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The 800-pound mutual fund gorillas

Canada's banks are gobbling up the sector through acquisitions. That may bring small fee cuts and less-risky offerings

INVESTMENT FUNDS REPORTER

Canada's big six banks are emerging as powerhouses in the mutual fund industry as they aggressively woo clients and snap up independent rivals.

As the banks increase their dominance, investors can expect slightly lower mutual fund fees. They may also find that they have fewer fund offerings to choose among as banks seek to move away from the fund industry's previous emphasis on star managers and emphasize more conservative investing strategies overseen by teams of managers.

Once considered minor players in the mutual fund world, banks now control about 44 per cent of all fund assets - a level that a decade ago would have been unthinkable in an industry that was largely built by independent players.

Banks' market share could climb to nearly 60 per cent if they snag major independent firms such as CI Financial Corp., which is already 36 per cent owned by Bank of Nova Scotia, and AGF Management Ltd., which is controlled by Toronto's Goldring family, said Dan Richards, president of consulting firm Clientinsights.

"There is a better than 50 per cent chance that in the next three years, either AGF or CI will be bought by a bank," he said. "With AGF, it is not as clear that they are a motivated seller. In the case of CI, it is pretty clear that they are open to selling, and it just comes down to price."

Many small independent players have already been swallowed up. Several had a tough time competing against the banks amid rising regulatory costs. Limited product lines also played a role.

"The problem with these independents is that they don't have a full product suite to compete, and they have mostly equity assets," said Canaccord Genuity analyst Scott Chan. "When stock markets rolled over in 2008, a lot of them found themselves in net redemptions."

The financial crisis speeded up a transformation of the Canadian fund industry that had been in progress for years. Back in the 1990s, investors sought out independent fund companies that bragged about star managers with stellar returns. The banks were known for less exciting bond and index funds.

Over the past decade, the banks, which controlled only about 23 per cent of the fund market in 1990, have beefed up their money-managing talent to improve returns on their equity funds. They also hired legions of financial advisers to sell funds to banking customers.

As bank funds continue to bolster their assets from new cash infusions and takeovers, investors could see fees decline slightly, because banks can spread their costs across a larger base of assets. But that drop is unlikely to be significant, Mr. Richards said.

"I think there is going to be continued pressure on fees. But, when you have an oligopoly, typically price wars don't start from within. ... What is putting pressure on mutual funds more than anything else are exchange-traded funds."

Morningstar Canada fund analyst Esko Mickels agreed that investors could see "marginally lower fees, but not a monumental shift."

Banks would be reluctant to substantially slash fees, he said. "If you charge 2 per cent on $10-billion [in assets], and lower the fees to 1 per cent, that is going to be pretty costly. You would have to try to figure out how much more in new assets to bring in to try to maintain the same level of profitability."

Other shifts are likely to be more noticeable. Funds acquired from independent firms by the banks will probably wind up being run more conservatively as banks impose additional risk controls and screening tools. For instance, Altamira Investment Services Inc., a firm once known for placing large bets on specific sectors or stocks to avoid index-like returns, was bought by National Bank of Canada in 2002. Its funds are now run by the bank's investment management arm.

"More often, banks tend to use a team management approach," Mr. Mickels said. "They don't have to have a star manager to attract people." Rather than placing large bets on a particular sector, bank funds tend to stick relatively closely to benchmark weightings, and as a result often end up with second- or third-quartile performance versus peers, he added.

Scotiabank's recent takeover of DundeeWealth Inc., which sells the Dynamic funds, "is going to be an interesting one to watch," he said. "Scotia has said it is going to leave Dynamic independent, and let the managers keep doing what they are doing. But it is a pretty clear culture clash there. ... There is a risk of losing the star managers."

As banks snap up independent firms, investors will have less choice about where to invest their money. But a reduction in industry players and fund products is "not a bad thing," said Dan Hallett, a fund analyst and director of asset management at HighView Financial Group. "There are way too many products out there."

New offerings from boutique-style firms will pop up again, Mr. Hallett predicted. "You have people who have received a fair amount of money through acquisitions, and many of them are either too young or too engaged in the industry to really retire so there is a bit of regeneration of sorts. ... And there is always going to be a desire to do something different that you can't do at a bank."

***

DULL COUSINS NO MORE

Banks control 44 per cent of all fund assets - a level that a decade ago would have been unthinkable. Assets under management as of Nov. 30:

Royal Bank of Canada (includes Phillips Hager & North): $106.8-billion

Toronto-Dominion Bank: $59.1-billion

Bank of Nova Scotia (once it closes deal to buy DundeeWealth): $56.5-billion

Canadian Imperial Bank of Commerce: $49.1-billion

Bank of Montreal: $32.3-billion

National Bank of Canada: $12.5-billion

Source: IFIC

© 2007 The Globe and Mail. All rights reserved.

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