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The mutual fund industry in Canada: what’s new?
In Canada, investors enjoy a wide choice of mutual funds. At the same time, the Canadian mutual fund industry is characterized by a small number of major players, and by a regulatory system which protects Canadian investment fund managers from competition by foreign fund managers. The result is higher costs for investors then would otherwise be the case. The global financial system has undergone major changes in the past 12 months. What about the mutual fund industry in Canada?

 Our site gives an overview of the financial system and reviews the high level of costs and other implications for the independent investor of such a degree of concentration. Practical suggestions are given to help investors in dealing with the Canadian system. For more, see The financial system . Our site also identifies certain aspects of the Canadian financial system which do not sufficiently take into account the interests of individual investors and encourages our readers to make their voices known when the occasion arises in order to change the rules. Some examples?

  • Revise the limits on ownership of Canadian chartered banks to encourage competition;
  • Encourage the establishment of a new major brokerage firm independent of the Canadian chartered banks, in conjunction with any future demand for a bank merger in Canada;
  • Change the habits of regulatory authorities who are not sufficiently concerned by the level of mutual fund management fees. One move in this direction would be to remove the prohibition on the sale, without further formalities, of U.S. mutual funds such as Vanguard in Canada;
Again, for more information, see The investor and the financial and regulatory system .
  
This said, in this commentary we look at whether recent developments are going in the right direction, i.e. in the direction of greater competitiveness and ultimately lower fees for investors?

We begin with the following. Despite a recent downward adjustment, the Canadian dollar has increased substantially since the beginning of 2007 (it was $ 0.85 U.S. on January 3, 2007. And if you go back to early 2000, it was U.S. $ 0.69). Strangely enough, the Canadian mutual fund industry has not suffered from the rise of the Canadian dollar. This is surprising because in almost all other economic sectors there has been downward pressure on prices of goods and services to Canadians because the protectionist advantage of a weak Canadian dollar has disappeared. But the absence of foreign competition in the mutual fund industry in Canada is so entrenched that it is accepted as normal. Therefore, when an economist with the Bank of Montreal (see article Porter 2008 doc.1020 ) publishes a study on the impact of the rising Canadian dollar on the various sectors of the Canadian economy, he does not even bother to include the mutual fund industry in his article. Obviously, this situation is largely explained by the fact that provincial regulation in Canada prevents Canadians from buying U.S. mutual funds sold publicly in the U.S.; see the section The Canadian financial system: an overview . Even funds managed by a reputable fund manager like DFA are hardly available in Canada, even by way of private placement; see article Banerjee 2008 doc.1021.

Another result of the absence of foreign competition is that the mutual fund industry in Canada is concentrated in the hands of a small number of Canadian financial groups that we call on our site the Top10 of the Canadian financial system; see the section The financial system on our site. There is a section on Wikipedia dedicated to calculating the respective shares of Canadian asset management companies; see the text Wikipedia 2008 doc.1022 (or through the direct link List of mutual fund companies in Canada ). During the past 12 months, two other independent asset managers have been swallowed up by members of the Top10 (Phillips Hager & North by the Royal Bank - see article chevreau doc.1034- and Saxon by Power Financial), with the result that 66% of all mutual fund assets are now managed by members of the Top10. And managers of the remaining 33% are largely dependent for distribution on the members of the Top10. When a Canadian buys a mutual fund of an independent manager through the retail network of a member of the Top10, he may even be charged additional costs; for an example, consider the case of Mawer funds sold by Manulife; see Carrick 2008 doc.1023 and Luukko 2008 doc.1024.

Canadians pay various types of costs when they buy mutual fund units, see Banerjee 2008 doc.1025. The result of the absence of sufficient competition is that the level of mutual fund management fees in Canada is not only much higher than in the U.S., but is the highest in the world; see our commentary Canada retains its standing (last place!) in world mutual fund universe .

If at least the Canadian mutual fund managers managed to beat the market, the level of their management fees might be less objectionable. But traditionally this has not been the case (see our section Beat the market? ), and that has continued for the last 12 months; see S & P 2008 SPIVA doc.1026. In recent months independent experts have complained that this combination of high costs and resulting poor performance will penalize the retirement income of Canadian investors; see Ambachtsheer submission Ontario doc.1027 and CD Howe report doc.1028.

To give an appearance of choice for investors, all fund managers create and sell multiple funds, to the point that there are now nearly 14, 000 mutual funds in Canada, an incredible number considering that there are less than 3,000 companies listed on the TSX and Ventures exchange; see site www.CanadianBusiness.com for their 2008 guide of mutual funds. A speech by an officer of the Royal Bank (see 2001 presentation Hatanaka doc.1029, page 16) demonstrates the strategy of major mutual fund managers: offer a large number of funds, knowing only a small percentage will offer superior results.

And what has been the reaction of Canadian securities commissions during the past 12 months to this situation? Unfortunately, they act as if the last place global position of Canada with regard to the level of management fees is not a national embarrassment. They have proposed no changes to their own rules to allow foreign investment fund managers to sell their US funds directly to Canadians and thus compete with the Top10 in the management and distribution of mutual funds in Canada. Instead, they have published for comment rules intended to simplify disclosures by mutual funds (see OSC 2007 fund disclosure proposal doc.1030 and 2007 joint forum announcement doc.1031). Regrettably, it is likely such disclosure changes will have a minimal effect on the level of mutual fund management fees in Canada; see Steadyhand 2007 submission fund disclosure , p.3 doc.1032.

Our conclusion. There have been no improvements during the past 12 months in a system that poorly serves Canadian mutual fund investors. The degree of competition in Canada has actually declined slightly, and no regulatory initiative designed to reduce the level of management fees has been proposed. The best alternative for Canadian investors is to consider ETF’s (they typically have much lower management fees; see Index funds- ETFs and index mutual funds ) which trade inside and outside of Canada, and which fortunately are all available for purchase by Canadians; see About us- Our philosophy . We recently discussed ETF portfolios in our newsletter 15; if you missed it, you will find it here , or on our home page under Information-Newsletters.
Last Updated ( Monday, 22 September 2008 )
 
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