Innovation in Retail Asset Management: 1960 to 1980

• Launch of Index Funds (Vanguard – 1975)
• Acceleration of mutual fund sales in the US first true “star manager” in Peter Lynch / Fidelity.
• 1980 – $8 billion est
• 1985 -$15 billion est.

Sold Not Bought: Role of Salesperson Compensation:

Historically: One time commission paid by investors (up to 9%)

1987 – Launch of deferred sales charge and trailers paid out of management fee of 2.5%

Front end commission: 4% upfront plus trailing commission of .5%

Backend compensation: Nothing upfront

but 1% trailing commission

Power of salesperson led to “buying business”. Sales people fueled major change in the way Retail Asset Management started.

Banks start to focus on fund sales via branches

• Growth of independent advisors – shift away from captive sales organizations (closed to open)
• Focus on stealing customers from banks
• Emphasis on US and global funds outside Canada to overcome home market bias
• First ETFs launched in Canada (TIPs)

Growth in Canadian Mutual Fund Industry (billions)

1980 – $   8  est                1995 – $144

1985 – $ 15 est                  1996 – $211

1990 – $ 25 est                  1997 – $287

1991 – $ 50 est                  1998 – $335

1992 – $ 67                        1999 – $397

1993 – $115                       2000 – $433

1994 – $125                       2001 – $441

• Interest rates on GICs and bonds
• Boomer demographic / saving years
• Scepticism about CPP
• Market performance
• Media coverage
• Banks starting to focus on mutual funds (beginning with money market funds)
• Industry innovation
• Strategic Asset Allocation – STAR (Mackenzie funds only) and Keystone (include outside funds)
• Clone funds to get around the foreign content limit within RRSPs (originally 20%, later increased to 30%, then eliminated)
• Corporate class funds to allow investors to switch between funds without triggering capital gains
• Fee structures for HNW and fee based accounts

Growth of Canadian mutual  fund industry assets (billions)

2002        $404                 2010  – $   772

2003        $474                 2011  – $   769

2004        $524                 2012  – $   849

2005        $603                 2013  – $   996

2006        $696                 2014  – $ 1138

2007        $739                 2015  – $ 1232

2008        $585                 2016  –  $1339

2009         $694                2024  –  $2000 (Forecast)

Net sales of Canadian funds

2004      – $12 billion             2011 – $31 billion

2005      – $10 billion             2012 – $36 billion

2006      – $17 billion             2013 – $42 billion

2007      – $22 billion             2014 – $58 billion

2008       ($15 billion)            2015 – $57 billion

2009 – $  5 billion              2016 – $30 billion

2010 – $11 billion             2017 – $19 billion (to July)

 

1990                     1998                     2011                     2016

Banks                   36%                      29%                      46%                      53%

Independents      35%                      53%                      45%                      39%

Captive / Direct   29%                      18%                      9%                        9%

Loss in Share by Banks was due to:

• Performance
• Advice
• Internal Barriers
• Level of Focus and Priority
• Internal Conflict / Cultural Issues

Banks Made Five Key Decisions

1. Ensured competitive products – shifted to packaged solutions
2. Approached high value customers with dedicated branch financial planners
3. Aligned incentives – implemented variable compensation / pay for performance for planners
4. Deployed sales management for planner salesforce
5. Incentives to activate branch referrals from front end staff

 

Growth of Canadian ETF assets (billions)

2002        $   5                    2010      – $    38

2003        $   9                    2011  – $    43

2004        $   9                    2012  – $    56

2005        $ 12                    2013  – $    62

2006        $ 15                    2014  – $    75

2007        $  18                   2015  – $    88

2008        $  19                   2016  – $  114

2009   $  31                        2017 –  $  134 (August)

Threat from ETFs – Sales

ETFs       Mutual Funds  ETF Share of Funds

1999                     .07                 18              0.4%

2010                        3                  11                    27%

2011                        7                  20                   35%

2012                     11                  31                    36%

2013                        5                  42                    12%

2014                     10                  58                    18%

2015                    16                   57                    28%

2016                     16                  30                    53%

Three Types of Innovation

1 Breakthrough

• Passive investing: Burton Malkiel, Princeton
• Three factor research: Fama and French, Value, Small Caps and Momentum
• Junk bonds: Michael Milken
• Asset allocation: Gary Brinson
• Stocks for the long run: Jeremy Siegel, Wharton

2 Incremental

• Income Trusts
• Income oriented offerings / return on capital
• Dividend growers vs dividend sustainers
• Low volatility funds
• Fundamental indexing / Smart Beta
• Active share
• Geographic sectors – Emerging Markets, Frontier, Japan
• Industry sectors – Technology, Energy, Pharma, Telecom, REITS
• Tax driven
• New instruments – Leveraged loans, Floating loans, Bank debt
• Market sectors – small caps, mid caps
• Market Responsive
• Fee structures
• Tax structures
• New pricing and features targeted to different segments