The industry’s medium-term future hinges on demographics, changing fee attitudes, and internal competition, among other trends
Canada’s investment fund industry has come to represent over a third (36.1%) of Canada’s total personal financial wealth, with $1.6 trillion in assets held in mutual, individual segregated, and ETFs. While healthy economic growth and rising capital market valuations have contributed significantly to this growth, numerous other trends have shaped its advance over the past decade — and will continue to influence it in the years ahead.
In a new report titled Canadian Investment Funds Industry: Recent Developments and Outlook, which was released by the Investment Funds Institute of Canada, Strategic Insight took note of key themes and areas of development within the industry.
Focusing on factors behind product design, the report highlighted the dilemma presented by two disparate age groups: seniors and millennials, whose distinctly different demands must be simultaneously addressed by investment fund managers and distributors. Aside from that, the industry players have had to contend with four factors likely to continue over the medium term:
- Emergence of non-traditional competitors in product manufacturing and distribution;
- Regulatory changes geared toward investor protection via transparency and education;
- A change in investor risk attitudes toward preserving capital; and
- Ongoing impact of new technologies on all stakeholders.
Those trends, the report noted, helped the rapid ascension of ETF products, with ETFs owning nearly one tenth of all investment-fund assets as of 2018. With ETF-managed assets expanding strongly from strong equity-market performance and wider availability and range of ETF products, they have become a large-enough contender to mutual funds that they can be legitimately positioned as both a complement and a competitor.
“Despite its generally positive experience and prospects, the ETF sector faces a number of challenges,” the report said. Aside from perceived vulnerabilities to market, liquidity, and concentration risks, ETF manufacturers — particularly new entrants and independent issuers — must deal with the challenge of reaching profitable scale. Tied to that is the increasing competition within the field, especially as large Canadian banks enter the fray; to the extent that certain platforms allow investments across borders, Canadian ETFs also face some degree of competition from US-listed products. Finally, issuers with novel products will find it hard to sustain a first-mover advantage as product proliferation and commoditization take hold.
Stand-alone funds, the report noted, have also lost market share to asset-allocation solutions over the years. Aside from the need to manage market risks, fund wraps have benefited from the increasing need for time efficiency among advisors needing to focus more on financial advice and planning.
Turning to distribution, the report highlighted the importance of DIY channels, robo-advisors, and direct-to-investor platforms as the expansionary domain of ETFs. Hybrid channels combining the best features of digital- and advisor-based channels are also set to expand more quickly than conventional advice-based networks. A factor that cannot be ignored is the continuing move to fee-based advisor practice models, which is expected to drive $2.9 trillion in assets into discretionary and non-discretionary fee-based accounts across all distribution channels by 2026 — “an increase of $2 trillion, the equivalent of an 13.0% compound annual growth rate over the decade.”
Given the Canadian investment funds industry’s maturity in terms of relative size and level of concentration — which has been impacted by mergers and acquisitions over the past decade — as well as barriers to achieving significant scale, the report said that the industry, particularly the mutual fund sector, will probably not see medium-term expansion in terms of participant numbers.
“It is worth noting that concentration, at an even faster pace, has been also witnessed in the two primary advice-based channels; those regulated by the Investment Industry Regulatory Organization of Canada (IIROC) and those regulated by the Mutual Funds Dealers Association of Canada (MFDA),” the report said.