The Globe and Mail, Tim Kiladze & Clare O'Hara, 8 January 2019
Royal Bank of Canada and BlackRock Inc. are joining forces to sell exchange-traded funds, forming a rare partnership between Canada’s largest asset manager and the country’s biggest ETF provider.
Under the brand RBC iShares, the firms will create and market ETFs, which are best-known as passive investments that track major indexes at lower fees than most mutual funds. The new brand will be the biggest in Canada, based on assets under management.
For RBC, the partnership is a way to bolster its competitive position in the race to gather ETF assets. Save for Bank of Montreal, Canadian lenders have been slow to embrace ETFs – even as investors have increasingly used them to fill at least a portion of their portfolios.
By teaming up with RBC, BlackRock will gain better access to a distribution network. Despite a wave of digital disruption in financial services that has helped ETFs emerge as a popular do-it-yourself investing phenomenon, the vast majority of investment funds are still sold through advisers in Canada – and RBC manages one of the largest adviser networks.
“There is an industrial revolution happening in asset management,” said Martin Small, the head of iShares in Canada and the United States, in an interview. “The modern portfolio is going to be different than the portfolio of yesteryear.”
The partnership is BlackRock’s means to keep up with all of the change. RBC also runs the country’s largest asset management business, and BlackRock will lean on its expertise to create ‘active ETF’ strategies. The iShares brand is best-known for simple index-investing, such as the S&P/TSX 60 Index ETF, which is the biggest ETF in Canada and tracks 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, RBC’s head of global asset management, said in the interview that RBC’s move signals a realization that investor preferences have evolved.
“ETFs, there’s no question, have become a growing part of the Canadian investor landscape,” he said. “We want to make sure we continue to be relevant to those investors.”
Amid this shift, both firms were at risk of losing their leading market positions.
BlackRock manages US$6.3-trillion globally, and iShares is one of the strongest brands known to both Canadian investors and advisers. The company has almost $57-billion in ETF assets in Canada, making it the market leader here.
But in recent years BlackRock has battled a growing number of competitors. Large mutual-fund firms, which sat the sidelines of the ETF market for many years -- including major independents such as AGF Investments and Mackenzie Investments and most banks -- have entered the market in the past two years.
Today, BlackRock remains the top ETF provider in Canada, but the new entrants have stolen market share. While BlackRock used to control more than 80 per cent of Canada’s ETF market, its position has dwindled to 36 per cent, as of Dec. 31, 2018, according to a report by National Bank Financial. Second place goes to Bank of Montreal, which is the one bank that got ahead of 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 earnings soar over the past decade as interest rates fell to near-zero, spurring a lending boom. Lately, however, benchmark central bank rates have started to rise, which makes borrowing more expensive. At the same time, baby boomers are hitting retirement age and this demographic bulge is seeking investment and wealth advice. Across the Big Six lenders, wealth management is seen as the next big potential profit driver.
Although RBC already has a large asset management business, with $369-billion under its watch in Canada, it has been missing an avenue to provide clients with low-cost index investing.
Because of their size in their respective fields, BlackRock and RBC are able to spread management costs across billions of dollars in assets, helping them gain a market advantage by lowering costs for investors. But global fund giants are starting to innovate. Fidelity Investments, for one, recently launched no-fee funds as a way to bring new investors in the door.
“Both firms had a lot of scale. But both of us are in a bit of the buy-versus-build mode,” ” BlackRock’s Mr. Small said, noting the companies began talks in mid-2018 as they started to believe that a joint venture would produce the fastest results.
Mr. Small suggested BlackRock could have hired more people or acquired an asset manager to create new types of ETFs, such as in-demand funds that cater to unique market characteristics, including volatility and momentum. “But it would take years to build that business in Canada,” he said.
Meanwhile, RBC had the opposite need. Canadian investors and financial advisers are shifting away from traditional mutual funds as they pour more money into ETFs, which were set to outpace mutual funds sales in 2018.
“RBC saw the need for more traditional indexing in its core portfolio and said, ‘We could build it, too,’” Mr. Small said. But again, time is of the essence.
While the partnership is unique and the first of its kind for ETFs in Canada, the wealth management sector was built on joint ventures. In the mutual-fund market, it is common for banks to sell funds under their brand names, but for the fund managers to be external. Such relationships are known as sub-advisory mandates.
BlackRock has announced a partnership in Canada in the past – albeit in a much smaller capacity. In 2017, the firm teamed up with Bank of Nova Scotia’s Dynamic Funds arm to launch five actively managed funds sold directly through advisers.
While the new RBC partnership has elements of a full-blown merger, the two firms will remain separate legal entities while operating a combined business branded as RBC iShares that will include 106 iShares funds and 44 RBC ETFs. The partnership will be overseen by a joint executive steering committee, with an equal number of representatives from BlackRock and RBC.
Under the new brand, the majority of the iShares ETFs and RBC ETFs will remain as is, with no formal changes to either name or ticker symbols. But most will be marketed as “RBC iShares,’ and the new entity plans to launch additional co-branded ETFs in the near future.
Fees for all of the ETFs will be divided between the two asset managers, with the split varying on the type of fund and how much each firm put into it. ETFs sold through RBC advisers, for instance, could deliver a bigger cut to RBC.
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Royal Bank of Canada and BlackRock Inc. are joining forces to sell exchange-traded funds, forming a rare partnership between Canada’s largest asset manager and the country’s biggest ETF provider.
Under the brand RBC iShares, the firms will create and market ETFs, which are best-known as passive investments that track major indexes at lower fees than most mutual funds. The new brand will be the biggest in Canada, based on assets under management.
For RBC, the partnership is a way to bolster its competitive position in the race to gather ETF assets. Save for Bank of Montreal, Canadian lenders have been slow to embrace ETFs – even as investors have increasingly used them to fill at least a portion of their portfolios.
By teaming up with RBC, BlackRock will gain better access to a distribution network. Despite a wave of digital disruption in financial services that has helped ETFs emerge as a popular do-it-yourself investing phenomenon, the vast majority of investment funds are still sold through advisers in Canada – and RBC manages one of the largest adviser networks.
“There is an industrial revolution happening in asset management,” said Martin Small, the head of iShares in Canada and the United States, in an interview. “The modern portfolio is going to be different than the portfolio of yesteryear.”
The partnership is BlackRock’s means to keep up with all of the change. RBC also runs the country’s largest asset management business, and BlackRock will lean on its expertise to create ‘active ETF’ strategies. The iShares brand is best-known for simple index-investing, such as the S&P/TSX 60 Index ETF, which is the biggest ETF in Canada and tracks 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, RBC’s head of global asset management, said in the interview that RBC’s move signals a realization that investor preferences have evolved.
“ETFs, there’s no question, have become a growing part of the Canadian investor landscape,” he said. “We want to make sure we continue to be relevant to those investors.”
Amid this shift, both firms were at risk of losing their leading market positions.
BlackRock manages US$6.3-trillion globally, and iShares is one of the strongest brands known to both Canadian investors and advisers. The company has almost $57-billion in ETF assets in Canada, making it the market leader here.
But in recent years BlackRock has battled a growing number of competitors. Large mutual-fund firms, which sat the sidelines of the ETF market for many years -- including major independents such as AGF Investments and Mackenzie Investments and most banks -- have entered the market in the past two years.
Today, BlackRock remains the top ETF provider in Canada, but the new entrants have stolen market share. While BlackRock used to control more than 80 per cent of Canada’s ETF market, its position has dwindled to 36 per cent, as of Dec. 31, 2018, according to a report by National Bank Financial. Second place goes to Bank of Montreal, which is the one bank that got ahead of 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 earnings soar over the past decade as interest rates fell to near-zero, spurring a lending boom. Lately, however, benchmark central bank rates have started to rise, which makes borrowing more expensive. At the same time, baby boomers are hitting retirement age and this demographic bulge is seeking investment and wealth advice. Across the Big Six lenders, wealth management is seen as the next big potential profit driver.
Although RBC already has a large asset management business, with $369-billion under its watch in Canada, it has been missing an avenue to provide clients with low-cost index investing.
Because of their size in their respective fields, BlackRock and RBC are able to spread management costs across billions of dollars in assets, helping them gain a market advantage by lowering costs for investors. But global fund giants are starting to innovate. Fidelity Investments, for one, recently launched no-fee funds as a way to bring new investors in the door.
“Both firms had a lot of scale. But both of us are in a bit of the buy-versus-build mode,” ” BlackRock’s Mr. Small said, noting the companies began talks in mid-2018 as they started to believe that a joint venture would produce the fastest results.
Mr. Small suggested BlackRock could have hired more people or acquired an asset manager to create new types of ETFs, such as in-demand funds that cater to unique market characteristics, including volatility and momentum. “But it would take years to build that business in Canada,” he said.
Meanwhile, RBC had the opposite need. Canadian investors and financial advisers are shifting away from traditional mutual funds as they pour more money into ETFs, which were set to outpace mutual funds sales in 2018.
“RBC saw the need for more traditional indexing in its core portfolio and said, ‘We could build it, too,’” Mr. Small said. But again, time is of the essence.
While the partnership is unique and the first of its kind for ETFs in Canada, the wealth management sector was built on joint ventures. In the mutual-fund market, it is common for banks to sell funds under their brand names, but for the fund managers to be external. Such relationships are known as sub-advisory mandates.
BlackRock has announced a partnership in Canada in the past – albeit in a much smaller capacity. In 2017, the firm teamed up with Bank of Nova Scotia’s Dynamic Funds arm to launch five actively managed funds sold directly through advisers.
While the new RBC partnership has elements of a full-blown merger, the two firms will remain separate legal entities while operating a combined business branded as RBC iShares that will include 106 iShares funds and 44 RBC ETFs. The partnership will be overseen by a joint executive steering committee, with an equal number of representatives from BlackRock and RBC.
Under the new brand, the majority of the iShares ETFs and RBC ETFs will remain as is, with no formal changes to either name or ticker symbols. But most will be marketed as “RBC iShares,’ and the new entity plans to launch additional co-branded ETFs in the near future.
Fees for all of the ETFs will be divided between the two asset managers, with the split varying on the type of fund and how much each firm put into it. ETFs sold through RBC advisers, for instance, could deliver a bigger cut to RBC.
