The Market for Mutual Funds Is Shifting. How Should You and Your Clients Navigate the Changing Investment Landscape?
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FOR FINANCIAL ADVISORS • 2019 The market for mutual funds is shifting. How should you and your clients navigate the changing investment landscape? Pages 23-44 ERHUI1979 / ISTOCKPHOTO (2) 2019 MUTUAL FUND GUIDE Presented by INVESTMENT EXECUTIVE CONTENTS PRODUCTS 30 26 BUCKING A TREND For the first time in a decade, ETFs outsold mutual funds last year. Was this the result of a down market, or a sign of things to come? By Rudy Luukko 30 COULD 0% BE THE FEE OF THE FUTURE? Repricing of mutual funds likely won’t result in rock-bottom fees, experts say By Michelle Schriver STRATEGIES 34 PTFs: WHERE ARE THEY NOW? 37 TAX-PLANNING TIPS A mutual fund innovation waits for its moment in the sun FOR MUTUAL FUND INVESTORS By Rudy Luukko Choosing the right strategy comes down to understanding a fund’s distributions and structure 35 HEDGE FUNDS FOR By Rudy Mezzetta THE AVERAGE INVESTOR Advisor and client interest in 38 A MATTER OF CHOICE liquid alternatives remains to be seen RI mutual funds now share the stage with similar ETFs, By Andrew Allentuck offering the socially conscious investor more choice 36 OVERSIGHT: A WORK-IN-PROGRESS By Leah Golob Looking at the big picture on mutual fund regulation By James Langton PEOPLE 40 BRINGING SCALE TO THE INDUSTRY 26 The head of one of Canada’s largest independent fund companies reflects on the evolution of mutual funds By Patricia Chisholm 42 EYES ON EXPANSION ETF heavyweight Vanguard entered the Canadian mutual fund market last year. What’s next? By Dwarka Lakhan OPINION 44 KEEPING IT SIMPLE You’re bombarded with products and strategies — but you don’t have to use them all ERHUI1979 / ISTOCKPHOTO (2) By Dan Hallett 24 Investment Executive’s Mutual Fund Guide 2019 Your little voice knows it’s good to stand up for an investment that has stood the test of time. The words “long term” get used a lot. We’re prepared to quantify it. Manulife Monthly High Income Fund has outperformed 97% of its peer group over a 21-year period.* That’s something to stand for. Performance as of April 30, 2019 for Manulife Monthly High Income Fund Advisor Series (Canadian Neutral Balanced Category+) over a 21 year period* (Inception Date September 30, 1997): 1 3 5 10 15 20 21 Year Year Year Year Year Year Year Fund returns 6.71% 5.97% 6.41% 8.88% 6.96% 9.14% 8.58% Category+ avg returns 5.99% 5.61% 4.35% 6.51% 4.96% 4.90% 4.70% Outperformance 0.72% 0.36% 2.06% 2.37% 2.00% 4.24% 3.88% % of Peers Beaten 65% 65% 65% 91% 85% 97% 97% Funds in category+ 759 674 504 193 89 37 30 * Manulife Monthly High Income Fund Advisor Series, remains capped as of August 28 2015. Performance histories are not indicative of future returns. The fund is available in Series B and Series F. Fees and expenses may differ between series. Investing. Do it different. manulifeinvestments.ca/different © 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. **The payment of distributions is not guaranteed and may fluctuate. If distributions paid by the fund are greater than the performance of the fund, then your original investment will shrink. Distributions should not be confused with a fund’s performance, rate of return, or yield. You may also receive return of capital distributions from a fund. Please consult with your tax advisor regarding the tax implications of receiving distributions. See the fund facts as well as the prospectus for more information on a fund’s distributions policy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in share/unit value and reinvestment of all dividends/distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Manulife Funds are managed by Manulife Investment Management. Manulife, Manulife & Stylized M Design, Stylized M Design and Manulife Investment Management are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. MP1065449E 05/19 PRODUCTS BUCKING A TREND For the first time in a decade, ETFs outsold mutual funds last year. Was this the result of a down market, or a sign of things to come? BY RUDY LUUKKO hen financial markets have a down year, sales of invest- ment products usually move in the same direction. This is part of the natural ebb and flow of the 86-year-old Can- Wadian mutual fund industry, which has endured multiple recessions and bear markets. Yet in 2018, the trend of falling markets causing falling sales was only partly true. There was a pronounced shift in sales leadership: ETFs — outweighed by a factor of roughly 10 to one in assets under management — outsold mutual funds for the first time in a decade. Plunging equities in the fourth quarter of 2018 spooked mutual fund investors, causing a reversal of the previously positive inflows. For the full year, long-term funds had $2.5 billion in net redemptions, the Investment Funds Institute of Canada (IFIC) reported. Mean- while, the Canadian ETF Association reported net ETF creations of $20.9 billion last year, behind only 2017’s record $25.8 billion, with equity ETFs leading the way. It would be wrong, however, to characterize the recent sales trends in terms of winners and losers among investment fund providers. Increasingly, mutual fund companies — in one form or another — are ERHUI1979 / ISTOCKPHOTO also involved in the ETF business. There’s an attitude of confidence that whatever fund structure investors tuting a very significant incentive for people to do more and financial advisors want is fine. In a sign of industry of that,” Cardone says. convergence, IFIC began this year to also cover ETFs in its Fund companies In today’s mutual fund market, particularly in monthly reports on fund industry assets and sales. that have chosen the advisor channels, says Cardone, there’s a greater For their part, fund companies that have chosen not not to create emphasis on value for money. That does not necessarily to create ETFs can still draw upon huge distribution mean low-fee passive strategies. “We continue to hear networks, such as deposit-takers’ branch networks, ETFs can still from some companies that have products that have other proprietary sales forces and independent dealers draw upon huge been selling very well and are actively managed.” who aren’t licensed to do business on stock exchanges. Carol Lynde, president and CEO of Toronto-based But these fund sponsors recognize that there’s intensi- distribution Bridgehouse Asset Managers, cautions against fied competition, downward pressure on management networks reading too much into recent product preferences. Sales fees and high compliance costs. This situation has trends run in cycles and can change quickly, she says. created a sense of urgency to operate efficiently, deliver For example, mutual funds again outsold ETFs in the competitive returns and provide excellent service. first quarter of 2019. In explaining why ETF inflows have been more resilient, Carlos “When we look at what we have to offer to Canadian investors and Cardone, senior managing director with the Toronto office of New to advisors, it’s important for us to focus on the fundamentals of what York-based Strategic Insight Inc., says ETFs are benefiting from a we do, be consistent with our style [and] be consistent in how we ser- substitution effect. To a large extent, direct holdings of securities in vice our clients, our advisors and our dealer firms,” says Lynde, who is the brokerage channel are being replaced by ETFs. This is particularly IFIC’s vice chairwoman and will take over as the group’s chairwoman true of bonds. “You’re finding ETFs these days in the fixed-income later this year. space with flavours that are very difficult to access for brokers, for As an industry leader, Lynde looks to work with securities regula- pretty much anyone,” Cardone says. tors to create a “level playing field” for mutual funds. “In some cases, In many cases, ETFs are also replacing mutual funds in the full- perhaps there’s a greater level of oversight and cost related to mutual service and discount brokerage channels. Among the funds most vul- funds than there is to other vehicles” she says. “We need to [ask], nerable to redemptions, says Cardone, are broadly based equity funds ‘Have we gone too far in terms of the regulation minutiae around with holdings similar to the market benchmark that charge higher owning a mutual fund?’ Because Canadians are questioning the cost fees than their ETF rivals. “Those funds are not finding it very easy to vs that benefit, and [they] may be going to products that are less regu- continue to grow.” lated than a mutual fund.” Depressing sales of all investment types is the accelerated payment Bridgehouse offers several lines of actively managed mutual funds of household debt. Strategic Insight calculates that in 2018, an addi- but isn’t jumping on the ETF bandwagon.