On August 13th, we published a piece titled Proud to Shroud II – Claymore Balanced Funds, in which we discussed two new ETFs being offered by Claymore Investments. The new funds prompted us to make two comments. First, these funds highlighted the fact that the ETF world is moving away from pure indexing and is now providing funds that are actively managed. Claymore is an industry leader in this regard. The asset allocation of their new funds is being determined by a quantitative research firm in the U.S. Second, we felt that Claymore’s disclosure on fees was lacking.

Shortly after that posting, I received a response from Som Seif, the President of Claymore Investments. With Som’s permission, we are belatedly publishing his email (Note: the belatedness was due to my operation and his honeymoon).

Dear Tom, I have hesitated in the past in emailing you on several of your blogs/articles that have been surrounding Claymore, but I wanted to touch base on this latest one, because I am a little frustrated. I generally am not bothered by bloggers who are voicing their opinions, but I do get upset when I see blogs that are continually picking at other players in the industry. I respect what you have done in the industry and have always been a fan of your columns in the G&M, because I believe in the same thing as you; bring low fee product to Canadian investors.

However, I just wanted to clarify some points from your blog on the Core Portfolio Series. On these funds, we have outlined that the fees are 70 bps, and we are controlling what we can, which is rebating 100% of any Claymore ETF underlying. Today, we do not have any Fixed Income ETFs, and therefore are using iShares for a portion of the portfolios. Unfortunately, we are not able to discount our fee for the iShares holdings (believe me, we looked hard at it). However, we are being as plain and transparent with the fees as we can. We do not know what the effective end cost will be on the year (there is no guarantee that these iShares ETFs will be in the portfolio or represent the same proportion next quarter, and if Claymore brings Fixed Income ETFs, then they may be in their place) and therefore it would be difficult to outline exactly what this will be. However, Claymore generates no more than 70 bps, period.

Second, it is very common for a mutual fund (globally) to hold ETFs underlying, whether for cash management or strategic investment. I have never seen the counting of the underlying ETF MER in the mutual fund cost. In fact, holding an ETF in my mind is no different than holding ONEX or Blackstone, or some other Investment management based corporate stock. This is because ETFs are designed to give you an efficient exposure to a market. What we are doing on the Core Portfolio’s is no different than this or any other mutual fund.

You mentioned that the alternative to using these funds is to a) build yourself or b) use low cost mutual funds. With respect to the first point, we agree, that those who can do it themselves, we urge them to do it themselves. But we find that many smaller investors and busy investors don’t have time or the capital to build and manage a portfolio. These Core Portfolios work great for them. Second, I haven’t found too many low cost Wrap Mutual fund programs that you can buy for under 90 bps, if that (all in including expenses). In fact, there are F-Class wrap funds, but as you know you can’t buy these from discount brokerages, and if you want to buy through an Advisor, you pay an advisor fee. So, for DIY investors, it’s a great option.

Finally, you seem to gloss over the fact that all of Claymore’s ETFs do not charge operating expenses on the fund (i.e. Claymore pays these). A mutual fund, which you are pointing people to, states the Management Fee, and then has operating expenses floating, which could be 3 bps or 50 bps in a year. I think this is a major point, and one that you are unfairly leaving out when you bring up lack of transparency on Claymore’s ETFs relative to the industry.

I hope you take this response in good faith and understand that we, just like you, are trying to run a low margin, asset management business that is competing against powerful and wealthy organizations with distribution and brand. However, we are finding success, as I suspect you are too, by focusing on bringing the best product possible for the investor and investment choice away for Canadians.

I am happy to discuss with you anytime at your convenience.

Regards,
Som

Som Seif, CFA
President,
Claymore Investments, Inc.