Research from InvestorCOM offers preliminary 12-month survey of significant changes
Just over nine months ago, the Canadian investment industry arrived at a crucial inflection point: the Know-Your-Product provisions of the client-focused reforms (CFRs) introduced by the Canadian Securities Administrators (CSA) officially came into effect.
Among other crucial elements within that change, the KYP CFRs require firms to assess relevant aspects of the securities and products on their shelves, and monitor those securities and products for significant changes.
While advisors, compliance officers, and other stakeholders are no doubt feeling the weight of the new rules already, a preliminary analysis conducted by InvestorCOM promises to create a more quantitative picture of the ramifications for Canada’s fund landscape.
“Prior to the CFRs, nobody was watching and measuring these changes,” said Dave Carr-Pries, VP, Consulting Services at InvestorCOM. “We thought it would be a great time before we reach the first anniversary of the CFRs to start quantifying that.”
Using its ShelfMonitor solution, InvestorCOM looked at data from its captured universe of slightly more than 62,000 mutual funds and just over 1,200 ETFs; it took the one-year period straddling the KYP CFR boundary, which includes June 1, 2021 until May 31 this year. The company will publish the full results and include a discussion in a webinar later this month.
Up until now, what changes count as significant remains a contentious question. To make sure it’s answering the most relevant questions, InvestorCOM focused its analysis on four fund data points – a fund’s category under the Canadian Investment Fund Standards Council (CIFSC) framework, its risk rating, its management expense ratio (MER), and its time horizon – that most of the client firms subscribed to its platform are using.
As Carr-Pries explains, a fund’s CIFSC category is determined based on the asset classes, geographies, and other areas where its holdings are concentrated.
“Generally, you’d think a fund’s investment strategy is fairly static, so its CIFSC category shouldn’t change that much,” he says. “But across the 62 CIFSC categories we tracked over the 12-month period, we detected over 2,000 changes for mutual funds, and 25 for ETFs, which is more than we expected.”
The nature of the CIFSC category changes vary widely. Some funds shifted from being a global fixed-income mandate to a global equity mandate as they crossed the key threshold of 60% stock exposure. Other funds, meanwhile, transitioned from being global equity funds to emerging-market equity funds as 90% of a given fund’s equity investments fell into the EM bucket.
“Over the past 12-month period, we saw two peaks in activity, including over 400 changes this February,” Carr-Pries said. “I think it just emphasizes the need to be able to stay on top of these things … you can expect risk rating changes after the introduction of a new product, but when it suddenly gets exposed to risk in a different way than you expected, it’s something you have to think about.”
Looking at MERs, InvestorCOM found nearly 40,000 changes over the 12-month period, nine tenths (89%) of which were less than or equal to 10 basis points. The changes were evenly split, with 52% showing upward moves, though Carr-Pries noted that larger-magnitude changes tended to be reductions rather than increases.
With respect to time horizon data, InvestorCOM saw 2,300 changes across the tens of thousands of funds covered by ShelfMonitor. Notably, 1,900 of those changes were newly reported values, which Carr-Pries said was spurred by conversations with clients who saw that as a gaping gap in the fund data they originally got from asset managers.
“I think one of the side effects of the CFRs is raising the bar on data quality,” he said. “Dealers and advisors are making a lot of decisions based on the data that's presented to them, which is probably through a data provider rather than directly from a sales rep, or a national accounts person from a company.”