Asset Management in Canada: Dark Clouds on the Horizon

A new report by Morningstar highlights the issues these firms face. And it’s not pretty.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Managing money for other people is one of the world’s most profitable industries. As a firm grows its assets under management (AUM), costs do not grow nearly as quickly – as a result, asset managers with sufficient scale typically earn very attractive returns. In Canada, the story is even better, with relatively little price competition and high customer loyalty. But there are some dark clouds on the horizon.

A new report by Morningstar Equity Research highlights the challenges that Canada’s independent asset managers face. The banks are competing fiercely, and stealing share. Competition for top talent is as high as ever. And perhaps most importantly, fees are becoming more of a concern for investors.

IGM: Lackluster performance

IGM Financial (TSX:IGM) is the largest independent asset manager in Canada, with $132 billion in AUM. About half of this is in Investors Group, the other half is housed in Mackenzie Investments.

Investors Group has done an excellent job building its internal sales force, which keeps clients very loyal; the redemption rate for long-term mutual funds averages only 9% per year. But that number could go up in future years, because the funds have not performed well. Only 12% of the funds were rated four or five stars by Morningstar, compared to 28% for the mutual fund universe overall.

Mackenzie’s funds have performed much better, but the group has had more trouble holding on to clients. Organic growth has been negative for each of the last five years, with the banks taking much of that share.

CI Financial: Distribution concerns

CI Financial (TSX:CIX) has one of the best long-term track records in Canada. The company had the most funds rated four or five stars in the industry last year, and has ranked in the top two every year for the past 10 years. This has allowed the firm to enjoy much better growth rates than its large peers.

The concerns about CI primarily revolve around its distribution relationships with Sun Life Financial and Scotiabank. Sun Life is trying to build up its own asset management business, which means its advisors will likely be pushing clients to switch out of CI’s products.

Meanwhile, Scotiabank has had numerous squabbles with CI, which only intensified after the bank bought DundeeWealth in 2010. If Scotiabank is able to wean itself from CI’s products, even just a little bit, that could take a big bite out of CI’s AUM.

AGF: The most troubled

The problems at AGF Management (TSX:AGF.B) are a great warning about what can go wrong in asset management. In 2012, the management team behind its AGF Emerging Markets fund left for a competitor. The firm has also had trouble with performance, with only 30% of its funds outperforming their respective benchmarks.

AGF did a decent job of holding on to assets, but the issues have started to catch up to the company. Institutional AUM has been cut in half over the last two years – in November, AGF lost $2.6 billion in AUM from a single client defection.

Foolish bottom line

While all of these asset managers face their own problems, they share two big ones. First, Canadian banks continue to use their branch networks to steal clients. Second, there have been growing calls for reform on fees, which are among the highest in the world and offer little transparency.

Investors should probably steer clear of these companies’ shares. While they operate in a very attractive and profitable industry, the risks are just too great. And these risks will not disappear any time soon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Hands holding trophy cup on sky background
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »

oil and natural gas
Energy Stocks

Small OPEC+ Oil-Output Hike: Buy More Energy Stocks?

Energy stocks could soar higher, because oil markets will remain tight due to the small production increase by OPEC+.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

edit Person using calculator next to charts and graphs
Investing

Where to Invest $500 in the TSX Right Now

Long-term investors can look to buy stocks, including Suncor Energy and Shopify, as they are poised to outpace the broader…

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

falling red arrow and lifting
Investing

2 Oversold TSX Stocks That Should Bounce Back

Stocks that are oversold without an external catalyst like a market crash or a weak sector might be risky buys,…

Read more »