Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from sections 2.3(f), 2.3(h), 2.5(2)(a) and 2.5(2)(c) of National Instrument 81-102 – Mutual Funds to permit a mutual fund to use ETFs to invest up to 10 percent of its net assets, in aggregate, in gold and other physical commodities – ETFs will be traded on a Canadian or U.S. stock exchange – subject to 10 percent exposure to physical commodities, in aggregate, and certain conditions
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, ss. 2.3(f) and (h), 2.5(2)(a) and (c), and section 19.1.
October 4, 2013
In the Matter of the Securities Legislation of Ontario (the Jurisdiction)
and
In the Matter of the Process for Exemptive Relief
Applications in Multiple Jurisdictions
and
In the Matter of
Manulife Asset Management Limited
(the Filer)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer for an exemption pursuant to section 19.1 of National Instrument 81-102 – Mutual Funds (NI 81-102) exempting the mutual funds listed in Schedule A attached hereto (each an Existing Fund and, collectively, the Existing Funds), and each future mutual fund managed by the Filer or an affiliate of the Filer that is subject to NI 81-102 and is an asset allocation fund that primarily invests in one or more underlying mutual funds managed by the Filer or by other investment fund managers (together with the Existing Funds, the Manulife Asset Allocation Funds and, individually, a Manulife Asset Allocation Fund) from clauses:
(a) 2.3(f) and (h) of NI 81-102 to permit the Manulife Asset Allocation Funds to invest indirectly in physical commodities (in addition to gold, which is permitted by clause 2.3(e) of NI 81-102) through investments in Commodity ETFs (as defined below);
(b) 2.5(2)(a) and (c) of NI 81-102 to permit the Manulife Asset Allocation Funds to invest in exchange-traded funds (ETFs) traded on a stock exchange in Canada or the United States that have exposure to one or more physical commodities other than gold or silver, on an unlevered basis (Commodity ETFs).
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator (the Principal Regulator) for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Manulife Asset Allocation Funds
The Filer is a corporation governed under the Business Corporations Act (Ontario) and has its head office located in Toronto, Ontario.
The Filer is registered in the categories of commodity trading manager, exempt market dealer, portfolio manager and investment fund manager.
The Filer is or will be the manager of each of the Manulife Asset Allocation Funds. The Filer additionally is, or will be, the portfolio advisor and/or trustee of each Manulife Asset Allocation Fund. Affiliates of the Filer are, or may be, portfolio sub-advisor to a Manulife Asset Allocation Fund.
The Manulife Asset Allocation Funds are mutual funds whose mandates are to provide investors with a variable mix of multiple asset classes such as Canadian, U.S. and/or other foreign equities, bonds, commodities and/or cash equivalents.
Each Manulife Asset Allocation Fund is, or will be, a mutual fund organized and governed under the laws of a jurisdiction of Canada, is, or will be, a reporting issuer under the laws of some or all of the provinces and territories of Canada and is, or will be, governed by the provisions of NI 81-102.
Securities of each Manulife Asset Allocation Fund are, have been, or will be, qualified for distribution in some or all of the provinces and territories of Canada under a simplified prospectus and annual information form filed with and receipted by the securities regulators in the applicable jurisdiction(s).
Neither the Filer nor any of the Manulife Asset Allocation Funds is in default of securities legislation in the Jurisdictions.
In addition to investing in silver and various ETFs pursuant to the decision document granted by the Principal Regulator to the Filer on July 11, 2011, (with the Commodity ETFs, the Underlying ETFs) each of the Manulife Asset Allocation Funds wishes to be additionally able to invest, to meet its investment objectives, in Commodity ETFs:
(a) to a maximum collective limit of 10 percent of its net asset value, taken at market value at the time of the purchase of securities of an Underlying ETF; and
(b) to a maximum of 2.5 percent of its net asset value of each of the Manulife Asset Allocation Funds in any one commodity sector, other than gold and/or silver, taken at market value at the time of purchase. For this purpose, the relevant commodity sectors are energy, grains, industrial metals, livestock, precious metals (other than gold and silver) and softs (including cocoa, cotton, coffee and sugar).
Each Commodity ETF will be a “mutual fund” (as such term is defined under the Securities Act (Ontario)) and will be listed and traded on a stock exchange in Canada or the United States.
The assets of a Commodity ETF consist primarily of one or more physical commodities, other than gold or silver, or derivatives that have an underlying interest in such physical commodity or commodities. These physical commodities may include, without limitation, precious metals commodities (such as platinum, platinum certificates, palladium and palladium certificates), energy commodities (such as crude oil, gasoline, heating oil and natural gas), industrials and/or metals commodities (such as aluminum, copper, nickel and zinc) and agricultural commodities (such as coffee, corn, cotton, lean hogs, live cattle, soybeans, soybean oil, sugar and wheat). The objective of a Commodity ETF is to reflect the price of the applicable commodity or commodities (less the Commodity ETF’s expenses and liabilities) on an unlevered basis.
Investments in Commodity ETFs
The investment objectives and investment strategies of the Manulife Asset Allocation Funds are designed to offer investors an opportunity to obtain exposure to a broad array of asset classes and strategies. To better fulfill their investment objectives, the Manulife Asset Allocation Funds require the ability to invest indirectly in physical commodities, in addition to gold or silver, through investments in the Commodity ETFs.
In addition to investing in securities of ETFs that are “index participation units” (as such term is defined in NI 81-102) (IPUs), the Manulife Asset Allocation Funds propose to have the ability to invest in the Commodity ETFs whose securities are not IPUs.
Any regulatory concerns, such as undue risk, liquidity concerns or lack of transparency, in connection with the Exemption Sought are mitigated by the following facts:
(i) There are no liquidity concerns with permitting the Manulife Asset Allocation Funds to invest in Commodity ETFs, since the securities trade on a Canadian or U.S. exchange and therefore are highly liquid investments. The Commodity ETFs will either be “registered” investment companies in the United States or reporting issuers in one or more of the Jurisdictions, which means that there will be clear disclosure about the Commodity ETFs readily available in the marketplace.
(ii) In accordance with its investment objective and investment strategies and in addition to its investments indirectly in commodities, the Manulife Asset Allocation Funds will be permitted generally to invest in ETFs.
(iii) The amount of loss that can result from an investment by a Manulife Asset Allocation Fund in an Commodity ETF will be limited to the amount invested by the Manulife Asset Allocation Fund in securities of the Commodity ETF.
(iv) The Commodity ETFs are attractive investments for the Manulife Asset Allocation Funds, as, in addition to being liquid, they provide an efficient and cost effective means of achieving diversification and exposure to the asset classes and strategies that the Manulife Asset Allocation Funds will invest in.
(v) Investments by the Manulife Asset Allocation Funds in the Commodity ETFs will be very limited. In accordance with the investment strategies of the Manulife Asset Allocation Funds, no more than 10 percent of the net asset value of each Manulife Asset Allocation Fund will be invested in a combination of Commodity ETFs taken at market value at the time of purchase. In addition, no more than 2.5 percent of the net asset value of each of the Manulife Asset Allocation Funds may be invested in any one commodity sector, other than gold and/or silver, taken at market value at the time of purchase. For this purpose, the relevant commodity sectors are energy, grains, industrial metals, livestock, precious metals other than gold and silver and softs (including cocoa, cotton, coffee and sugar).
(vi) The simplified prospectus of the Manulife Asset Allocation Funds discloses or will disclose the next time it is renewed (i) the fact that the Manulife Asset Allocation Funds have obtained relief to invest in Commodity ETFs, (ii) an explanation of what each category of Commodity ETFs is, (iii) that the Manulife Asset Allocation Funds may invest indirectly in gold and other physical commodities and (iv) the risks associated with such investments and strategies.
Any investment by the Manulife Asset Allocation Funds in securities of a Commodity ETF will be made in compliance with the custodian requirements in Part 6 of NI 81-102.
An investment by the Manulife Asset Allocation Funds in securities of a Commodity ETF will represent the business judgment of responsible persons uninfluenced by considerations other than the best interest of the Manulife Asset Allocation Funds.
The Filer has determined that it would be in the best interests of the Manulife Asset Allocation Funds to receive the Exemption Sought.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that, in respect of each Manulife Asset Allocation Fund:
(a) an investment by the Manulife Asset Allocation Fund in securities of a Commodity ETF is in accordance with the fundamental investment objectives and investment strategies of the Manulife Asset Allocation Fund;
(b) the Manulife Asset Allocation Fund will limit its exposure to all physical commodities, including gold and silver, (whether direct or indirect) to no more than 10 percent of the net assets of the Fund in aggregate, taken at market value at the time of purchase;
(c) the Manulife Asset Allocation Fund may not purchase securities of an Commodity ETF if, immediately after the purchase, more than 10 percent of the net assets of the Fund in aggregate, taken at market value at the time of purchase, would consist of securities of Commodity ETFs;
(d) the securities of the Commodity ETFs are traded on a stock exchange in Canada or the United States; and
(e) the simplified prospectus of the Manulife Asset Allocation Funds discloses or will disclose the next time it is renewed (i) the fact that the Manulife Asset Allocation Funds have obtained relief to invest in Commodity ETFs, (ii) an explanation of what each category of Commodity ETFs is, (iii) that the Manulife Asset Allocation Funds may invest indirectly in gold and other physical commodities and (iv) the risks associated with such investments and strategies.
Darren McKall
Manager, Investment Funds Branch
Ontario Securities Commission
SCHEDULE A
LIST OF EXISTING FUNDS
Manulife Balanced Income Private Pool
Manulife Balanced Income Private Trust
Manulife Diversified Income Portfolio
Manulife Diversified Strategies Fund
Manulife Global Managed Volatility Portfolio
Manulife Leaders Balanced Growth Portfolio
Manulife Leaders Balanced Growth Class
Manulife Leaders Balanced Income Portfolio
Manulife Leaders Balanced Income Class
Manulife Leaders Opportunities Portfolio
Manulife Leaders Opportunities Class
Manulife Simplicity Conservative Portfolio
Manulife Simplicity Moderate Portfolio
Manulife Simplicity Balanced Portfolio
Manulife Simplicity Global Balanced Portfolio
Manulife Simplicity Growth Portfolio