Holland warns on costs, sees strong RRSP season

Canadian mutual fund companies must keep a closer eye on costs, or they risk losing market share, according to the head of one industry giant.

“I don’t think there is even an option to increase the management fees charged to investors anymore. It would be very difficult to increase trailer fees from where they are,” said William Holland, CEO of CI Financial. “It’s unconceivable in my view that we can charge higher management fees. I think the market has really capped here at 2% plus modest expenses.”

Holland was speaking to analysts in CI’s third-quarter conference call. When asked if he expected rival fund companies to boost advisor compensation as a competitive measure, He warned that such an increase in expenses would inevitably be shouldered by investors. That, he said, would hand the industry to the banks.

“If you start looking at the funds in different companies with strong performance, if they have high management fees, they stop selling way quicker than ones that have more competitive management fees.”

Looking to the market, Holland said he expects funds sales to be strong during the upcoming RRSP season, but he believes Canadian investors will opt for domestic investments rather than foreign equity. This is almost a reverse of the sales trend of the RRSP sales season earlier in 2007, which saw sales driven by foreign equity as investors diversified their portfolios.

What has happened since then? Holland says the shift will be a direct result of the high Canadian dollar. The rise in the value of the loonie, almost 7.5% in the third quarter alone, has in many cases completely negated the returns on many foreign equity funds, regardless of their underlying performance.

“If the RRSP season starts today it would be exceptional. Lower [interest] rates will do a lot for mutual funds sales,” Holland said, noting his company has already seen $50 million in net sales for the month of November. “But Canadians who had been moving into foreign funds just got creamed.”

In particular, Holland predicts Canadian balanced funds will be the hot seller during the RRSP season as investors remain committed to diversifying but will want to limit the effects of currency exposure.

CI’s conditional bid for DundeeWealth drew the most questions on the call. Holland said for all intents and purposes CI’s bid is dead, as it did not issue a circular at the end of last month. Holland pointed out that the majority of the controlling votes are controlled by one shareholder — Ned Goodman — and that there is no interest in selling at this point.

“The circular has essentially been sent out to one person. We sent out a bid in a press release to Dundee, the person at Dundee. [He] has the ability to say yes or no. It doesn’t matter what the other shareholders think; we cannot do a deal without the endorsement of that single shareholder,” Holland said. “Sending out a circular to other shareholders is a waste of paper and may even be offensive to that single shareholder, given that the deal can’t go on without his endorsement.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com