Mutual fund companies and their executives are quick to point out that mutual funds are the investment product of choice for the vast majority of Canadian investors. Even with the spectacular growth of ETFs in recent years, the assets under management (AUM) held in mutual funds currently outweighs AUM held in ETFs by a factor of more than nine to one.
Yet, these days are a far cry from the 1990s boom in mutual funds, when the number of new entrants and innovative products, as well as AUM, were growing by leaps and bounds.
Even though the mutual fund industry continues to grow – total AUM was $1.52 trillion as of Sept. 30, up by 6.3% from $1.43 trillion a year earlier – year-to-date sales of long-term mutual funds were at a nine-year low, according to Investment Funds Institute of Canada (IFIC) data.
Furthermore, net sales of long-term mutual funds totalled $13.1 billion through the nine months ended Sept. 30, only about one-third of the almost $39 billion in the corresponding period in 2017. In fact, this year’s nine-month figure was the worst since 2009, when global stock markets emerged from a severe bear market.
The sales slump reflects the prevailing risk-averse mentality among investors, whose concerns include how much longer the post-global financial crisis equities bull market can last as well as what the negative impact of rising interest rates on bond prices will be.
Also worrisome is the geopolitical environment. Says Paul Bourque, president and CEO of IFIC: “There’s significant economic uncertainty out there, and we’ve seen that over the past 12 to 24 months. Political uncertainty, trade agreements, taxes. There’s a lot going on, and I think that’s going to continue to impact mutual fund sales [negatively].”
One way to mitigate risk is to diversify, and that’s what mutual fund investors have been doing. Although year-to-date sales of balanced funds as of Sept. 30 were two-thirds lower than in the corresponding period a year earlier, these funds continue a multi-year trend of being the most popular long-term product. These include fund-of-funds portfolios, which constitute a hefty 35% of total mutual fund AUM, up from 19% in 2010, according to IFIC data.
The preference for multiple asset-class mutual funds shows up in both the bank channel, which dominates this segment, and through sales by third-party brokerages and dealers.
“Individual products, or asset classes or categories, have become less important through the lens of [financial] advisors, who are focusing more on portfolio construction and on generating the right kind of outcomes for their clients,” says Peter Intraligi, president and chief operating officer at Invesco Canada Ltd. “And that actually drives the investment decisions, as opposed to what’s the next hot asset class.”
Amid the sluggish sales and shrinking profit margins, there’s a well-established consolidation trend in mutual funds. Unlike in the ETF industry, which had 30 sponsors as of Sept. 30 (up from a dozen three years ago), there have been few new mutual fund sponsors. As well, several firms, including Sentry Investments Corp. and Excel Funds Management Inc., were absorbed into bigger market players during the past year.
A rare exception is Vanguard Investments Canada Ltd., the third-largest ETF provider in Canada, which branched out into mutual funds in Canada this past June. Vanguard Canada, of course, is no typical mutual fund startup: the company draws on the vast resources of its giant U.S.-based parent company.
“Costs have been increasing, and the only way to manage that is with scale,” says Bourque, citing competitive pressure on fees and the increasing costs of complying with regulatory requirements. “That drives consolidation and acquisitions.”
However, there are few remaining takeover targets yet to be acquired by banks, foreign- controlled fund companies or the few large independents. This led CI Financial Corp., which in the past has swallowed up several competitors, to announce in August that it will buy back up to $1 billion of its stock.
“We have concluded CI’s best use of free cash is to aggressively buy back our own shares,” CI’s CEO Peter Anderson told market analysts at that time. He said shares of asset managers, globally, are trading at the low end of their trading ranges, mostly because of uncertainty in the industry.
Along with adverse financial market conditions, mutual fund companies face fee competition from rivals such as ETF providers and robo-advisors. To counter this, there has been a consistent trend toward declining mutual fund fees, says Bourque. He cites data that mutual fund sponsors have announced fee cuts covering 90% of the industry’s AUM since 2015. And on the distribution side, he adds, the vast majority of front end-load commissions are being waived.
Intraligi, who also is head of wealth-management intermediaries in the Americas for Invesco’s Atlanta-based parent firm, Invesco Ltd., acknowledges that fees for actively managed mutual funds are high relative to their passively managed ETF counterparts – particularly in Canada.
“We took steps years ago to try to build efficiencies into our business models so that we could pass back the benefits by way of being more competitive on fees,” Intraligi says.
Invesco’s most innovative cost-saving initiative was the launch of platform-traded funds for fee-based advisors, which trade on the NEO Connect platform, in 2015. Thanks to streamlined back-office processes, savings can be passed on in the form of lower fees.
“If they’re not the lowest in the country,” Intraligi says, “they’re among the lowest in the country for actively managed mutual funds.”
This story is part of a four-part series that explores the state of Canada’s mutual fund industry.