I’m picking on Claymore Investments again. I don’t have a thing about them, but they’re hard to ignore because they advertise a lot and are releasing a steady stream of new products. They are also an interesting firm in that they are transitioning exchange-traded funds (ETFs) from index products to actively-managed funds using a quantitative approach.

Claymore has recently come out with two balanced funds that use Claymore and iShares ETFs to make up the portfolio. The income and growth-oriented funds both hold 13 ETFs. The asset mix is actively managed by an outside firm, Sabrient, which is a quant shop out of California. Sabrient rebalances quarterly and presumably adjusts the mix so as to emphasize markets, sectors and security types that will provide the maximum return. I think I’ve got this last point right, although it’s not clear to me from any of the documentation as to whether they do this or not. The fact that the fund has ranges for each asset class makes me think that Sabrient makes changes to the base mix.

There are a few noteworthy things about these funds:

• These are actively-managed balanced funds. The underlying Claymore ETFs aren’t actively managed day to day, but their design and initial setup is driven by quantitative modeling (active). And in these two products, the asset mix is actively managed by Sabrient. Having said that, some of the assets are allocated to index products (i.e. the iShares units).
• Fee disclosure is horrendous – The fee on the fund is disclosed as being 0.70% and the selling document says “no duplication of underlying fees on Claymore ETFs.” That sounds good, except 50% of the income-oriented fund is in iShare units, which charge their fees. For instance, the fund has a 20% allocation to the iShares Canadian Short Bond Index Fund which has a fee of 0.25%, so effectively the unitholder is paying 0.95% (0.70% + 0.25%) for that (indexed) portion of the fund. Overall, I calculate the income fund has an adjusted MER of 0.91% (taking into account two layers of fees on the iShares holdings), which is expensive for this type of asset mix. Because Claymore offers more equity products, iShares make up only 30% of the growth fund. It that case, the fund’s adjusted MER is about 0.83%.
• Claymore is proud to shroud. The term ‘shroud’ comes from an earlier posting (Structured Products - Proud to Shroud) in which I referred to a new term invented by two academics from the U.S. They defined shrouding as “hiding key information from consumers." In the case of these two funds, the MERs do not accurately reflect the fees clients are paying. Whether it be the selling document or Claymore’s customer service desk, they never explicitly acknowledge the two layers of fees.

On the first of my three points, the evolution of ETFs is inevitable and could make for some very good products. It’s important, however, that clients know the fund is actively managed so they have the appropriate expectations. Then they will also understand why they are paying higher fees than is typical of an indexed ETF. If investors don’t want a quant-based asset allocation product, then they can put together a very cheap, truly-indexed balanced fund themselves. The fees on such a product would be less than half of the Claymore balanced funds. Or if the investor wanted to stay with active management, they could buy low cost mutual funds for about the same price as the Claymore balanced funds.

As for disclosure, I just wish increasingly influential companies like Claymore would be more forthcoming on fees. With these two funds, the real fees are meaningfully different from what’s advertised. I guess when shrouding is deeply entrenched, it’s hard to shake off.