Guardian Capital brings ETF investment strategies in-house

Guardian Capital LP has launched new products to bring investment strategies that it has long offered through an external sub-advisory agreement in-house, the firm announced on Tuesday.

The Toronto-based asset manager has rolled out the new Guardian i³ Canadian Dividend Growth Fund, available in A, F and ETF series (TSX: GICD).

It has also introduced an ETF series for the Guardian i³ Global Dividend Growth Fund (TSX: GIGD), along with a U.S.-dollar F series for that fund and the Guardian Fundamental Global Equity Fund.

The launches of GICD and GIGD, in particular, come as Guardian Capital’s sub-advisory responsibilities for two ETFs managed by Global X Investments Canada Inc. near an end, with Global X’s corporate sibling — Mirae Asset Global Investments (USA) LLC (Mirae Asset USA) — set to assume the sub-advisory responsibilities of the funds on July 1.

Guardian Capital has acted as the sub-advisor for the Global X Active Canadian Dividend ETF (TSX: HAL) and Global X Active Global Dividend ETF (TSX: HAZ) for roughly 15 years. Its replacement as sub-advisor for the funds is part of a broader industry-wide trend of large asset managers insourcing their sub-advisory work as they seek to cut costs and leverage their own investment management expertise, while asset managers that have acted as external sub-advisors for other firms grow their own product shelves.

Adam Cilio, senior portfolio manager with Guardian Capital in Toronto, said his firm has wanted to bring its Canadian dividend and global dividend ETF investment strategies onto its own platform “for quite a long time,” but it couldn’t because of “outside exclusive distribution rights.”

“But now, we can internalize assets on our side, and we’re excited to have [these mandates] back on our platform,” Cilio said in an interview.

“I look at it as … Marvel getting Spider-Man back from Sony, because it’s allowing us to now further consolidate our product relationships with Guardian clients.”

Guardian Capital is still serving as a sub-advisor for funds offered by BMO Global Asset Management and NEI Investments, in addition to “a number of smaller relationships,” a spokesperson said in a statement.

An ‘amicable’ split

Cilio called the end of the sub-advisory relationship between Guardian, which was recently acquired by Desjardins Global Asset Management, and Global X “very amicable.”

Jonathan McGuire, vice-president, communications with Global X, echoed that comment.

“The decision was amicable and we are very excited about the future of these funds,” he said in a written statement, referring to HAL and HAZ.

“Overall, it comes down to the global strength that our parent company Mirae Asset delivers, which includes the ownership of Wealthspot, a proprietary and powerful AI technology that is now being leveraged by the sub-advisor of these funds, Mirae Asset USA.”

McGuire noted that internalizing this sub-advisory work within the Mirae Asset network, which includes both Global X and Mirae Asset USA, “also brings certain cost efficiencies that we are pleased to pass along to investors in HAZ and HAL.” Both funds will see their fees reduced when the sub-advisory changeover takes effect on July 1, with HAL’s management fee dropping to 0.35% from 0.55% and HAZ’s dropping to 0.5% from 0.65%.

Asked how Guardian Capital’s GICD and GIGD may fare in the marketplace alongside funds from Global X and other competing providers, Cilio said he believes that the scale Guardian Capital offers, along with the 0.5% management fees for its new ETF series, are “quite competitive.”

He also noted that the funds will leverage what he described as the firm’s three capabilities — artificial intelligence, human intelligence and innovation — to deliver dividend income and capital growth.

“We use AI to help us predict quality earnings growth going forward, and we use AI to help us predict quality dividend growth going forward, so we can gear the portfolio towards those outcomes,” Cilio explained.

Guardian Capital’s i³ investments team will incorporate AI into their analytics model to screen hundreds of Canadian and global companies to build the portfolios of the Guardian i³ Canadian Dividend Growth Fund and Guardian i³ Global Dividend Growth Fund.

Cilio noted that the portfolio managers on the team have a decade’s worth of experience using AI in the investment selection process and they apply their judgment and risk management at every stage.

ETF industry grows in scale

Daniel Straus, managing director, ETF research with National Bank Capital Markets in Toronto, said the sub-advisory agreement between Guardian Capital and Global X coming to an end is part of a wider industry trend that’s been taking shape in Canada’s ETF industry over the past few years.

“This is an example of the ETF industry growing in scale to the point that large, incumbent managers are able to in-house a lot of their expertise,” Straus said in an interview.

“And this paradoxically benefits the whole ecosystem actually, because it means that the smaller providers are able to launch full-fledged businesses of their own.”

Straus said it used to be “very common” for Canada’s largest ETF providers to partner with smaller asset managers or even established asset managers with small or non-existent ETF businesses to offer ETFs, as those smaller managers sought to “dip their toes in the water” of the ETF industry.

However, he said a shift has started to occur in recent years as large ETF providers seek to cut costs and increase margins while smaller managers simultaneously look to establish their own ETF businesses.

“[Global X, formerly known as Horizons ETFs] has launched at least 30 ETFs sub-advised by external managers. We’re talking Fiera, Guardian, Forstrong, CIBC,” Straus said, listing a few.

“Over time, many of these sub-advisors, after having … achieved success in the ETF market, went on to launch their own ETF businesses with Horizons’ blessing. So, this was a very kind of symbiotic business arrangement between the sub-advisor and the ETF manager.”

At the same time, he said large ETF providers have been placing a greater focus on active management and have brought this expertise in-house, as well as, in some cases, their own index providers.

“Mirae has its own index shop. They used to sub-contract the indexing to companies like S&P, MSCI, some of the more low-cost indexers like Solactive, but now they don’t even have to pay Solactive necessarily” Straus said, because “they can use their own in-house index.”

And while not all sub-advisors turned ETF providers will go on to see the same success as their predecessors, he said the more fund managers, the merrier.

“The Street is one that is very competitive, but in many ways, it’s got some friendly symbiotic relationships that work to the advantage of both parties, in addition to investors,” Straus said.