A growing number of mutual fund companies are chasing a piece of this country's estimated $700-billion institutional and pension fund management business.
AGF Management Ltd. and AIC Ltd. are keen on boosting their presence in the market. They follow Fidelity Investments Canada Ltd., whose parent is a powerhouse in the U.S. institutional market that ramped up its Canadian offerings about three years ago, and Franklin Templeton Investments Corp., a long-time institutional manager that has seen its slice of the market double to about $16-billion in the past four years.
"If you have the capacity and you can get reasonable margins, it can make a lot of sense to add institutions," said Jonathan Wellum, chief investment officer of AIC, manager of about $100-million in institutional funds.
It's estimated that about $400-billion in pension business is overseen by external managers; in comparison, Canada's retail fund market hovers near $550-billion.Profit margins in the institutional business are tiny when compared with the retail trade. While annual management fees paid by retail unitholders hover between 1 and 3 per cent, institutions pay a paltry 50 basis points to as little as 10 basis points depending on the size of the account. (A basis point is 1/100th of a percentage point.) And winning new business is an extremely competitive process that can take many, many months of work.
"You can't just walk in and say we have a fund with a great three-year track record. Do you want to buy it? They will just laugh at you," said Stuart Graham, executive vice-president of retirement services at Fidelity. Institutional assets under management have swelled to $6-billion in about three years and are expected to increase by about 30 per cent in 2006.
"When people try to dabble in this they just won't be successful," Mr. Graham said.
Indeed, Fidelity has thrown a lot of resources at the pension and institutional market. Unlike its rivals, Fidelity both manages and administers plans to meet client needs. In addition, the company has a dedicated team whose sole task is managing relationships with key consultants that act as the go-between for fund managers and pension funds.
For fund companies, the payoff is substantial. Management costs are significantly lower. A $1-billion pension fund is a single client; a $1-billion retail fund will have thousands of unitholders with servicing needs.
Most important, institutional and pension accounts represent an opportunity to diversify revenue streams via a long-term relationship.
"The money tends to be quite sticky for a cycle at least," said Blake Goldring, AGF's president and chief executive officer.
While fickle retail investors and advisers flit from fund to fund, institutions and pension accounts are in it for the long term, said Brendan George, head of the investment consulting practice at Aon Consulting Inc. in Vancouver.
"Pension funds are not looking to generally shoot the lights out in terms of performance. They are looking for steady, consistent, year-by-year numbers," Mr. George said.
Despite the ambitions of some fund companies, consultants that help marry pension funds and managers are skeptical.
Wendy Brodkin, practice leader of investment consulting for central Canada at Watson Wyatt Worldwide, believes many retail fund companies dwell too much on marketing and long-only returns. Seasoned institutional money managers are now shifting their attention to increasingly sophisticated investment tools that focus on risk management, she said.
"The money managers out there now are moving on to the next generation of products and I'm not sure the retail side has been going there yet," Ms. Brodkin said.
Keith Ambachtsheer, president of pension consultancy K.P.A. Advisory Services Ltd., believes some retail fund managers are out of step with the needs of major clients.
Pension funds and institutions "are becoming less and less interested in beauty contest investing and more and more interested in really trying to understand the economics of investing," Mr. Ambachtsheer said. "I really don't see a role for most of the mutual fund management companies. . . . What are they going to do? What do they have to offer? It's not clear to me."
Resolute taken down a peg
Resolute Growth Fund, one of Canada's best-performing mutual funds, is shrinking.
Assets under management of the small-cap equity fund managed by Tom Stanley slid to about $254-million at the end of November, down from close to $400-million in September. The award-winning fund boasts a stunning 27.4-per-cent average annual return since its inception in December, 1993.
Mr. Stanley's spat with the Ontario Securities Commission is to blame. He wants the mutual fund to be exempt from new disclosure requirements that force the fund to reveal its 25 largest holdings every quarter. Typically, the fund holds less than 20 equities and Mr. Stanley believes privacy is key to his success.
"There have been a significant number of redemptions," he said in an interview. "Investors don't like uncertainty."
But all is not gloom at Resolute Funds Ltd. Total assets under management at the Toronto fund company are about $552-million, up from $335.5-million at the end of March.
Mr. Stanley reports that a good chunk of funds heading out of the Resolute Growth Fund are finding a home in the Resolute Performance Fund, a private fund not subject to some of the OSC's new rules.
© 2007 The Globe and Mail. All rights reserved.
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