U.S. fund firms find Canada tough sledding

After all, Canadian investors have begun flocking to such investments.

“Preliminary estimates for December indicate net [mutual fund] sales reached $2.8 billion (U.S.), the highest net sales for a December since 1996,” said Susan Yellin, director of communications for the Toronto-based Investment Funds Institute of Canada.

And most analysts are guardedly bullish.

“While returns will likely be somewhat lower than the 17% yielded by the [Toronto Stock Exchange] in 2006, the market’s overall performance will be that much more notable this year in light of a weakening Canadian economy,” said Jeff Rubin, chief strategist and chief economist of CIBC World Markets Inc., the wholesale and corporate-banking arm of the Toronto-based Canadian Imperial Bank of Commerce.

“Continued strong demand for energy, gold and base metals will push the TSX composite to 14,250 by yearend despite a sluggish domestic Canadian economy,” he said. As of last Wednesday, the index stood at 12,730. U.S. mutual fund issuers may be rightly afraid of competing for market share and profits with the Canadian banks that dominate the financial landscape north of the border.

Some U.S. mutual fund companies have tried. Toronto-based Fidelity Investments Canada Ltd., a subsidiary of the Boston-based fund giant, is the sixth-largest fund manager in Canada, as ranked by the IFIC. For the 10-month period ended Oct. 31, it had $255 million in net sales of long-term funds. The Fidelity unit suffered redemptions of $1.02 billion in the comparable period in 2005.

More than 80% of Canadians’ deposits and assets are managed by the top six retail banks.

Bank-owned firms 1-2

“By operating in a mature and relatively unchallenged market, Canadian banks have fine-tuned their customer interface. In doing so, they have developed an extraordinarily strong and technologically advanced customer service culture,” said Christopher Owen, managing director of BearingPoint Inc. in McLean, Va. “Few firms match the brand strength of the banks. They are used to dominating every business line they enter, be it mutual funds or mortgages.”

Indeed, according to the IFIC, two mutual fund firms owned by Toronto-based banks topped the asset flow charts in December. RBC Asset Management Inc. of Toronto once again was the month’s top-selling firm, reporting $464 million in net sales. TD Asset Management Inc., also of Toronto, was close behind at $455 million.

At least one Canadian mutual fund firm apparently is of the mind-set that if you can’t beat the banks, join them. On Dec. 4, the Toronto-based CI Financial Income Fund, parent of CI Investments Inc., also of Toronto, announced that it had extended through mid-2011 its investor services outsourcing relationship with RBC Dexia Investor Services of London, a joint venture of Toronto-based Royal Bank of Canada and Luxembourg-based Dexia BIL SA.

This outsourcing relationship is the largest of its kind in the Canadian market.

CI Investments was the laggard in November, with net redemptions of $203 million (U.S.). But other independent firms are faring better against the banks — and they are very confident.

Ranking third in December flows was IGM Financial Inc., Winnipeg, Manitoba-based parent of both Investors Group and Toronto-based Mackenzie Financial Corp. It reported $296 million in net sales. Montreal-based Power Financial Corp., which owns 55.9% of IGM, has confirmed that it is in talks about a possible purchase of Boston-based Putnam Investments from Marsh & McLennan Cos. Inc. of New York for $3.9 billion.

“It would make the most sense,” to add Putnam to IGM, Andre-Philippe Hardy, an analyst with Merrill Lynch Canada Inc., wrote in a Jan. 8 research note, because IGM has more “leverage capacity.”

If Power succeeds, more U.S. asset management purchases could follow, as “Power has a track record of taking part in the consolidation of industries it is in,” Mr. Hardy wrote.

Toronto-based Merrill Lynch Canada is a subsidiary of New York-based Merrill Lynch & Co. Inc.

U.S. mutual fund companies have one key competitive advantage: their knowledge of the U.S. market at a time when Canadian investors are more likely than ever to look outside their own country. Spurred by new rules allowing individual Canadians free rein to invest for their tax-sheltered retirements abroad, Canadians in November bought $1.3 billion of foreign-equity funds, making that asset class the month’s top seller, according to the IFIC. It was the third straight month of net inflows for an asset class that reported net redemptions of $242 million in August.

The Canadian fund industry has responded with a flood of global offerings. Among them are two dividend funds Investors Group introduced in December, stating in a release that the funds are “aimed at addressing investors’ need for income yield diversity and long-term capital growth.”