Canadians shop global brands yet buy asset managers locally

For many investors names like Morgan Stanley, T. Rowe Price and John Hancock may be familiar brands.  Others like Principal Group, Edgewood, Laudus, Alger and Valic may be completely foreign.  What each of these companies have in common is two fold, one they all have top performing Large Cap US equity funds and two the majority don’t do business in Canada.  Of the top 30 managers in Canada ranked by AUM, 5 are foreign.  Natixis Investment Management, a French company and the worlds 14th largest asset manager with over $700B in assets just left Canada after not being able to gain traction.  Is there a cost to Canadian investors of having an investment industry with limited breadth and how can we attract more foreign talent to Canada? 

Of the top 50 Large Cap US equity funds in the US ranked by 10 year return to the end of Dec. 2018 only 5 were products from companies that do business in Canada.  There were 4 products from Fidelity and 1 each from Vanguard and Franklin Templeton.  The remaining 46 were from companies without a Canadian retail presence.  That would not be an issue if Canadian based managers have equalled their US counterparts in respect to performance, risk, etc.  We reviewed all US Equity funds in Canada that have a USD share class.  The top performer in Canada, in USD and CAD terms over a 5 year return to the end of December 2019 is the Dynamic Power American Growth fund with a return of 16.96%.  This was an excellent result but still fell short of the top US fund the Morgan Stanley Multi Cap Growth fund which annualized 17.98% over the same time period.  However, if you didn’t pick the top fund in Canada the deterioration in return is substantially higher in Canada vs. a broader US manager market.  In the number 10 spot in the US is the Edgewood Growth Retail Fund that returned 15.97% compared to the Canadian counterpart at 11.68%.  That works out to an extra $233,710 on a $1M investment in just 5 years.  Looking at CAD series funds the number 10 spot is Fidelity’s US Focused Stock with a 14.99% return, with the conversion to CAD that is reduced to 14.06% resulting in an almost 2% differential versus the Edgewood Growth Retail Fund.

Money is being left on the table due to domestic biases which is even more pronounced among large Canadian funds.  The largest Canadian fund in the US equity category is a $6.2B fund.  Over the last 5 years it returned 10.6% in CAD to the end of December 2019.  The largest active US equity fund in the US is the $120B Fidelity Contra Fund that returned 13.1% in USD terms.  Converting to CAD would add another 1% resulting in a 3.5% shortfall between the two large funds.  The result is even more surprising when you consider the size of the Contra fund relative to it Canadian counterpart, the smaller fund should do better.  The majority of the other large funds have had similar results with the outliers being TD US Blue Chip, Desjardins American Equity Growth, and Dynamic Power American growth.  If you didn’t pick these few winners you likely experienced underperformance versus a more broad US opportunity set of 2-5% which is real money over a 5 year or longer time period.    

There are more investors and asset management firms that are taking notice of the results in Canada and sourcing credentialed, experienced and successful global asset managers and bringing them to Canada.  Many may be foreign names, smaller or larger managers that just don’t operate in Canada.  Being open to doing something different can have a significant impact on client portfolios.  The difference is worth the investigation and will make the Canadian wealth management industry even stronger.