A limited domestic market and a weak native currency have spurred a number of Canadian mutual fund providers to look to the U.S. retail market for growth opportunities.
Royal Bank of Canada Global Asset Management has expanded its mutual fund product lineup in the U.S. to 14 new funds in the past four years, according to Morningstar, with a total 20 mutual funds and three money market funds positioned in the U.S.
In the last year, RBC posted a 44% increase in U.S. distributions to escape the sluggish Canadian mutual fund market, as client services and marketing professionals have grown as well. Sales and marketing staffs have seen dozens of new hires and the firm has continued to expand its intermediary sales team over the last four years.
Matthew Applestein, the head of sales and distribution at RBC GAM-U.S., says it should be no surprise that Canadian institutions are seeking to grow their assets in the neighboring U.S. retail market.
"Part of [our] long-term strategy is to be bigger in the U.S.," Applestein says, adding the firm's global dominance in revenue and growth opportunities. "We're going to continue to grow and open more funds going forward."
Five years ago RBC GAM-U.S. added just one open-end mutual fund to its list of 18 total funds offerings, more than $465 million in assets under management, according to Morningstar. Now with 32 total open-end mutual funds, or roughly $1.525 billion in AUM, RBC GAM has already added eight new funds as of June 30, 2015, according to Morningstar.
Of the $300 billion it currently manages across the globe, RBC reports $41 billion of those assets were in the U.S. as of June 30. It employs 150 staff members in Minneapolis, Boston, Chicago and New York offices.
CONSIDERABLE SUCCESS
Dan Werner, senior equity analyst for Morningstar, suggests Canadian flows into U.S. mutual funds are reflective of the considerable success in the U.S. retail market.
"A lot of banks, especially the big Canadian banks, are turning to wealth management as a way to grow revenue by increasing their AUM," Werner explains. "One way to do that would be to grow into the big market like the U.S. and shoot for those like the Bank of Montreal that already has a presence here."
He adds that "it's not particularly surprising, given how that's been a focus for a BMO and for RBC Wealth Management."
Werner points to the success that the BMO has found in the ETF market, adding that they have benefitted from having the foresight of the product's popularity before other Canadian institutions. The same, he says, is true for their success in mutual funds.
"When you look at the different funds that rolled out by BMO, it pretty much covers every type of investment strategy, in terms of growth, value, large cap, small cap," he says. "It's a pretty wide array so I think clearly they've tried to hit on every niche that an investor could want."
DOUBLING OFFERINGS
Bank of Montreal Global Asset Management Co-CEO Barry McInerney says his firm has doubled its U.S. sales team, tripled its intermediary sales and currently has $254 billion in AUM with 24 offices in Canada, the U.S., EMEA and Asia Pacific. In the U.S., the firm has nearly $60 billion in total assets, $15 billion of which are invested in the firm's mutual fund platform, BMO Funds, he adds.
In the last three years, the firm has doubled its mutual fund offerings in the U.S., collecting an additional $3 billion in the new funds, McInerney says.
"The U.S. population overall is growing faster than other developed countries due to immigration," McInerney says.
"Overall, the U.S. retail market is a very attractive marketplace to participate. And like other markets, we distribute all of our over 250 domestic and global investment products and strategies into the U.S. markets."
He adds that his firm has aggressively grown its retail distribution in the U.S., via wirehouses, full-service platforms, RIAs, private banks and insurance companies.
In the last 10 years the firm has seen steady growth in its open-end mutual fund offerings in the U.S., growing from $2.257 billion in total assets in 2005 to $7.694 billion in AUM in 2015, offering 130 total funds with 54 new funds in the U.S. this year, according to Morningstar.
National Bank Investments, a wholly-owned subsidiary of the National Bank of Canada, also claimed a U.S. mutual fund stake after adding Goldman Sachs Asset Management to its list of international third party portfolio managers.
Through their partnership with the roughly $670 billion New York-based firm, according to FINRA records, the $20.8 billion Canadian institution launched the National Bank Strategic U.S. Income and Growth Fund for its Canadian investors.
"We are in fact the only major Canadian bank to exclusively retain third party portfolio managers," says Jonathan Durocher, president and CEO of National Bank Investments, in a statement. "This entrepreneurial culture enables us to attract the most reputable portfolio managers and to provide investors with a unique access to their expertise."
HIGH FEES
One knock against Canadian mutual funds is that they received a D- rating on fees from Morningstar, according to a July report from Bloomberg.
Although retail fees are higher in Canada than in the U.S., McInerney notes that, "institutional fees are lower in Canada," and that BMO GAM competitively prices their products and strategies, "from a local perspective" to find their success abroad.
"We don't determine price vis-à-vis our home market," he explains, which analysts say has been overrun by a booming ETF market. The country's management expense ratios average 0.61% for ETFs and 1.86% for active mutual funds, according to Bloomberg.
"In fact, in the U.S., we consider ourselves a U.S. firm with strong U.S. and global capabilities and reach."
And this strategy is not limited to BMO. In an effort to complement its expansion of retail service and product infrastructure with lower fees, RBC GAM introduced its Cornerstone Investor Program, an institutional seed pricing model for shareholders in four of its mutual funds. The initiative intends to provide a reduction in total expenses of roughly 39% to 44%.
On the institutional side, RBC's Applestein boasts about the firm's growth in the U.S. small cap space. "We went from nowhere to becoming one of the top 13 managers in assets in the U.S. We've had a lot of success on the institutional side and we're now leveraging that."
