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Growth study of the Canadian mutual fund industry

University of British Columbia

The Canadian mutual fund industry has been well recognized as being the fastest growing financial intermediary in Canada. An examination of this industry as a financial intermediary and the reasons behind its rapid growth represents the fundamental purpose of this thesis. This examination encompasses a brief study of the Canadian capital market and of the financial intermediaries operating in this market. It also confirms the growth position of the Canadian mutual fund industry relative to other major financial institutions. The Canadian mutual fund industry is then more fully discussed to provide the reader with a basic understanding of what mutual funds are, how they are organized, their growth, how they differ from other financial institutions, what relationships they have to other financial institutions, what benefits or financial services they provide and finally, how they are sold. This background information provides insight into the attractiveness of the mutual fund package and the effective means by which it has been sold. Once this insight is attained, it is possible to analyze the factors that have created public interest in the mutual fund package. A projection of the future growth of the industry is then attempted based on social and technological changes expected to favour the mutual fund form of investment and specific industry innovations geared to creating new demands for an expanding range of financial services. Many interesting conclusions are reached as a result of this growth study of the Canadian mutual fund industry. Firstly, it is concluded that the pooling of savings in a single diversified portfolio combined with professional management, marketability, accumulation plans, administrative features, dollar-cost averaging, variety of mutual funds and withdrawal rights, when combined, form a very attractive investment package offered by mutual funds to potential investors. At the same time, the industry has been remarkably successful in developing channels of distribution through which the mutual fund package has been sold to the Canadian public on a national basis. Secondly, it is concluded that certain environmental factors have stimulated tremendous public interest in mutual funds; hence causing the industry's rapid asset growth from 1957 to 1968. These environmental factors are the growth in personal net savings, a development of financial sophistication by Canadian savers and a marked public preference to save through specific financial institutions. An analysis of each one of these factors reveals developments which have enabled the Canadian mutual fund industry to expand its assets. The growth in personal net savings, for instance has been accompanied by a desire for higher rates of return as a means of inflation protection. The traditional approach for such protection has been to invest in equities of growth corporations. Mutual funds have represented an attractive vehicle for equity participation by investors who also desire professional investment management. A development of financial sophistication by Canadian savers has been revealed by their demand for investments in which risks are large but where potential rewards are great. In addition, they have demanded a broader range of financial services. Mutual funds and other financial institutions which have altered their package offering to include an increased amount of investment counselling and investment management have benefited in terms of growth. The growing tendency toward indirect investment through financial institutions is somewhat difficult to understand, especially when increasing financial sophistication assumes that individuals progress from indirect to direct investment. The explanation for this inconsistent trend is based upon three problems in the Canadian financial community. First, the class structure has had a limiting effect on the amount of common stock available to middle class investors as large holdings become consolidated in the hands of the wealthy. Second, there is a shortage in the supply of equities becoming available in relation to an expanding demand for equities. Third, brokerage firms in Canada and the United States have begun to show a reluctance to service small investment accounts. As a result of these three problems, the small investor has gradually altered his investment strategy by participating in the equities markets indirectly through mutual funds and other financial institutions offering similiar opportunities. The third and final conclusion reached in this study is that the Canadian mutual fund industry will continue to maintain its relative growth position in the immediate future. An examination of expected social and technological changes reveals that the mutual fund concept of investing will gain wider public acceptance. In terms of innovations, this industry has made tremendous strides which should enhance its future expansion. The formation of mutual fund complexes, financial complexes and venture funds represent three such innovations. All three will enable the industry to provide potential investors with an integrated line of financial services and to spread operating costs over a wider range of activities.

Thesis/Dissertation

eng

Vancouver : University of British Columbia Library

10.14288/1.0101952

Master of Science in Business - MScB

Business, Sauder School of

UBCV

DSpace