Vanguard Upends the World's Costliest Market for Equity Funds

(Bloomberg) -- The Vanguard effect is coming for the Canadian mutual fund industry, which charges the highest fees in the world to manage equities.

Vanguard Investments Canada Inc., known for its bargain-basement fees on exchange traded funds, is launching its first suite of mutual funds with a maximum management fee of 0.5 percent. That compares with a median expense ratio of 2.23 percent for Canadian equity funds in 2017, the highest of 25 countries, according to a Morningstar study.

“We’ve brought the cost down for Canadian ETFs and our competitors have brought their costs down to compete,” Atul Tiwari, managing director and head of Vanguard Canada, said in a phone interview. “We want to bring that same competition to the mutual-fund space.”

Vanguard will offer a global balanced fund, a global dividend fund, a U.S. value fund and an international growth fund, all of which have been offered by Malvern, Pennsylvania-based Vanguard Group Inc. in the U.S. or the U.K. The foray in Canada is part of a global push by the company that’s emphasizing actively managed funds over index trackers.

That strategy bucks the trend of mutual-fund providers moving into ETFs. Firms including AGF Management Ltd., Mackenzie Investments Corp. and Manulife Financial Corp. have all recently entered the ETF space in Canada.

The Vanguard management fee could be less than 0.5 percent if the funds underperform their benchmarks, said head of product Tim Huver.

“In the industry in the past, you’ve seen almost this ‘Heads I win, tails you lose’ structure,” Huver said. “This really aligns the range of outcomes with the end investor in terms of the returns that they’re receiving.”

The funds will join Vanguard Canada’s lineup of 36 ETFs which have more than C$16 billion ($12 billion) in assets. Tiwari said Vanguard plans to introduce more mutual funds to the Canadian market in the future.

Although ETFs have been rapidly growing in popularity, they’re still dwarfed by mutual funds. Canadian investors had C$1.5 trillion invested in mutual funds as of May and C$157 billion in ETFs, according to data from the Investment Funds Institute of Canada and National Bank Financial.

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