In defence of the mutual fund industry

In Gowland’s new role at Scotiabank, he oversees all wealth-management distribution channels, including private banking, the bank’s brokerage subsidiary (ScotiaMcLeod Inc.) and the advisor channel that came with Scotiabank’s 2010 acquisition of DundeeWealth Inc. Previously, Gowland had been in charge of Scotiabank’s private client and global institutional business.

With an impressive ability to multi-task, the energetic Gowland is stepping into the two-year role as IFIC’s chairman at a time when the investment fund industry is battling tough challenges on a variety of fronts. Fund-management firms are facing both rock-bottom interest rates on bonds and nervous stock markets, so it’s a challenge for these firms to generate growth on assets under management (AUM) and attract strong sales. Competition from low-fee index products such as exchange-traded funds (ETFs) also is mounting. At the same time, the regulatory burden is becoming increasingly onerous.

Still, there are many positive winds blowing in favour of investment funds. Despite the economic uncertainties facing investors, the fund industry has grown by 10.5% in the past year to $827 billion in AUM, and about 25% of that amount is in diversified fund-of-fund products that suit the aging investor demographics. About 2,800 mutual funds are sold through 120 investment firms, Gowland says, which also contributes to a strongly diversified industry.

Gowland, 47, began in the fund industry when he was 30 years old by taking a marketing job at Toronto-based O’Donnell Group of Funds, a startup venture of Jim O’Donnell, formerly the president of Mackenzie Financial Corp. and a well-known industry innovator. Gowland’s family had just sold a farm-machinery distribution business, and he was looking for a challenge that would build on the skills he had already learned through building the family business and dealing with clients around the world.

At O’Donnell, Gowland eventually moved into regional sales and then national sales, at which point his responsibilities included the Scotiabank account.

“It can be difficult to keep a line of sight from the investment-management side [through] the sales process to the end- user,” Gowland says. “But in a small shop, you can see how those lines are connected – and that’s a useful perspective.”

After six years at O’Donnell, Gowland joined Scotiabank in 2000, assuming various responsibilities in its wealth-management division. His roles included managing director and head of Scotia Mutual Funds, president of Scotia Asset Management LP and president of Scotia Securities Inc.; while with the last, he was responsible for more than $40 billion in AUM across numerous distribution platforms.

Gowland notes that mutual funds are “not a one-trick pony” but cover a range of investment strategies to suit clients’ various financial goals and degrees of risk tolerance. That includes funds designed for short-, medium- and long-term needs as well as for varying degrees of risk.

“Mutual fund strategies run the gamut from conservative, near-cash investments to small-cap, global companies,” Gowland says. “From the beginning, the industry’s purpose has been to give small investors access to products and expertise that had previously been available only to pension funds and high net-worth individuals. And that is very much part of the DNA of the industry.”

Despite the challenging financial markets, investors’ confidence in mutual funds is higher than for any other product – and has been for seven years in a row, Gowland says. The seventh annual Landscape Survey, recently conducted by Pollara Inc., found that the confidence level for mutual funds was 80%, vs 68% for guaranteed investment certificates, 59% for bonds, 56% for stocks and 31% for ETFs.

Over the past 20 years, fund AUM has seen a compounded annual growth rate of 15.2%. More than one-third of Canadian households, or 4.3 million households, hold units in mutual funds. These investments account for 25% of the financial assets owned by Canadians; and, Gowland says, partly because of this popularity, mutual funds are held to a higher standard of disclosure than any other financial product. He wants to make sure the industry and its clients are not hurt by “unintended consequences” that might arise from importing regulations from other countries that are inapplicable to the Canadian landscape. IFIC’s role is to work closely with regulators and policy-makers, he says, giving thoughtful responses to potential initiatives and their impact.

“Our goal is to make sure we are not saddled with excess costs of regulation and disclosure, to the point that growth is stifled,” Gowland says. “Mutual funds make up a quarter of the household balance sheet, but the other 75% of financial products are not subject to the same level of regulatory scrutiny. We would like to ensure that regulators look across the broad spectrum of investment products and treat them in a similar fashion, so that end-users can make informed decisions about the cost of ownership and what they are getting for those costs.”

For example, Gowland notes, an index-based mutual fund is almost identical to an ETF. But mutual fund firms are required to send the client a prospectus and subsequent semi-annual and annual reports, while the ETF investor doesn’t get much more than the initial trade confirmation statement.

Although the cost of independent financial advice from the independent advisor network is often embedded in the management fees of mutual funds, the management fee of an ETF does not include the same costs for advice or sales commission structure, Gowland points out, and that makes it tricky to do a direct comparison.

“We are big proponents of disclosure,” Gowland says. “But it’s important that it be brought to bear on all financial products.”

Gowland has been on the board of IFIC for five years, and he is familiar with the issues the mutual fund industry is facing. As chairman, he is stepping up from his previous position as vice chairman and head of IFIC’s public liaison committee. Improving financial literacy is one of his top priorities: IFIC is involved in a variety of initiatives that sponsor educational programs and awards, and IFIC also promotes education regarding personal financial planning at the high-school, even the elementary-school level. Gowland also will continue to disseminate IFIC’s findings on the value of financial advice, which have found that Canadians who use financial advisors do considerably better in their investments than those who manage their own affairs.

Gowland believes that various kinds of investments have their roles in a diversified portfolio, including both active strategies and the passive, index-based strategies that characterize most ETFs. “The goal of active management may not be simply to outperform an index,” he says, “but to manage volatility so that investors are more comfortable staying the course.”

With baby boomers beginning to retire, demand has been increasing for more conservative balanced and fund-of-fund products, Gowland says. At the same time, Canadians facing longer lifespans and the challenge of inflation will need some growth securities, which equities-based mutual funds can provide. IFIC will continue to encourage products that make sense for the savings solutions that are being delivered by the government, such as RRSPs and tax-free savings accounts.

“Mutual funds are a remarkable vehicle, and continue to evolve,” says Gowland. “They are a vehicle for many different strategies. If a new strategy comes along, it can be bundled into a mutual fund to give access to small investors.”

© 2012 Investment Executive. All rights reserved.