The High Price of Change

How Canada's money management landscape has changed.

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1155329_coin_towersInvestors, be they plan sponsors or individuals, are forever searching for money managers to help them enhance their wealth. However, the returns investors expect are affected by the inherent costs (e.g., management fees, brokerage commissions, custody fees, audit fees, etc.) incorporated in the management of these funds. One cost that seems to be ignored is the expense of switching from one management organization to another. All too frequently the changes within the money management industry are created by firms themselves resulting in clients having to find someone new to manage their assets. In this article I address the changes in our industry over the past 35 years with data presented in Benefits Canada, which has published the Top 40 Money Managers Report ranking (by pension assets) since 1978. As a packrat, I just happen to have all 35 annual issues. The money management community waits with bated breath for the published results every year to see, whether their firm made it into the Top 40, whether they improved their lot from the previous year, and to see who is gaining assets or losing assets.

I believe that there is a perception that the Canadian money management community has been fairly stable over the past three-plus decades. In reality, the community has undergone significant changes.  As an indication, there have been over 130 mergers, acquisitions, takeovers, going publics and going privates within the Canadian money management space with some firms changing hands more than once.  As an example, only three of the Top 40 money managers in 1978 made it into the Top 40 in 2013.

In the 1950s and 60s, the pension community and mutual fund industry in Canada were embryonic – just starting to get some traction. In those days, the bulk of the monies of most types of investors were managed by institutions – mainly trust companies and insurance companies.  It was not until the early to mid-80s that the independent, money management firm constituted the leading share.

Classification methodology

I have found that the money management firms in the Top 40 list fall neatly into five main categories:

1)     Institutional (i.e., banks, trust companies and insurance companies. Here assets are often gathered through the client relationships they have from other corporate services they provide);

2)     Independent (i.e., money management firms where investment management and asset gathering are truly independent and the majority ownership is held by the partners in the firm. If there is a large, external single shareholder and the shareholder is primarily passive, I have placed the firm in this category);

3)     Foreign-Owned (i.e., controlled subsidiaries of foreign firms. The one exception here is that I included any foreign-owned insurance company in the Institutional category rather than in the Foreign-Owned slot, as they tend to operate their money management business more autonomously within the Canadian marketplace);

4)     Captive (i.e., firms that have either an institution or a pension fund sponsor as a major shareholder; but, also “act” as independent managers for other organizations); and,

5)     Specialty (i.e., those Canadian firms that offer just one product line, like real estate, and, therefore, are a niche provider to the plan sponsor community, this category also includes those firms that provide a multi-manager structure where money is outsourced to sub-advisors for the various asset classes).

I have made one other adjustment: I have removed firms (e.g., BIMCOR and CDP) from the list that have a captive client base and do not market their investment management expertise across the country.  As well, Benefits Canada did include these two organizations for a few years and later removed them from the Top 40 list.  To be consistent, when removing these firms, I have added those firms that would have been listed 41st and 42nd.

Assets by manager type

The following Table shows the breakdown of money managers and assets under management into the five categories outlined above – as at June 30th in each year (click image to enlarge):

JJ_Chart 1


As shown above, the makeup of the investment management community has changed significantly over the past three decades. Here are some highlights:

­   Pension assets were, virtually, non-existent prior to the 1980s – with total trusteed pension assets crossing the $50 billion dollar mark for the first time in 1980.

­   The pension market in 1978 was dominated by trust companies and insurance companies (accounting for three quarters of the assets managed by the Top 40 firms). Both charged quite low fees, often bundled with custody and other services. When the independent, Canadian money organizations began to emerge, they had to set their fees similarly low in order to compete with the institutions. The result: Canada still has among the lowest pension fund management fees of any of the major developed countries around the world (a nice plus for Canadian plan sponsors). There were also no Independent money managers within the top 10 firms in 1978.

­   In the complete 1978 listing of Canadian money managers, there were 31 firms included under the title Investment Counsellors. Of those, only three (i.e., Beutel Goodman, Guardian Capital and Jarislowsky Fraser) have survived in their original form. Of the 19 insurance companies listed, only four are in the Top 40 today; and all 15 trust companies have disappeared.

­   The institutions have lost their dominant position over the past 30-plus years, with the percentage declining from just over three quarters in 1978 to just under one-fifth in 2008. The rebound over the past five years (to approximately one-third) has been primarily the result of CIBC acquiring TAL, Royal Bank acquiring Phillips, Hager & North and Co-operators acquiring Addenda. All three of these organizations were within the top 10 money management firms when they were acquired.

­   Firms falling into the Foreign-Owned category now represent close to 40% of the assets managed by the Top 40 firms, up from no representation in 1988. As an aside, the first foreign manager to enter the Top 40 was in 1991 when Barclays acquired E.J. McConnell.

­   In 1978, just over three-quarters of trusteed pensions assets were managed by the Top 40 money managers in Canada. Today, the percentage has fallen to just under 50%. Some 40% of all pension fund assets are managed internally by firms such as the CDP, CPPIB, OMERS, Ontario Teachers, etc. The remainder of the pension assets are managed by money managers outside of the Top 40.

The first tipping point

The end of the 1970s brought an abrupt halt to the domination of the Institutions in managing pension fund assets. Between 1978 to 1988, the assets of trusteed pension funds increased by a factor of five times, while pension assets of the Top 40 only tripled. The pension assets managed by Institutions did not even double. One reason for this anaemic growth by institutions can be attributed to the Wood Gundy Measurement Service. This was one of the first peer group sampling firms in Canada. It was the first time managers were compared to each other, however the more important change was the way the service presented the data. They separated out the aggregate performance of trust companies, insurance companies and investment counsellors – at least showing the median return for each of these three manager types.

The median returns for trust companies and insurance companies were quite close to each other while the median return for the investment counsellors was consistently about 100 basis points higher. This measurement service was considered to be independent, third-party, and with no apparent biases. It was not unusual for investment counselling firms to use the results of the survey to convince the clients of the Institutions that they were more “capable” of managing their pension fund assets.  However, were the investment counsellors really that much better at managing money as this measurement service seemed to show? Or was there another explanation?

The following Table shows the asset allocation of trusteed pension funds as at December 31, 1978:


Some observations from the Table above:

  • In 1978, the asset mix was dominated (approximately 80%) by fixed-income investments, a good portion in mortgages – a specialty of the Institutions.
  • The short term allocation was, basically, GICs, another specialty of the institutions. This was considered an asset class rather than a tactical defensive bet against a market decline. Bonds were, generally, of a mid/long duration, which Institutions believed, at the time, were safe/ secure assets.
  • The Other category was, essentially, term loans offered by the various trust companies and insurance companies.
  • Equity-type investments represented less than one-fifth of the assets of trusteed pension assets at this time.

Now, consider the following four facts:

1)     Virtually all pension fund assets managed throughout the Seventies were managed on a balanced fund basis.

2)     The decade of the 1980s produced mid-teen annualized returns for both the Canadian and U.S. stock markets.

3)     In the 1980s, the consulting community began to emerge as a catalyst in the design of investment policy for plan sponsors. This resulted in a number of asset mix models, both asset-only and asset/liability driven, that tended to arrive at what became the standard 60/40 equities/fixed income mix.

4)     Bond yields in the 1970s were rising at an alarming rate, with concomitant capital losses in bond prices, making the fixed income component of any pension fund structure a significant drag on overall performance results until yields peaked in late 1981.

Given the significant fixed income exposure by the institutions (considered their expertise), with a large exposure to mortgages (which investment counsellors could not provide directly) in a rising interest rate environment in the 1970s, it is of little wonder that the higher exposure to equities (with the support of consultants) by the investment counselling firms resulted in the disparity of approximately 100 basis points in total return – favouring the counsellors. In fact, as tactical/asset mix management was, generally, not practiced by the Institutions, it is surprising that the variance in returns was not significantly higher.

So, back to my original question: were the investment counselling firms actually that much better at managing money than the institutions?

Not necessarily. The primary difference was due to the asset mix allocations. And, since most money management firms originating in the late 1970s and early 1980s were started by investment professionals who left these institutions, it is not realistic to expect that these average managers from institutions became superior managers just by walking across the street and setting up their own firm.

The second tipping point

In the 1990s and early 2000s, the Canadian investment counselling firms began to lose their dominant position to the foreign money managers. In the early 1970s, the Federal Government introduced the Foreign Property Rule – which, as it transpired, had a significant negative impact on both the growth and diversity of Canadian money management firms (and, likely, on the Canadian plan sponsor community).  This rule was created within the Income Tax Act and placed a penalty on pension assets that exceeded a 10% limit on foreign investments. As a result, the majority of Canadian money management firms did not find it economical to build an investment management team totally dedicated to investing outside of Canada. The result was that the management of foreign assets was ceded, by default, mainly to foreign firms – a position they have consolidated over the past 10 years.


The changes within the Canadian money management industry over the past three decades have been much greater than most observers might have realized. The major moves have seen the institutions give way to investment counsellors and, then, starting in the 1990s, Canadian investment counselling firms losing their dominant position to the foreign-owned firms.

Why do we care about all this management activity?  Isn’t it all in the direction of improved skill sets?  Maybe, if there really is a payoff to skill in today’s relatively efficient markets, after all costs. And, if those making the change can, on average, identify above-future-median replacements for managers being dropped. But, for sure, there is a cost associated with change. Usually when ownership changes at a management firm, or simply as the herd moves, it triggers manager re-evaluations, and, typically, a manager search and replacement. The transactions costs, market impact, and advice costs could well total as much as 1% of total pension fund assets moved from one manager to another. One should be sure the change is necessary.

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