(Bloomberg) -- Canada’s old-guard mutual fund managers are realizing they can’t buck the ETF trend any longer.
Long-time asset managers including IGM Financial’s Mackenzie Investments, AGF Management and CI Financial announced plans to offer ETFs in the past month as investors seek lower-cost alternatives to traditional mutual funds.
"This is another arrow in our quiver," said AGF Chief Executive Officer Blake Goldring said. AGF said it acquired a majority stake in Boston-based FFCM last week, an ETF adviser firm that operates in the U.S. with an eye to bringing its products to Canada. His firm manages about $25 billion with the inclusion of FFCM’s business, he said. “We are a traditional long-only house and that’s not going to change. But we also see a growing segment of clients looking for other alternatives.”
AGF and other mutual fund providers have struggled with weak equity market returns, especially in Canada, amid a slump in commodities prices. The rise of the low-cost ETF industry, as well as new rules that require firms to divulge fees clearly, has also helped make cost an increasingly important factor in investor decisions.
ETFs OUTPACE
ETF assets jumped 13% this year after Oct. 31, outpacing a 7.4% increase in mutual fund assets. The Canadian mutual fund industry still dwarfs the ETF marketplace with C$1.23 trillion in assets, according to data from the Investment Funds Institute of Canada.
Mackenzie Investments, a unit of IGM, Canada’s biggest independent asset manager with about C$130.9 billion as of Sept. 30, confirmed in an e-mail it will be introducing actively managed ETFs in the first half of 2016 to complement its existing family of mutual funds. Mackenzie itself manages C$60.3 billion.
Rival CI Financial acquired ETF provider First Asset Capital Oct. 23. First Asset managed about C$1.76 billion in ETF assets as of Oct. 31, the sixth-largest ETF provider in Canada, according to data from the Canadian ETF Association. BlackRock’s iShares Canada manages C$45.6 billion to lead all providers in the C$86.8 billion ETF marketplace, the data show.
DON'T CANNIBALIZE
“Having ETFs to lower your overall fees and offer a different product suite which will be in higher demand going forward, especially as more advisers go to the fee-based model, they want to be there,” said Scott Chan, a Toronto-based analyst at Cannacord Genuity Corp. He has buy ratings for CI and IGM, part of the Power Corp. of Canada empire, and a sell for AGF. “I don’t see AGF or any of these guys selling ETFs on a standalone basis as it’ll cannibalize their other business.”
Canadian mutual funds received a grade of D- on fees, the worst out of 25 countries in a June Morningstar report. The U.S., Australia and the Netherlands tied for the best scores in the gauge, which measures ratios across different categories. Canadian management expense ratios average 0.61% for ETFs and 1.86% for active mutual funds, according to Morningstar.
Beginning in 2016 Canadian firms will have to submit annual reports to clients showing how much advisers were paid for products and services.
HURTING MORE
Shares of AGF have slumped a record 39 percent this year, the most since 2008, while IGM has tumbled 17% and CI has lost 2.3%. The wider Standard & Poor’s/TSX Financials Index has lost 2.5% in the same period.
“AGF is definitely hurting more than its competitors,” said Paul Holden, an analyst at Canadian Imperial Bank of Commerce. He rates CI a sector outperform, or buy, IGM a sector perform or neutral, and AGF the equivalent of a sell. “Performance has been an issue, the loss of people has been an issue.”
AGF, which has seen its assets under management slide from C$36.9 billion two years ago, announced in December 2014 it would slash its quarterly dividend to 8 Canadian cents a share from 27 cents to deploy the capital on initiatives “with greater potential for shareholder value” -- including its acquisition of FFCM.
FFCM’s addition will be “very significant” in bolstering AGF’s results, including growing its asset base, Goldring said, while declining to provide specific figures.
FFCM is the investment adviser for the QuantShares family of ETFs in the U.S., which uses quantitative strategies including momentum, value and size. The deal for FFCM, for undisclosed terms, gives AGF a toehold in the U.S. ETF market, while also giving AGF the opportunity to eventually market FFCM products north of the border, Goldring said.
AGF isn’t trying to replicate an index ETF, Kevin McCreadie, chief investment officer at AGF, said. "That has no value added to anybody and that game has been played by some of the larger guys. We’re looking to create solutions within a portfolio.”
