Royal Bank of Canada and BlackRock Inc. are joining forces to sell traded funds, forming a rare partnership between Canada's largest asset manager and the country's largest ETF provider.
Under the RBC iShares brand, companies will create and market ETFs, which are better known as passive investments that track the major indices at lower rates than most mutual funds. The new brand will be the largest in Canada, based on assets under management.
For RBC, partnership is a way to strengthen its competitive position in the race to pool ETF assets. With the exception of the Bank of Montreal, Canadian lenders have been slow to adopt ETFs – even as investors increasingly use them to fill at least part of their portfolios.
By joining RBC, BlackRock will gain better access to a distribution network. Despite a wave of digital disorganization in financial services that has helped ETFs emerge as a popular phenomenon of do-it-yourself investment, the vast majority of investment funds are still sold through consultants in Canada – and RBC administers one of the largest consulting networks.
"There is an industrial revolution going on in asset management," said Martin Small, director of iShares in Canada and the United States, in an interview. "The modern portfolio will be different from the portfolio of the past."
The partnership is the means of BlackRock to keep up with all the changes. RBC also manages the largest asset management business in the country, and BlackRock will rely on its expertise to create "active ETF" strategies. The iShares brand is best known for investments in simple indexes, such as the S & P / TSX 60 Index ETF, which is Canada's largest ETF and follows the largest companies on the Toronto Stock Exchange for only 18 basis points annually, or 0.18 per cent .. However, the ETF market has become commoditized. To stand out, fund providers are creating more complex products that cost investors a little more money.
Damon Williams, director of global asset management at RBC, said in the interview that the RBC decision signals the perception that investor preferences have evolved.
"ETFs, no doubt, have become a growing part of the Canadian investor scenario," he said. "We want to make sure we continue to be relevant to these investors."
In the midst of this change, both companies were at risk of losing their leading positions in the market.
BlackRock manages $ 6.3 trillion globally, and iShares is one of the strongest brands known to Canadian investors and consultants. The company has nearly $ 57 billion in ETF assets in Canada, making it the market leader here.
But in recent years, BlackRock has been battling a growing number of competitors. Large mutual fund firms, which have been sidelined for many years in the ETF market – including large independents like AGF Investments, Mackenzie Investments and most banks – have entered the market in the past two years.
Today, BlackRock remains the leading provider of ETFs in Canada, but new entrants have stolen market share. While BlackRock controlled more than 80% of Canada's ETF market, its position declined to 36% as of December 31, 2018, according to a National Bank Financial report. Second place goes to Bank of Montreal, which is the only bank that has surpassed the trend and now has $ 48.6 billion in ETF assets under management.
RBC is navigating its own increasingly complicated competitive landscape. Canadian banks saw their profits rise over the past decade as interest rates fell to near zero, spurring a boom in lending. Lately, however, central bank benchmark rates have started to rise, making lending more expensive. At the same time, baby boomers are reaching retirement age, and this demographic is looking for investment and wealth advice. Among Big Six lenders, equity management is seen as the next great potential for profit.
While RBC already has a large asset management business with $ 369 billion under its watch in Canada, it is missing an opportunity to provide customers with low-cost index investments.
Because of their size in their respective fields, BlackRock and RBC are able to distribute management costs in billions of dollars in assets, helping them gain a market advantage by cutting costs for investors. But global fund giants are starting to innovate. Fidelity Investments, for example, has recently launched no-fee funds as a way to attract new investors.
"Both companies had a lot of scale. But we're both in a way to buy versus build, "said Small from BlackRock, noting that companies began negotiations in mid-2018 when they began to believe a joint venture would produce the fastest results.
Small suggested that BlackRock could have hired more people or acquired an asset manager to create new types of ETFs, such as on-demand funds that meet unique market characteristics including volatility and momentum. "But it would take years to build this business in Canada," he said.
Meanwhile, the RBC had the opposite need. Canadian investors and financial advisors are moving away from traditional mutual funds as they invest more money in ETFs, which are expected to outperform mutual fund sales in 2018.
"RBC saw the need for more traditional indexing in its core portfolio and said," We could also build it, "said Small. But again, time is of the essence.
Although the partnership is unique and the first of its kind for ETFs in Canada, the equity management industry was built on joint ventures. In the mutual fund market, it is common for banks to sell funds under their brands, but for fund managers to be outside. Such relationships are known as subconscious commands.
BlackRock has announced a partnership in Canada in the past – albeit at a much lower capacity. In 2017, the company partnered with Bank of Nova Scotia's Dynamic Funds arm to launch five actively managed funds, sold directly through consultants.
While the new RBC partnership has elements of a complete merger, the two companies will remain separate legal entities while operating a company combined with the RBC iShares brand, which will include 106 iShares funds and 44 RBC ETFs. The partnership will be overseen by a joint executive committee, with an equal number of representatives from BlackRock and RBC.
Under the new brand, most iShares ETFs and RBC ETFs will remain as they are, with no formal changes to the name or code symbols. But most will be marketed as "RBC iShares," and the new entity plans to roll out additional ETFs together in the near future.
Rates for all ETFs will be split between the two asset managers, with the split splitting on the type of fund and how much each company put into it. ETFs sold through RBC consultants, for example, could offer a greater cut to RBC.