It was only a matter of time before Vanguard Investments launched mutual funds here in Canada to accompany its active and passive ETF offerings as it’s done for a long time south of the border.
“Given our growth and popularity with Canadian ETF investors over the past seven years, we feel the time is right to launch mutual funds,” Atul Tiwari, managing director of Vanguard Investments Canada Inc., told The Globe and Mail. “We brought the Vanguard effect to ETFs and we believe that the Canadian mutual-fund industry could benefit from some price competition as well.”
Tiwari’s statement could very well be the understatement of the year in the Canadian financial services industry. The assault it has made on fees south of the border is legendary. Here in Canada, cuts haven’t been nearly as aggressive, but it appears that Vanguard is willing to shake things up a little.
Canada always lags
As is always the case in the Canadian market, nothing is ever exactly as it seems.
Vanguard is introducing four actively managed mutual funds, but only as F-series funds, which are lower than individual fund fees because they are charged in addition to the fees you pay your financial advisor.
So, if you have two financial advisors charging 1% annually for their advice and one uses the new Vanguard funds and the other doesn’t, the client whose advisor does use them pays 1.4% annually while the client who doesn’t pay 1.8% or 29% more fees for the same advice.
The good news if you live in Canada is that Vanguard’s probably only getting started. Since launching its ETFs in Canada, fees have dropped in almost every category in which it competes. You can bet the same thing will happen by 2025 after Vanguard’s been in the mutual fund business for seven years.
Who loses from Vanguard’s entry
Anyone who sells a lot of mutual funds will be hit hard. Those providers charging higher than average fees are likely to be hit the hardest. At the end of 2017, Canadians had $1.6 trillion invested in mutual funds or approximately 10 times the assets invested in ETFs.
It’s a big deal, and given that Vanguard’s likely only gotten started, it will become an even bigger deal in 12-24 months as the pressure mounts to lower fees to match the U.S. behemoth.
Who suffers the most?
Not the banks. They’ve created a distribution system in Canada that’s second to none ensuring that all their mortgage customers also buy their own brand of mutual funds. It doesn’t matter if they’re expensive; surveys suggest convenience keeps Canadians faithful to their banks’ products.
Investors’ has some serious work to do
As I see it, one company has the most to lose from Vanguard’s launch with two other potential losers rounding out the suffering.
The first and most obvious is IGM Financial Inc. (TSX: IGM), whose mutual fund products include those offered by its Investors Group and Mackenzie Financial subsidiaries.
Investors Group’s largest mutual fund by assets under management, according to Rob Carrick’s June examination of Canada’s 100 largest mutual funds is its Investors Dividend Fund, Series C, with $16.9 billion AUM. It charges a management expense ratio of 2.80%, which is double what you’d pay for the F-series funds mentioned earlier and the accompanying advisory services.
Investors and Mackenzie have four other funds in the top 50 charging an average MER of 2.40% annually. While I’m a fan of its parent, Power Corporation of Canada, its exposure to high-cost fees is going to provide a headwind until it can get investors’ fees down in a meaningful way.
Two other potential losers are AGF Management Limited (TSX:AGF) and CI Financial Corp. (TSX: CIX), AGF because it is tiny in relation to many of the bigger players and can’t possibly fight a price war with Vanguard and CI because it has a lot of expensive mutual funds to go along with an ETF business without the the size and scope to compete with iShares.
Both AGF and CI are stocks I’ve recommended in the past. Generally, I don’t have a problem with their businesses. However, the latest move by Vanguard suggests that all bets might be off.
