they are not authorized to speak publicly about the discussions.
However, the company confirmed Thursday that there was not enough time to close a deal with interested parties. Emerge Canada said an agreement would have pushed back the date investors would receive their funds into 2024.
On April 14, the Ontario Securities Commission imposed a temporary trading halt – known as a cease-trade order – on the company’s 11 ETFs. At the same time, The Globe reported that Emerge Canada, which manages about $118-million in assets, owed a total of $2.53-million to its six Emerge ARK funds.
A month later, the OSC revealed that the amount was far higher than previously disclosed – with Emerge Canada owing $5.5-million to its own ETFs. The OSC decision also disclosed that Emerge Canada is short of cash because it hasn’t collected money owed to it by its U.S.-based parent company, Emerge Capital Management Inc.
Emerge ETFs will be delisted from the Cboe Canada exchange around Oct. 23. Because of the cease-trade order, the ETFs have not traded or issued any new units since April 6.
The company says the assets of the ETFs will be liquidated by Dec. 20, and investors will receive the net proceeds “less all liabilities and all expenses incurred in connection with the dissolution of the ETF, on a pro-rata basis.”
While Emerge Canada owes money to the funds, the wind-down can still occur. It agreed to pay an amount owing to some ETFs, but has not repaid it as of Thursday. However, Emerge Canada will still owe that money to the investors if it fails to pay it back before the funds close, the company statement said.
In a May 10 order, Debra Foubert, director of the OSC’s compliance and registrant regulation branch, suspended Emerge Canada from being an investment fund manager, a portfolio manager and an exempt market dealer.
The group of investment funds is linked to Cathie Wood, a prominent U.S. investor and chief executive officer of ARK Investment Management LLC. ARK is a subadviser to U.S.-based Emerge Capital, which in turn is a subadviser to Emerge Canada.
The cease-trade order prevented owners of the ARK ETFs from cashing out this summer after three months of great performance – and locked in some painful losses as the calendar turned to fall.
Data from Morningstar Direct shows that all six Emerge ARK funds posted positive returns in May, June and July. In certain one-month periods, Emerge ARK funds returned well over 10 per cent. In July, four of the six did so.
By July 30, every ARK ETF had a better since-inception performance than they had at the end of March. But investors were unable to sell to take advantage of those gains.
In August and September, fortunes turned: All six ARK funds lost money in both months. In some cases, they were down by double digits. The Emerge ARK Genomics & Biotech ETF lost 12.19 per cent in August and another 13.16 per cent in September, according to Morningstar Direct.
By Sept. 30, four of the six ARK funds had worse lifetime performance than they had at the end of March.
The OSC also confirmed that Emerge Canada continues to collect management fees on the funds while the cease-trade order is in effect.
In its most recent public disclosures, Emerge Canada has said that its management fee for the six ARK funds, as well as five funds branded “Empower,” is an annual charge of 0.8 per cent of assets in the funds. The Globe estimates that Emerge Canada has collected somewhere between $400,000 and $500,000 in management fees in the past six months, based on asset figures provided by Morningstar Direct.
While its Empower funds still exist in Canada, over the summer, Emerge Capital wound down the five U.S.-based, U.S.-traded versions of its Empower funds.
In its June 16 announcement of the plan to U.S. investors, Emerge Capital, based in Buffalo, said a majority of the board of trustees of Emerge ETF Trust approved a plan of liquidation. The trustees said they decided it was in the best interests of the funds and their shareholders.
After the liquidation, Emerge ETF Trust filed documents with the U.S. Securities and Exchange Commission on July 20 to delist and deregister the funds.