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How can investment managers offer tax efficient funds to Canadian institutional investors?

, Patrick Waters

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How can investment managers offer tax efficient funds to Canadian institutional investors?

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Patrick Waters, from AMX’s business development team in North America, identifies the main challenges to serving tax-exempt clients in Canada and suggests a potential solution.

 

The multi-trillion-dollar Canadian asset management market is a highly desirable one for many investment houses and, consequently, highly competitive. The institutional sector is no exception and many managers have tried but failed to make a success of it. The three main barriers to entry are regulation, scale and cost. Although some people might claim the Canadian market is parochial, we have seen little evidence of that with institutions. Yes, there is sometimes a bias towards Canadian and US investment strategies but that is partly a reflection of the choice of funds available. Large pension funds, foundations and other tax-exempt investors are as keen as those in Europe to run diversified, global portfolios with a range of strategies. Instead, the main barriers to entry are structural. They revolve around the question of how best to participate in the market and create an investment product that institutional clients can buy.

 

The regulatory challenge
 

The first question investment managers tend to ask is whether they should set up a local entity and create a locally regulated product. However, that takes significant investment because it means having a physical presence in the country (not just a nameplate on a mailbox). The Canadian regulators will want you to put assets into the entity, they will want to see senior people on the ground and to be sure you are using Canadian regulated products, which may not be practical if you only offer a limited number of strategies.

 

The cost challenge
 

An alternative to having your own office is to use a locally registered intermediary, of which there are many with a record of helping companies enter Canada. However, this is not an inexpensive option, not least because they tend to take a share (up to a third) of the asset management charge (AMC) in return for their service. In addition, they tend to insist on pairing the regulatory structure with a distribution service. That distribution invariably includes a retail focus, mainly as a way of trying to acquire more assets, faster, and so achieve economies of scale. While this may reduce some running costs, it makes the fund less tax efficient for institutional investors because the presence of retail investors pushes up the underlying tax rates. This means the manager is paying for something they don’t need, and their clients don’t want.

 

The scale challenge

 

A third approach is to become a sub-adviser to an asset manager that is already packaging products for the Canadian market. However, that means losing control of your distribution and always remaining one step removed from your end client. Although you have less regulatory and cost pressures, your destiny is in the intermediary’s hands and you never really build scale in the market as an independent manager.

 

The tax-efficient Common Contractual Fund (CCF) opportunity
 

CCFs, such as AMX’s Ireland-domiciled funds, offer investment managers and institutional investors similar tax benefits to in-country funds without the associated regulatory and administrative costs. The tax transparent structure of these pooled funds allows them to gather assets from institutions in multiple geographies without compromising the tax position of individual investors. This enables them to scale faster and achieve greater efficiencies sooner. Unlike many intermediaries, AMX only charges for the services our clients need, and our fees come out of the fund’s operational expenses. Investment managers and institutional investors that choose AMX, benefit from our ability to act as a bridge between them. We give institutional  investors a greater choice of tax-efficient funds and specialist managers, while giving managers lower-cost access to new markets. AMX has regulatory clearance to service tax exempt and accredited investors in Canada. 

 

If you’d like to find out more about how we can help you access this market, please get in touch

 

Photo credit: Emma Gray


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