Jonathan Chevreau Aug 3, 2011
Moody’s Investor’s Service predicts the imminent entry of Vanguard into Canada will force leading domestic fund companies to reduce fees: a “win win” for retail investors but “a negative for Canadian asset managers’ profitability.”
Moody’s describes the Canadian mutual fund industry as “one of the highest fee mutual fund markets in the world.”
With US$1.7 trillion in assets worldwide, “Vanguard’s low-cost model is certain to exert price pressure on Canada’s dominant mutual fund players,” says a mid-June report entitled Vanguard in Canada is Negative for Incumbent Asset Managers. It notes the domestic fund market is dominated by ten players, including the asset management arms of all five big banks. The other five are IGM Financial Inc., Fidelity Investments Canada, Dynamic Funds, AGF Investments Inc. and Franklin Templeton.
Canada’s equity fund MERs more than twice that of US
Citing Morningstar, the report finds median asset-weighted Managment Expense Ratios [MERs or ERs] for equity funds sold by Canadian asset managers are 2.31%, compared to 1.9% in the UK and 0.94% in the U.S.
Canadian fixed-income funds have a median expense ratio of 1.31%, versus 1.14% for the UK and 0.75% for the U.S. Even Canadian money market funds are almost twice as costly: 0.8% versus 0.41% for the UK and 0.47% for the US.
If anything, Vanguard’s position as a low-cost manager is the polar opposite of Canadian mutual fund companies. Moody’s says Vanguard’s average MER is a stingy 0.21%, “a competitive advantage we expect Vanguard to exploit.”
Moody’s says foreign mutual fund companies like Vanguard have not been active in Canada because regulations prohibit investors from buying mutual funds domiciled outside Canada. “These barriers to entry have limited distribution competition, allowing domestic fund companies to maintain high fees.”
However, institutional investors and retail investors are permitted to buy ETFs domiciled outside Canada. Vanguard has yet to say if its focus here will be index mutual funds, ETFs or both.
New Pooled pensions a second way Vanguard can shake up the industry