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BlackRock dips into mutual fund business

Exchange-traded funds are loved for their low fees and hands-off investing style. But the popularity of mutual funds persists - more than 60 per cent of Canadians buy them - and ETF heavyweight BlackRock Inc. wants a piece of the market.

Blackrock, the largest seller of these products in Canada, is well-known for its iShares ETFs. It has nearly $40-billion in assets under management and accounts for nearly 60 per cent of the market. The company's new strategy revolves around using those iShares to create a suite of seven mutual funds to expand even further into the Canadian investment marketplace.

The line between ETFs and mutual funds has been steadily blurring in Canada. There were 37 mutual funds with $4.1-billion in assets that invested exclusively in ETFs at the end of March, according to Investor Economics.

BlackRock's brand name and international scale have contributed to its success in the country. But Noel Archard, head of BlackRock Canada says that clients had been asking for the option to invest in mutual funds for a couple of years.

"A lot of Canadian investors still default to the mutual fund, which they've grown up with. But they're also super focused on the embedded costs," Mr. Archard said. He noted that most clients tend to use different kinds of investment products within their portfolios. The products will be branded as the BlackRock Strategic Portfolio Series.

Institutional and retail investors alike appreciate the liquidity, diverse mandates and low fees, which are often measured in basis points. The iShares MSCI Emerging Markets IMI Index fund has a 0.35-per-cent management fee, for example. When ETFs are sold as mutual funds they sometimes come with a trailer fee or load charge to pay advisers, which can drive up costs. BlackRock has yet to disclose the fee structure for its new products.

"Some of the features of the ETFs are starting to resemble the mutual-fund industry," Sandeep Gosal, associate consultant at Investor Economics, said. He says similarities in fee structure and the introduction of active management are two examples.

Selling ETFs through mutual funds makes it easier for independent Mutual Fund Dealers Association-licensed advisers to access the vehicles, Mr. Gosal said. They might not have access to purchase ETFs directly from exchanges.

BlackRock's new mutual funds will be up against competition from other providers, such as Bank of Montreal. The lender began selling ETFs in 2009 and offers mutual funds of ETFs through its branches. BMO is now the second-largest ETF seller in Canada by assets.

"On the distribution side, it could be harder for BlackRock. They're a big firm globally, but I guess it depends how much effort they want to put in on sales guys here," Scott Chan, analyst at Canaccord Genuity, said.

BlackRock isn't starting from scratch with its mutual fund business. It already offers the funds in 35 markets around the world with more than $420-billion (U.S.) in assets under management.

The investment vehicles themselves also won't be a big departure from BlackRock Canada's current offerings, since the mutual funds will be solely made up of pre-existing iShares products.

© 2007 The Globe and Mail. All rights reserved.

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