Pooled funds bring lower fees for high-net-worth investors

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Typically aimed at high-net-worth investors, pooled funds can fly under the radar. They are not advertised like mutual funds, but investors with sizable assets may want to consider them to help lower their fees and/or diversify their portfolios.

"Generally speaking, once you hit half a million in assets, you should be starting to enjoy lower costs," says Dan Hallett, a vice-president and principal at Oakville, Ont.-based HighView Financial Group.

Pooled funds are essentially private mutual funds that are sold to more sophisticated investors using an offering memorandum rather than a prospectus. Among the investments available are stock and bond funds as well as alternative-strategy offerings including private equity and debt. Investors will need to do some homework to find a suitable investment firm, or deal with an advisor to navigate this space.

Investors generally need to come up with higher minimum investments – often $25,000 to $150,000 – for pooled funds, and that helps to drive down fees, Mr. Hallett says. "It would not be unusual to see pooled funds at 50 basis points cheaper than your standard A-series mutual fund." (A basis point is 1/100th of a percentage point.)

Pooled funds, which have the flexibility to employ complex strategies that include options, are generally sold to accredited investors. To qualify, an individual must have earned more than $200,000 (or $300,000 with a spouse) in each of the previous two years. Also qualifying are individuals with net assets of more than $5-million, which includes real estate, or someone with $1-million in cash and securities.

Some investment-management firms offer pooled funds only to their clients, while others sell through advisory firms. Fund companies, insurers and banks may also have them. Investors can view the performance for some funds on Globeinvestor.com. RBC Investor & Treasury Services also posts a quarterly survey of pooled funds on its website, but its returns are gross-of-fees.

But past performance should not be the sole criteria for choosing pooled funds because it is not indicative of future returns, said Mr. Hallett, who oversees manager research at HighView. "The culture of an organization is also a very important part of due diligence."

For smaller, boutique firms, he also looks at how they manage their business and their ownership structure. If an investment firm, which is growing, has a couple of co-founders who still have 100-per-cent ownership, "that would be a red flag for us," he said.

"It's one thing … to attract quality analysts and portfolio managers, but to retain them, you need to share some of that ownership," Mr. Hallett said.

It's also difficult to generalize about the fee savings, he added. Some funds can be cheap but require a minimum investment of $500,000 to $1-million, while others may have a similar pricing structure to mutual funds and include a trailing commission, he noted. "But if investors are more focused on fees, they can easily go to exchange-traded funds [ETFs] to drive the costs down."

Lorne Zeiler, a portfolio manager with Toronto-based TriDelta Investment Counsel, agreed that ETFs can reduce costs, but their savings will also depend on how investors use them. "Everyone classifies them together, but there is a difference in their fees and liquidity," he said.

Investors can benefit from ETFs such as the iShares S&P/TSX 60, which charges a 0.18-per-cent fee, Mr. Zeiler said.

But ETF charges may not always be inexpensive because investors often like to buy funds with sector or other themes, which carry fees of 0.50 to 0.80 per cent or more, and the bid-ask spread – the difference between the buying and selling price – can easily be 0.50 per cent or higher, he added.

Investment counselling firms, which may run their own pooled funds or deal with external managers, typically charge clients a fee based on their assets managed. For example, "our fees are 1.69 per cent on the first $500,000, and drop to 0.75 per cent at $5-million in assets under management," Mr. Zeiler said.

While TriDelta runs its own pooled funds, it may also recommend that some clients invest 10 to 30 per cent of their portfolios in alternative investments managed by other firms, he added. "We like the private asset investment space in areas such as real estate, mortgage investments and private credit."

For instance, he recommends and is personally invested in the Sprott Bridging Income Fund, Sprott TEC Private Credit Fund, TREZ Capital Yield Trust U.S., TREZ Capital Prime Trust and Timbercreek Four Quadrant Global Real Estate Partners Fund.

These kinds of pooled funds can provide "a high level of income with very little to no correlation with the underlying equity markets," Mr. Zeiler said. "I think that results in some pretty good diversification and volatility reduction in a portfolio."

With these alternative strategies, costs are often higher than for a mutual fund because the managers usually charge a performance fee of up to 20 per cent on the investment profit, he said. "But most have a hurdle: If they don't make a certain underlying return, they don't earn the performance fee."

The downside is that investors might have to give one to six months' notice to redeem units, Mr. Zeiler said. Investors who are used to settling a stock or mutual fund sale after two days may be uncomfortable with that. "We would only put very long-term-focused clients in them."

While pooled funds are typically accessible only to affluent investors, Vancouver-based robo-adviser WealthBar Financial Services Inc. is challenging those perceptions. For a minimum as low as $1,000, its clients have access to pooled products run by Nicola Wealth Management Ltd., which has a minority stake in WealthBar.

This is possible because "we can invest on behalf of clients as the accredited investor" for their segregated accounts, said WealthBar's chief executive officer, Tea Nicola. "We wanted to bring that sophisticated level of investment management to the masses."

WealthBar offers the pooled funds in three private investment portfolios, and fees range from 0.80 per cent to 1.2 per cent.

Among the potential clients are investors older than 50 and those who are nearing retirement, she said. "They will want the reduction in volatility and cash flow from distributions."