Excitement Evaporates for Canadian Investors
The pain felt by American mutual-fund owners this year is shared by investors north of the border.
Enthusiasm for mutual funds had been growing by leaps and bounds in Canada, with total assets doubling in size since the end of 1992. The Investment Funds Institute of Canada now counts 800 member funds--a larger number of products per capita than in the United States.
But with Canada’s stock market soft and bond market bruised by rising interest rates, some of the excitement has evaporated. Many shareholders have been redeeming their investments of late, especially people who had purchased funds on a no-commission basis through large Canadian banks.
Overall, net sales have been running modestly negative since spring.
This makes it tougher for the handful of American fund companies with marketing operations in Canada. Fidelity Investments, Templeton, Piper Jaffray and G.T. Global all do business up north--the last two starting fairly recently. U.S. fund companies must offer separate fund products in Canada.
More firms could be on the way, following an interpretation by Ontario regulators this year that foreign companies don’t have to set up an office in Canada to do business there.
One factor arousing the interest of U.S. fund companies is the relatively immature state of the industry in Canada. Despite a bountiful number of products up north, mutual funds tend to be considerably smaller than here.
“We feel the (fund) industry will grow more dramatically in Canada,” says Joe Canavan, president of G.T. Global Canada, a subsidiary of San Francisco-based G.T. Capital.
The U.S. has about six times as many funds as Canada, but with roughly 20 times the assets. “The Canadian market has about the same level of growth as the U.S. did in 1985,” says Chethan Lakshman, product manager for Fidelity Investments Canada. America’s population is nearly nine times as large.
A turning point for the mutual-fund industry up north came a couple of years back, when Canadian banks--which wield greater clout in the investment arena than their U.S. counterparts--started to sell their own lines of funds.
“The legitimization of mutual funds didn’t happen in Canada until the banks started selling their proprietary products,” says Lakshman.
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Today, four Canadian banks rank among the 10 biggest fund marketers in the country.
Partly because of their smaller size and higher management fees, Canadian funds tend to be more costly to own than their American counterparts. However, expense ratios on Canadian funds are likely to compress as competition intensifies, predicts Rudy Luukko, mutual funds editor for The Financial Times of Canada.
As in the United States, funds loaded with a sales charge have captured the lion’s share of the Canadian market.
In an interesting twist, Fidelity’s Canadian operation sells all of its funds through brokers with loads attached--a major departure from its American marketing focus.
Since setting up shop in 1987, Fidelity has become the No. 6 player overall and largest American entrant in Canada with $6 billion in assets. The company has a dominant 25% stake of the market in French-speaking Quebec.
“That’s Fidelity’s largest market share in any jurisdiction in the world,” says Lakshman.
Fidelity prospectuses are printed in both English and French, and some marketing literature is available in Cantonese to reflect the large Chinese population in many cities.
Canadian investors tend to be more conservative than their American counterparts, in the sense they are more willing to seek out and pay for professional help, observers say. But Canadian shareholders have a larger stake in equity products than American fund investors.
Canadians have an important incentive to invest in the domestic stock and bond markets through their Registered Retirement Savings Plans--tax-sheltered vehicles that operate much like individual retirement accounts in the United States but with larger contributions allowed. Non-Canadian investments are limited to a maximum 20% stake in these accounts.
But Canadians also have a reason to invest in other countries considering that Canada weighs in at only about 3% of global stock-market values.
“To have a reasonably diversified portfolio, it’s a lot more important for Canadians to have global holdings than Americans,” says Luukko.
Global and international funds have figured prominently among the new products rolled out in Canada in recent years. At Fidelity’s Canadian unit, for instance, three-quarters of the assets under management are invested in the United States and other foreign markets. Templeton and G.T. Global also are known for their international expertise.
Canadian residents who spend their winters in places like California, Arizona and Florida have yet another reason to invest internationally: currency depreciation.
Since a 1991 peak, the Canadian dollar has dropped from about 89 U.S. cents to 72 cents. That has eroded living standards for “snowbirds” visiting warmer climes in the United States, says Terry Ritchie, a Scottsdale, Ariz., certified financial planner with expertise in cross-border tax and investment matters.
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Although Canada’s economy has been strong this year--helped by the weak currency--the general mood is negative, says Ritchie, who grew up in Calgary and makes frequent trips north.
“A lot of clients are looking for ways to get their money out of Canada,” he says. The currency’s decline, higher tax rates, huge government deficits and the failure of a large life-insurance company are some of the factors behind such thinking.
To satisfy investors nervous about currency considerations, several companies have come up with an interesting solution: Canadian mutual funds denominated in either Canadian or U.S. dollars.
While U.S. mutual funds can’t be marketed in Canada, Canadians who spend time in this country might want to purchase shares of American portfolios, says Robert Keats of Keats, Connelly & Associates, a Phoenix firm specializing in cross-border financial issues.
Buying U.S. funds isn’t necessarily easy, as Canadians should be willing to apply for a U.S. Social Security number and have an address here, says Keats. And even then, Canadians still might encounter paperwork and administrative hassles if dealing with U.S. brokerages or fund companies that aren’t used to servicing seasonal visitors.
Estate taxes pose another potential problem, says Keats, because under current law Canadians who own more than $60,000 in real estate and other American investments could face taxation in this country, compared to the standard $600,000 estate-tax exemption for Americans. However, a treaty amendment (not part of NAFTA) is likely to be enacted by both countries reasonably soon, which would largely solve this problem, Keats says.
These problems aside, Canadian snowbirds might still find it worthwhile to own some U.S. mutual funds, given the funds’ lower expenses and denomination in American currency. “This can be a good way to generate U.S. income to finance a winter stay,” says Keats.
How Canadian Funds Invest
More than 50% of Canadian mutual fund assets are earmarked to foreign and domestic stocks, compared to 40% of holdings in the United States. Here’s how Canadian mutual fund assets break down by investment category:
Can. stocks: 22.8%
U.S. stocks: 3.3%
Other foreign stocks: 21.1%
Can. balanced: 13.6%
Can. money market: 11.5%
Can. bonds: 11.0%
Can. mortgages: 10.8%
Other: 5.9
Source: Investment Funds Institute of Canada
