Earl Bederman has a mixed forecast for the mutual fund industry: The good news is the business is growing. The bad news? Not for every player.
Mr. Bederman is the president of Investor Economics, a research company that focuses on financial services. The Toronto firm's confidential data are considered near-gospel in the fund sector. There was a rare opportunity last week to hear Mr. Bederman's views at a presentation to the Investment Funds Institute of Canada's annual convention.
According to IE, Canadians control an estimated $2.1-trillion in financial wealth, a pie of riches that grew an impressive 11 per cent last year. The long-term forecast, however, is more challenging, with an estimated compound annual growth rate of about 8 per cent through 2014. Equities are an important part of the mix, but as baby boomers age and retire, demand will shrink and the asset class "will not be nearly the driver of success that they were in the past," Mr. Bederman said.
Fund assets of all types accounted for about 37 per cent of the total wealth pie, up from about 33 per cent only a few years ago. The catch is that demand for retail mutual funds is declining, and their share of the market is falling, too, as investors embrace new asset classes. For example, stand-alone funds now account for about 50 per cent of assets held at full-service brokerages. Six years ago, funds made up about 72 per cent of assets, Mr. Bederman said.
"The whole character of the market, the vehicles, the instruments are changing as we speak and will continue to change," he said.
Demand for wraps, so-called portfolio solutions that bundle together mutual funds, is "growing significantly faster" than stand-alone funds, Mr. Bederman said. There's about $126-billion in wrap accounts today, up from about $53-billion in 2000. Fund companies with access to financial advice networks, a group that includes the big banks, will continue to dominate the wrap business. To date, smaller firms without distribution access have been challenged and control a slender $13-billion in wrap accounts, he said.
Fortunately, Canada's aging population will need more help managing their money. At present, about 60 per cent of the country's wealth is managed through advice channels; IE estimates this will increase to about 70 per cent over the next 10 years as investors become more risk-averse. "More and more households are moving off the tax-deferred highway onto the exit ramp. They are cashing in their retired wealth," Mr. Bederman told IFIC delegates. "The demand for advice and the need for advice is going to continue to grow."
The unasked question
Fund investors are a confident, knowledgeable group -- just don't bother them with the details.
On Friday, IFIC released its first investor attitude survey, the source of much ballyhoo at last week's convention. Not surprisingly, the survey found 85 per cent of Canadian investors are confident that mutual funds are a worthwhile means to achieve their financial goals. The sole asset class to score higher -- with an 88-per-cent level of confidence -- was real estate.
In addition, the survey found that investors tend to want less information about their investments rather than more. Only 12 per cent favoured a detailed annual document, while 5 per cent wanted both the detailed document plus a two-page summary.
"The numbers confirm our belief that confidence and knowledge levels among mutual fund investors are strong," said Joanne De Laurentiis, IFIC president and chief executive officer. The survey of 1,865 fund clients was conducted by Pollara Inc. of Toronto.
The study was IFIC's informal response to an August study that concluded that Canadians pay the globe's highest mutual fund fees. The academic report, entitled "Mutual fund fees around the world," found Canadian mutual fund investors pay an average management expense fee of 2.68 per cent a year, compared with 1.42 per cent in the United States at the end of 2002.
Unfortunately, the IFIC poll did little to satisfy critics. Ken Kivenko, a retired corporate executive turned mutual fund industry watchdog, described the survey as "statistical skulduggery."
"Most fund investors don't know that they don't know," Mr. Kivenko said. "The survey adroitly avoided asking the tough question: Are Canadian fees excessive?"
Altamira gets cracking
Altamira Investment Services Inc. is waking from its slumber.
The fund subsidiary of the National Bank of Canada has launched Meritage, a wrap program that consists of 12 portfolios holding 17 funds. Investors can choose between five investment portfolios, five income-oriented portfolios with a fixed distribution, and two pure equity portfolios.
The Meritage offering follows the August decision to hand over management of the Altamira Canadian Value Fund and the Altamira Global Value Fund to well-regarded Howson Tattersall Investing Counsel Ltd. of Toronto. The move indicates Altamira is serious about performance. The Toronto firm replaces Natcan Investment Management Inc., a Montreal money manager that's also owned by National Bank.
The effort to fix Altamira, an industry hot shot about 10 years ago, is long overdue. While investors have been pouring money into the Altamira High-Interest CashPerformer, the company's traditional fund business has shrunk to $3.7-billion, down from a peak of about $6.4-billion in 1997.
Keith Damsell is the editor of GlobeinvestorGOLD
© 2007 The Globe and Mail. All rights reserved.
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