Michael White of Picton Mahoney shares thoughts on CSA's liquid-alternative blanket relief order and industry's likely next steps
It’s been two years since Canadian regulators opened the doors for the development and distribution of liquid-alternative funds across the country, but in many ways, the industry has yet to hit its stride.
Some might argue that the products were introduced before their time. In January 2019, the longest bull run in U.S. stock market history was just two months shy of its 10th year, and arguments for portfolio defence through non-correlated assets and alternative strategies smacked of faint-hearted pessimism. Things changed last year, when the initial onset of the COVID-19 pandemic sparked a 30% top-to-bottom drawdown in the S&P 500; over the course of 2020, assets in Canadian alternative mutual funds swelled from $5.8 billion to $12.2 billion, according to the Investment Funds Industry of Canada (IFIC).
Another hindering factor was an unevenness in regulations, specifically with respect to investment professionals operating within and outside the Investment Industry Regulatory Organization of Canada (IIROC). The proficiency requirements for IIROC advisors, which are set out under National Instrument 81-104 Alternative Mutual Funds, put them well within the parameters set out for the distribution of liquid alternative funds; for advisors outside that channel, however, the requirements were different, and the costs associated with getting up to speed proved very prohibitive.
A late January announcement from the Canadian Securities Administrators (CSA) has effectively narrowed the gap. Through a declaration of blanket relief implemented through local blanket orders, the CSA opened up additional course options for dealing representatives in the Mutual Fund Dealers Association of Canada (MFDA) channel and outside the MFDA channel in Quebec for distributing alternative mutual funds.
“The idea to create bridging courses dedicated to alternative mutual funds for these non-IIROC advisors was one of several proposals by a number of industry groups and trade associations,” said Michael White, portfolio manager, Multi-Asset Strategies, at Picton Mahoney Asset Management (Picton Mahoney). “Not only have the CSA been open and willing to create access for investors for alternative mutual funds, but they've also encouraged the creation of some of this course content. It’s all been part of a very cooperative process that we expect will continue.”
Now, mutual fund dealing representatives across Canada have the option to take bridge courses either through the Canadian Securities Institute (CSI) or the IFSE Institute, the latter of which Picton Mahoney made key contributions to. As White explained, the course builds off a dealing representative’s basic knowledge of mutual funds, introduces concepts to explain what makes alternative investment funds a potential source of non-correlated returns and diversification, and expounds on the instruments and strategies used by alternative funds to achieve those objectives.
“In the IFSE course, for instance, there's seven units. The seventh unit covers due diligence for alternative mutual funds,” White said. “It's not creating the recipe or the checklist for due diligence per se. It's Introducing a lot of suitability and know-your-product concepts surrounding liquid alternatives, and then allowing the dealing representative to lean on their dealer organization to approve certain funds and provide them more due diligence guidelines.”
From White’s vantage point, the blanket relief order has been a very welcome development, particularly among the mutual fund industry where it has been greatly anticipated. Conversations Picton Mahoney has had with MFDA dealers and dealing representatives have been very positive, including inbound calls where the dealer indicates interest in the firm’s liquid alternative funds.
“The progress toward increasing this accessibility to alternative investments has so far been very encouraging. It's been on a timeline that's been fair and exhibits due diligence,” White said. “I would say this news from the end of January is the biggest step regulators have taken so far, with respect to broadening access to liquid alternatives and making them ultimately very inclusive.”
While he declined to comment on what regulators’ next steps should be, White said his firm would likely be turning their attention toward their existing educational materials. For example, a presentation module for alternative investments they would typically deliver to IIROC advisors, for which the latter would receive CE credits, could be repurposed or used as a content foundation to provide independent education to complement the CSI or IFSE bridging courses.
“I think what's probably going to be interesting is just to see how quickly or how broadly this course take-up is,” White said. “We’ll probably need a couple months to see where the dealers are in terms of either mandating or facilitating some of their dealing representatives to take these courses.”
From what he’s seen and heard, many non-IIROC dealers will need a helping hand from an external educator with the capacity to build learning materials focused on liquid alternatives. Given its established history and reputation for advocacy and education with respect to alternative investments, Picton Mahoney is in a strong position to share its views with firms and representatives looking to learn more about alternative strategies.
“This is not something that needs to be kept under lock and key. The U.S., Europe – we’ve had alternative funds in those markets for many, many years,” White said. “In a way, Canada has been allowed to sort of watch other markets develop, and we could copy those, amend, and then fix as we needed to.”
