UBC Theses and Dissertations

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UBC Theses and Dissertations

Growth study of the Canadian mutual fund industry 1969

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A GROWTH STUDY OF THE CANADIAN MUTUAL FUND INDUSTRY by PAUL HENRY CHARLES DYSON B.S.(Bus.)» U n i v e r s i t y o f I d a h o , 1964 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION i n t h e D e p a r t m e n t o f Commerce and B u s i n e s s A d m i n i s t r a t i o n We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF B R I T I S H COLUMBIA November, 1969 I n p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f t h e r e q u i r e m e n t s f o r an a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1 a g r e e t h a t t h e L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s t u d y . I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may be g r a n t e d by t h e Head o f my D e p a r t m e n t o r by h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . PAUL H. C. DYSON D e p a r t m e n t o f Commerce and B u s i n e s s A d m i n i s t r a t i o n The U n i v e r s i t y o f B r i t i s h C o l u m b i a V a n c o u v e r 8, C a nada Date November 7 , 1969 i i ABSTRACT The C a n a d i a n m u t u a l f u n d i n d u s t r y has been w e l l r e c o g n i z e d as b e i n g t h e f a s t e s t g r o w i n g f i n a n c i a l i n t e r - m e d i a r y i n C a n a d a . An e x a m i n a t i o n o f t h i s i n d u s t r y as a f i n a n c i a l i n t e r m e d i a r y and t h e r e a s o n s b e h i n d i t s r a p i d g r o w t h r e p r e s e n t s t h e f u n d a m e n t a l p u r p o s e o f t h i s t h e s e s . T h i s e x a m i n a t i o n e n c ompasses a b r i e f s t u d y o f t h e C a n a d i a n c a p i t a l m a r k e t and o f t h e f i n a n c i a l i n t e r m e d i a r i e s o p e r a t i n g i n t h i s m a r k e t . I t a l s o c o n f i r m s t h e g r o w t h p o s i t i o n o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y r e l a t i v e t o o t h e r m a j o r f i n a n c i a l i n s t i t u t i o n s . The C a n a d i a n m u t u a l f u n d i n d u s t r y i s t h e n more f u l l y d i s c u s s e d t o p r o v i d e t h e r e a d e r w i t h a b a s i c u n d e r - s t a n d i n g o f what m u t u a l f u n d s a r e , how t h e y a r e o r g a n - i z e d , t h e i r g r o w t h , how t h e y d i f f e r f r o m o t h e r f i n a n c i a l i n s t i t u t i o n s , what r e l a t i o n s h i p s t h e y have t o o t h e r f i n a n c i a l i n s t i t u t i o n s , what b e n e f i t s o r f i n a n c i a l s e r v i c e s t h e y p r o v i d e and f i n a l l y , how t h e y a r e s o l d . T h i s b a c k g r o u n d i n f o r m a t i o n p r o v i d e s i n s i g h t i n t o t h e a t t r a c t i v e n e s s o f t h e m u t u a l f u n d p a c k a g e and t h e e f f e c t i v e means by w h i c h i t has been s o l d . Once t h i s i n s i g h t i s a t t a i n e d , i t i s p o s s i b l e t o a n a l y z e t h e f a c t o r s t h a t have c r e a t e d p u b l i c i n t e r e s t i n t h e m u t u a l f u n d p a c k a g e . i i i A p r o j e c t i o n o f t h e f u t u r e g r o w t h o f t h e i n d u s t r y i s t h e n a t t e m p t e d b a s e d on s o c i a l and t e c h n o l o g i c a l c h a n g e s e x p e c t e d t o f a v o u r t h e m u t u a l f u n d f o r m o f i n v e s t m e n t and s p e c i f i c i n d u s t r y i n n o v a t i o n s g e a r e d t o c r e a t i n g new demands f o r an e x p a n d i n g r a n g e o f f i n a n c i a l s e r v i c e s . Many i n t e r e s t i n g c o n c l u s i o n s a r e r e a c h e d as a r e s u l t o f t h i s g r o w t h s t u d y o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . F i r s t l y , i t i s c o n c l u d e d t h a t t h e p o o l i n g o f s a v i n g s i n a s i n g l e d i v e r s i f i e d p o r t f o l i o c o m b i n e d w i t h p r o f e s s i o n a l management, m a r k e t a b i l i t y , a c c u m u l a t i o n p l a n s , a d m i n i s t r a t i v e f e a t u r e s , d o l l a r - c o s t a v e r a g i n g , v a r i e t y o f m u t u a l f u n d s and w i t h d r a w a l r i g h t s , when c o m b i n e d , f o r m a v e r y a t t r a c t i v e i n v e s t m e n t p a c k a g e o f f e r e d by m u t u a l f u n d s t o p o t e n t i a l i n v e s t o r s . A t t h e same t i m e , t h e i n d u s t r y has b e e n r e m a r k a b l y s u c c e s s f u l i n d e v e l o p i n g c h a n n e l s o f d i s t r i b u t i o n t h r o u g h w h i c h t h e m u t u a l f u n d p a c k a g e has been s o l d t o t h e C a n a d i a n p u b l i c on a n a t i o n a l b a s i s . S e c o n d l y , i t i s c o n c l u d e d t h a t c e r t a i n e n v i r o n m e n t a l f a c t o r s have s t i m u l a t e d t r e m e n d o u s p u b l i c i n t e r e s t i n m u t u a l f u n d s ; h e n c e c a u s i n g t h e i n d u s t r y ' s r a p i d a s s e t g r o w t h f r o m 1957 t o 1968. These e n v i r o n m e n t a l f a c t o r s a r e t h e g r o w t h i n p e r s o n a l n e t s a v i n g s , a d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by C a n a d i a n s a v e r s and a marked p u b l i c p r e f e r e n c e t o s a v e t h r o u g h s p e c i f i c f i n a n c i a l i n s t i t u t i o n s . An a n a l y s i s o f e a c h one o f t h e s e f a c t o r s r e v e a l s d e v e l o p m e n t s w h i c h have e n a b l e d t h e C a n a d i a n m u t u a l f u n d i n d u s t r y t o ex p a n d i t s a s s e t s . i v The g r o w t h i n p e r s o n a l n e t s a v i n g s , f o r i n s t a n c e has b e e n a c c o m p a n i e d by a d e s i r e f o r h i g h e r r a t e s o f r e t u r n as a means o f i n f l a t i o n p r o t e c t i o n . The t r a d i t i o n a l a p p r o a c h f o r s u c h p r o t e c t i o n has b e e n t o i n v e s t i n e q u i t i e s o f g r o w t h c o r p o r a t i o n s . M u t u a l f u n d s have r e p r e s e n t e d an a t t r a c t i v e v e h i c l e f o r e q u i t y p a r t i c i p a t i o n by i n v e s t o r s who a l s o d e s i r e p r o f e s s i o n a l i n v e s t m e n t management. A d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by C a n a d i a n s a v e r s has b een r e v e a l e d by t h e i r demand f o r i n v e s t m e n t s i n w h i c h r i s k s a r e l a r g e b u t where p o t e n t i a l r e w a r d s a r e g r e a t . I n a d d i t i o n , t h e y have demanded a b r o a d e r r a n g e o f f i n a n c i a l s e r v i c e s . M u t u a l f u n d s and o t h e r f i n a n c i a l i n s t i t u t i o n s w h i c h have a l t e r e d t h e i r p a c k a g e o f f e r i n g t o i n c l u d e an i n c r e a s e d amount o f i n v e s t m e n t c o u n s e l l i n g and i n v e s t m e n t management have b e n e f i t e d i n t e r m s o f g r o w t h . The g r o w i n g t e n d e n c y t o w a r d i n d i r e c t i n v e s t m e n t t h r o u g h f i n a n c i a l i n s t i t u t i o n s i s somewhat d i f f i c u l t t o u n d e r s t a n d , e s p e c i a l l y when i n c r e a s i n g f i n a n c i a l s o p h i s t i c a t i o n assumes t h a t i n d i v i d u a l s p r o g r e s s f r o m i n d i r e c t t o d i r e c t i n v e s t m e n t . The e x p l a n a t i o n f o r t h i s i n c o n s i s t e n t t r e n d i s b a s e d upon t h r e e p r o b l e m s i n t h e C a n a d i a n f i n a n c i a l c o m m u n i t y . F i r s t , t h e c l a s s s t r u c t u r e has had a l i m i t i n g e f f e c t on t h e amount o f common s t o c k a v a i l a b l e t o m i d d l e c l a s s i n v e s t o r s as l a r g e h o l d i n g s become c o n s o l i d a t e d i n t h e hands o f t h e w e a l t h y . V S e c o n d , t h e r e i s a s h o r t a g e i n t h e s u p p l y o f e q u i t i e s b e c o m i n g a v a i l a b l e i n r e l a t i o n t o an e x p a n d i n g demand f o r e q u i t i e s . T h i r d , b r o k e r a g e f i r m s i n Canada and t h e U n i t e d S t a t e s have begun t o show a r e l u c t a n c e t o s e r v i c e s m a l l i n v e s t m e n t a c c o u n t s . As a r e s u l t o f t h e s e t h r e e p r o b l e m s , t h e s m a l l i n v e s t o r has g r a d u a l l y a l t e r e d h i s i n v e s t m e n t s t r a t e g y by p a r t i c i p a t i n g i n t h e e q u i t i e s m a r k e t s i n d i r e c t l y t h r o u g h m u t u a l f u n d s and o t h e r f i n a n c i a l i n s t i t u t i o n s o f f e r i n g s i m i l i a r o p p o r t u n i t i e s . The t h i r d and f i n a l c o n c l u s i o n r e a c h e d i n t h i s s t u d y i s t h a t t h e C a n a d i a n m u t u a l f u n d i n d u s t r y w i l l c o n t i n u e t o m a i n t a i n i t s r e l a t i v e g r o w t h p o s i t i o n i n t h e i m m e d i a t e f u t u r e . An e x a m i n a t i o n o f e x p e c t e d s o c i a l and t e c h n o l o g i c a l c h a n g e s r e v e a l s t h a t t h e m u t u a l f u n d c o n c e p t o f i n v e s t i n g w i l l g a i n w i d e r p u b l i c a c c e p t a n c e . I n t e r m s o f i n n o v a t i o n s , t h i s i n d u s t r y has made t r e m e n d o u s s t r i d e s w h i c h s h o u l d e n hance i t s f u t u r e e x p a n s i o n . The f o r m a t i o n o f m u t u a l f u n d c o m p l e x e s , f i n a n c i a l c o m p l e x e s and v e n t u r e f u n d s r e p r e s e n t t h r e e s u c h i n n o v a t i o n s . A l l t h r e e w i l l e n a b l e t h e i n d u s t r y t o p r o v i d e p o t e n t i a l i n v e s t o r s w i t h an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s and t o s p r e a d o p e r a t i n g c o s t s o v e r a w i d e r r a n g e o f a c t i v i t i e s . v i TABLE OF CONTENTS CHAPTER PAGE I . INTRODUCTION 1 I m p o r t a n c e o f t h e S t u d y 1 M e t h o d o l o g y 3 O r g a n i z a t i o n o f C h a p t e r s 5 L i m i t a t i o n s o f t h e S t u d y 8 D e f i n i t i o n s o f Terms Used 10 S t a t i s t i c a l D a t a 11 I I . CANADIAN FINANCIAL INTERMEDIARIES AND THE CAPITAL MARKET 14 The C a p i t a l M a r k e t and R o l e o f F i n a n c i a l I n t e r m e d i a r i e s 15 The D e v e l o p m e n t o f C a n a d i a n F i n a n c i a l I n t e r m e d i a r i e s 18 H i s t o r y o f C a n a d i a n f i n a n c i a l i n s t i t u t i o n s . 18 G r o w t h o f C a n a d i a n f i n a n c i a l i n t e r m e d i a i r e s . 20 Summary 22 I I I . CANADIAN MUTUAL FUNDS AS FINANCIAL INTERMEDIARIES 24 M u t u a l Funds as I n v e s t m e n t Companies 25 Open-end i n v e s t m e n t c o m p a n i e s ( m u t u a l f u n d s ) 28 C l o s e d - e n d i n v e s t m e n t c o m p a n i e s 32 O r g a n i z a t i o n o f C a n a d i a n M u t u a l Funds 34 M u t u a l Fund R e l a t i o n s h i p s t o O t h e r F i n a n c i a l I n s t i t u t i o n s 38 v i i CHAPTER PAGE C a n a d i a n M u t u a l Fund G r o w t h S t a t i s t i c s 40 B e n e f i t s A t t a c h e d t o M u t u a l Fund O w n e r s h i p . . 42 P r o f e s s i o n a l management 42 D i v e r s i f i c a t i o n 43 L i q u i d i t y and m a r k e t a b i l i t y 43 R e g u l a r i t y o f i n v e s t i n g 44 V o l u n t a r y a c c u m u l a t i o n p l a n 44 P r e p a i d o r c o n t r a c t u a l p l a n 45 C o n v e n i e n c e 45 D o l l a r c o s t a v e r a g i n g 46 V a r i e t y o f m u t u a l f u n d s 46 T e m p o r a r y w i t h d r a w a l 49 M u t u a l . Fund C h a n n e l s o f D i s t r i b u t i o n 50 Summary 5 8 IV. PUBLIC ACCEPTANCE OF MUTUAL FUNDS 62 P e r s o n a l Net S a v i n g s 64 D e v e l o p m e n t o f F i n a n c i a l S o p h i s t i c a t i o n . . . . . . 73 I n v e s t i n g t h r o u g h F i n a n c i a l I n s t i t u t i o n s 79 C l a s s s t r u c t u r e i n C a n a d i a n e q u i t i e s m a r k e t s 79 C a n a d i a n e q u i t i e s - s u p p l y and demand f a c t o r s 82 The s u p p l y o f C a n a d i a n e q u i t i e s . 83 The demand f o r C a n a d i a n e q u i t i e s 93 The r e s u l t o f e x c e s s demand f o r C a n a d i a n e q u i t i e s 9 7 v i i i CHAPTER PAGE The f i n a n c i a l c o m munity and t h e s m a l l i n v e s t o r 101 Summary 104 V. GROWTH POTENTIAL FOR CANADIAN MUTUAL FUNDS 107 C a n a d i a n M u t u a l Funds and S o c i a l and T e c h n o l o g i c a l Changes 110 M u t u a l Funds and t h e I n n o v a t i o n P r o c e s s 115 F i n a n c i a l c o m p l e x e s 117 F i n a n c i a l c o u n s e l l i n g 125 V e n t u r e f u n d s - p e r f o r m a n c e a s p e c t 128 Summary 133 V I . SUMMARY AND CONCLUSIONS 136 M e t h o d o l o g y R e v i e w e d 136 Summary and C o n c l u s i o n s by C h a p t e r 137 O p p o r t u n i t i e s f o r O t h e r S t u d i e s 150 BIBLIOGRAPHY 151 APPENDIX 157 i x L I S T OF TABLES TABLE PAGE I . G r o w t h i n T o t a l A s s e t s o f M a j o r C a n a d i a n F i n a n c i a l I n t e r m e d i a r i e s , 1957 t o 1968 21 I I . Canada's F i v e L a r g e s t M u t u a l Fund C o m p l e x e s as a t December 31 , 1967... ; 48 I I I . C a n a d i a n M u t u a l Fund D i s t r i b u t i o n C ompanies w i t h o v e r 200 S a l e s m e n as a t J u n e 30 , 1967 54 I V . C o n c e n t r a t i o n o f D i r e c t S a l e s F o r c e S a l e s m e n by R e g i o n a t J u n e 30 , 1967 56 V. P e r s o n a l Income, E x p e n d i t u r e s and S a v i n g s i n C a n a d a , 1957 - 1968 67 V I . C o m p a r i s o n o f G r o w t h and S t o c k H o l d i n g s o f S e l e c t e d F i n a n c i a l G r oups 72 V I I . Who's i n t h e S t o c k M a r k e t 81 V I I I . Net New C o r p o r a t e S e c u r i t y I s s u e s i n C a n a d a , 1957 - 1966 91 I X . I n s t i t u t i o n a l I n v e s t m e n t s i n C a n a d i a n C o r p o r a t e S t o c k , 1960 - 1965 94 X. E.T. § A . A c c o u n t s - E s t i m a t e d I n v e s t m e n t i n C a n a d i a n E q u i t i e s - Book V a l u e 97 X I . S p e c u l a t i v e C a n a d i a n M u t u a l Funds O f f e r e d t o t h e P u b l i c 131 X I I . Net A s s e t s H e l d by C a t e g o r y o f M u t u a l Funds 1961 and 1967 142 X L I S T OF FIGURES FIGURE PAGE 1. A p p e a r a n c e o f S e l e c t e d F i n a n c i a l I n s t i t u t i o n s i n Canada by Decades 19 2. P e r c e n t a g e G r o w t h i n P e r s o n a l Net S a v i n g s and P e r s o n a l D i s p o s a b l e Income, and P e r s o n a l N et S a v i n g s as a P e r c e n t a g e o f P e r s o n a l D i s p o s a b l e Income 66 3. Zones o f F i n a n c i a l S o p h i s t i c a t i o n 75 4. I n t e r n a l C o r p o r a t e F i n a n c i n g 85 5. P e r c e n t a g e B reakdown o f t h e F i n a n c i n g o f D o m e s t i c C a p i t a l F o r m a t i o n 86'< 6. The I n v e s t o r s Group S u b s i d i a r y and A f f i l i a t e d C ompanies 123 7. The C o l l e c t i v e Group S u b s i d i a r y and A f f i l i a t e d C ompanies 126 x i ACKNOWLEDGMENTS The w r i t e r w i s h e s t o e x p r e s s h i s s i n c e r e a p p r e c i a t i o n t o t h e l a t e P r o f e s s o r L e s l i e G. J . Wong and P r o f e s s o r P e t e r A. L u s z t i g f o r t h e i r a s s i s t a n c e i n m a k i n g p o s s i b l e t h e r e t e n t i o n o f t h e w r i t e r as r e s e a r c h c o - o r d i n a t o r by t h e C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . I n a d d i t i o n , t h e w r i t e r i s g r a t e f u l t o P r o f e s s o r W. W i n i a t a f o r a c c e p t i n g t h e p o s i t i o n o f t h e s i s a d v i s e r t o t h e w r i t e r a f t e r t h e d e a t h o f P r o f e s s o r Wong. CHAPTER I INTRODUCTION T h i s i s a p a p e r a b o u t t h e C a n a d i a n m u t u a l f u n d i n d u s t r y as one o f t h e many f i n a n c i a l i n t e r m e d i a r i e s o p e r a t i n g i n t h e C a n a d i a n c a p i t a l m a r k e t . The p r i m a r y p u r p o s e h e r e i n w i l l be t o e x a m i n e t h i s i n d u s t r y as a f i n a n c i a l i n t e r m e d i a r y and a t t e m p t t o i s o l a t e t h e r e a s o n s f o r i t s r a p i d g r o w t h s i n c e 1957. I n a d d i t i o n , a p r e d i c t i o n w i l l be made a b o u t t h e f u t u r e g r o w t h o f t h e i n d u s t r y b a s e d upon t r e n d s d e v e l o p i n g i n t h e f i n a n c i a l community t h r o u g h s o c i a l and t e c h n o l o g i c a l c h a n g e s and f i n a n c i a l i n n o v a t i o n s . I . IMPORTANCE OF THE STUDY I t i s t h e w r i t e r ' s hope t h a t t h i s s t u d y w i l l i n s p i r e s t u d e n t s o f f i n a n c e t o e x a m i n e o t h e r C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s f r o m t h e same v i e w p o i n t . B e c a u s e o f t h e c o n t r i b u t i o n f i n a n c i a l i n t e r m e d i a r i e s have made t o w a r d t h e e c o n o m i c d e v e l o p m e n t o f C a n a d a , a c l e a r u n d e r s t a n d i n g o f t h e r o l e p l a y e d by t h e s e i n t e r m e d i a r i e s i n t h e c a p i t a l m a r k e t s h o u l d be s o u g h t by a l l members o f t h e b u s i n e s s c o m m u n i t y . The i m p o r t a n c e o f t h i s u n d e r s t a n d i n g becomes c l e a r when we t h i n k i n t e r m s o f t h e e c o n o m i c 2 d e v e l o p m e n t t h a t has t a k e n p l a c e i n Canada and t h e o u t l o o k f o r c o n t i n u i n g d e v e l o p m e n t i n t h e f u t u r e . I t i s o f t e n e x p r e s s e d t h a t Canada i s a l a n d o f o p p o r t u n i t y . T h i s i s so b e c a u s e o f t h e s e e m i n g l y e n d l e s s q u a n t i t y o f n a t u r a l r e s o u r c e s , t h e i n t e l l i g e n c e o f t h e C a n a d i a n p e o p l e i n r e c o g n i z i n g t h e u s e s f o r t h e s e r e s o u r c e s , t h e t e c h n o l o g y a v a i l a b l e f o r d e v e l o p i n g u s e f u l p r o d u c t s f r o m n a t u r a l r e s o u r c e s and t h e c a p i t a l t o f i n a n c e t h e e x p l o r a t i o n and e x p l o i t a t i o n o f t h e s e r e s o u r c e s . O b v i o u s l y , t h i s l i s t c o u l d be e x p a n d e d u p o n , b u t w i l l s u f f i c e t o i n d i c a t e some o f t h e r e a s o n s f o r C a n a d i a n e c o n o m i c d e v e l o p m e n t i n t h e p a s t and t h e p o t e n t i a l f o r c o n t i n u e d d e v e l o p m e n t i n t h e f u t u r e . E c o n o m i c d e v e l o p m e n t w o u l d n o t , h o w e v e r , h a v e t a k e n p l a c e w i t h o u t an e x p a n d e d u se o f money and c r e d i t . I n v e r y p r i m i t i v e s o c i e t i e s e c o n o m i c d e v e l o p m e n t i s h e l d b a c k b e c a u s e o f t h e l i m i t e d methods one g r o u p c a n u t i l i z e i n p a y i n g f o r goods and s e r v i c e s t h e y d e s i r e f r o m a n o t h e r g r o u p . I n some c a s e s c r e d i t may be e x t e n d e d w h i c h i n v o l v e s c l a i m s e n t i t l i n g t h e h o l d e r t o r e c e i v e payment f r o m t h e i s s u e r a c c o r d i n g t o s p e c i f i e d t e r m s . I n a p r i m i t i v e s o c i e t y t h e s e c l a i m s may p a s s d i r e c t l y f r o m one g r o u p r e q u i r i n g f u n d s t o a n o t h e r g r o u p w i t h s u r p l u s f u n d s . As a n a t i o n b e g i n s t o d e v e l o p p a s t t h e p r i m i t i v e s t a g e , e c o n o m i c g r o w t h i s a c c o m p a n i e d by t h e d e v e l o p m e n t o f a c a p i t a l m a r k e t . I n s i m p l e t e r m s , t h e c a p i t a l m a r k e t i t s e l f i s a m a r k e t where i n t e r m e d i a t e and l o n g - t e r m 3 f u n d s a r e g a t h e r e d and made a v a i l a b l e t o t h e u s e r s o f c a p i t a l , and where i n s t r u m e n t s t h a t a r e a l r e a d y o u t s t a n d i n g a r e t r a n s f e r r e d . The p r o c e s s o f g a t h e r i n g , a l t e r i n g and t r a n s f e r r i n g o f f u n d s and i n s t r u m e n t s a r e p e r f o r m e d by i n s t i t u t i o n s commonly r e f e r r e d t o as f i n a n c i a l i n t e r m e d i a r i e s . The f i n a n c i n g o f any l a r g e u n d e r t a k i n g i s f a c i l i t a t e d by a c a p i t a l m a r k e t and t h e i n s t i t u t i o n a l m a c h i n e r y t o b a c k i t up. I t has be e n t h e e x i s t e n c e o f t h e c a p i t a l m a r k e t and t h e f i n a n c i a l i n t e r m e d i a r i e s o p e r a t i n g i n t h i s m a r k e t t h a t have a s s i s t e d i n m a k i n g e c o n o m i c d e v e l o p m e n t p o s s i b l e i n C a n a d a . I I . METHODOLOGY The above d i g r e s s i o n f r o m t h e p u r p o s e o f t h i s p a p e r was n e c e s s a r y t o a s s i s t t h e r e a d e r i n a p p r e c i a t i n g t h e i m p o r t a n c e o f a s t u d y o f f i n a n c i a l i n t e r m e d i a r i e s . An e x t e n s i v e s t u d y o f a l l f i n a n c i a l i n t e r m e d i a r i e s w o u l d be an u n d e r t a k i n g o f s i g n i f i c a n t i m p o r t a n c e ; h o w e v e r , a somewhat a m b i t i o u s t a s k f o r one i n d i v i d u a l t o a c c o m p l i s h w i t h any d e g r e e o f s u c c e s s . F o r t h i s r e a s o n t h e w r i t e r d e c i d e d t o l i m i t t h i s s t u d y t o one f i n a n c i a l i n t e r m e d i a r y . N e v e r t h e l e s s , a s t u d y o f one i n t e r m e d i a r y r e q u i r e s t h a t t h e r e a d e r have some b a c k g r o u n d i n f o r m a t i o n on what 4 t h e c a p i t a l m a r k e t i s , what f i n a n c i a l i n t e r m e d i a r i e s a r e , t h e r o l e t h e y p l a y i n t h e c a p i t a l m a r k e t and how t h e y have f a r e d i n t e r m s o f g r o w t h and d e v e l o p m e n t . B e c a u s e o f t h e n e c e s s i t y f o r s u c h i n f o r m a t i o n , t h i s s t u d y w i l l b e g i n w i t h a s i m p l e d i s c u s s i o n o f t h e g r o w t h and d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s w h i c h w i l l s e r v e t h e d u a l p u r p o s e o f e x p l a i n i n g t h e f u n c t i o n o f f i n a n c i a l i n t e r m e d i a r i e s , and where t h e C a n a d i a n m u t u a l f u n d i n d u s t r y s t a n d s i n r e l a t i o n t o o t h e r m a j o r f i n a n c i a l i n t e r m e d i a r i e s . Then i n t h e b a l a n c e o f t h e s t u d y we w i l l be c o n c e n t r a t i n g on t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . T h e r e a r e t h r e e r e a s o n s why t h e w r i t e r d e c i d e d t o w r i t e a b o u t t h e p a s t and f u t u r e g r o w t h o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . F i r s t l y , t h i s i n t e r m e d i a r y has grown more r a p i d l y s i n c e 1957 t h a n any o t h e r m a j o r f i n a n c i a l i n t e r m e d i a r y . S e c o n d l y , i t i s t h e w r i t e r ' s p r e d i c t i o n t h a t t h i s i n d u s t r y w i l l c o n t i n u e t o m a i n t a i n i t s g r o w t h r e l a t i v e t o o t h e r f i n a n c i a l i n t e r m e d i a r i e s , f o r s e v e r a l y e a r s . T h i r d l y , t h e w r i t e r has d e v e l o p e d an a p p r e c i a t i o n o f many o f t h e o p e r a t i o n a l a s p e c t s o f t h i s i n d u s t r y by s e r v i n g as t h e r e s e a r c h c o - o r d i n a t o r on The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , ^ A p p e n d i x A., c o n t a i n s a d e s c r i p t i o n o f t h e f o r m a t i o n and r e s p o n s i b i l i t i e s o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . The r e a d e r i s e n c o u r a g e d t o r e a d t h i s d e s c r i p t i o n b e f o r e p r o c e e d i n g i n t o t h e t e x t o f t h e s t u d y . 5 I I I . ORGANIZATION OF CHAPTERS The s t u d y has been o r g a n i z e d t o p r o v i d e a l o g i c a l s e q u e n c e o f r e l a t i o n s h i p s n e c e s s a r y t o a c c o m p l i s h t h e p u r p o s e o f t h e t h e s i s . F o l l o w i n g t h i s c h a p t e r , t h e r e a r e f o u r c h a p t e r s c o n t a i n i n g t h e body o f t h e t h e s i s p l u s a f i n a l c h a p t e r r e p r e s e n t i n g t h e summary and c o n c l u s i o n s . C h a p t e r I I b e g i n s by p r o v i d i n g a b r i e f r e v i e w o f t h e g r o w t h and d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . I n i t i a l l y i t w i l l p r o v i d e a d e f i n i t i o n o f t h e t e r m " c a p i t a l m a r k e t " , and t h e n p r o c e e d i n t o a d i s c u s s i o n o f t h e r o l e p l a y e d by f i n a n c i a l i n t e r m e d i a r i e s i n t h e c a p i t a l m a r k e t . Once t h i s t a s k has been a c c o m p l i s h e d , i t w i l l be p o s s i b l e t o d i s c u s s t h e d e v e l o p m e n t o f f i n a n c i a l i n t e r m e d i a r i e s i n t e r m s o f t h e i r d a t e o f a p p e a r a n c e and g r o w t h i n a s s e t s f r o m 1957 t o 1968. A g l i m p s e a t t h e g r o w t h i n a s s e t s o f t h e n i n e m a j o r C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s s h o u l d c o n f i r m t h e g r o w t h l e a d e r s h i p of. t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . The C a n a d i a n m u t u a l f u n d i n d u s t r y as a f i n a n c i a l i n t e r m e d i a r y i s t h e t o p i c u n d e r c o n s i d e r a t i o n i n C h a p t e r I I I . P r i m a r i l y t h e c h a p t e r i s i n c l u d e d t o p r o v i d e t h e r e a d e r w i t h a b a s i c u n d e r s t a n d i n g o f what m u t u a l f u n d s a r e , how t h e y a r e o r g a n i z e d , how t h e i n d u s t r y has grown i n s i z e , how m u t u a l f u n d s d i f f e r f r o m o t h e r f i n a n c i a l 6 i n s t i t u t i o n s , what r e l a t i o n s h i p s t h e y have t o o t h e r f i n a n c i a l i n s t i t u t i o n s , what b e n e f i t s o r f i n a n c i a l s e r v i c e s t h e y p r o v i d e and f i n a l l y how t h e y a r e s o l d t o t h e p u b l i c . I n s h o r t , t h e m a i n f u n c t i o n o f t h e c h a p t e r i s t o show t h e a t t r a c t i v e n e s s o f t h e m u t u a l f u n d p r o d u c t , and t h e a b i l i t y o f t h e i n d u s t r y t o d i s t r i b u t e i t s p r o d u c t t o t h e p u b l i c . An a t t r a c t i v e p r o d u c t and e f f i c i e n t d i s t r i b u t i o n f a c i l i t i e s w o u l d c e r t a i n l y r e p r e s e n t two r e a s o n s f o r t h e i m p r e s s i v e g r o w t h o f t h i s i n d u s t r y . A t h i r d r e a s o n , and p o s s i b l y t h e most i m p o r t a n t , i s t h e a c c e p t a n c e o f t h i s p r o d u c t by t h e p u b l i c . C h a p t e r IV w i l l be d e v o t e d t o an a n a l y s i s o f t h e f a c t o r s t h a t h ave c r e a t e d p u b l i c p r e f e r e n c e f o r t h e i n s t r u m e n t s and s e r v i c e s o f f e r e d by t h e m u t u a l f u n d i n d u s t r y o v e r t h o s e o f f e r e d by o t h e r f i n a n c i a l i n t e r m e d i a r i e s . T h r e e f a c t o r s w i l l be m e n t i o n e d as h a v i n g had a m a j o r i n f l u e n c e upon t h e p u b l i c ' s a t t i t u d e t o w a r d s m u t u a l f u n d s as a f o r m o f e q u i t y i n v e s t m e n t . The f i r s t f a c t o r d i s c u s s e d w i l l be t h e g r o w t h o f p e r s o n a l n e t s a v i n g s c o m b i n e d w i t h a g r o w i n g c o n c e r n by s a v e r s t o be p r o t e c t e d a g a i n s t t h e h a r m f u l e f f e c t s o f i n f l a t i o n . I t w i l l be shown t h a t h i s t o r i c a l l y i n v e s t o r s h ave f o u n d some measure o f p r o t e c t i o n by i n v e s t i n g i n c o r p o r a t e e q u i t i e s . The a b i l i t y o f t h e m u t u a l f u n d i n d u s t r y t o o f f e r i n d i r e c t p a r t i c i p a t i o n i n t h e e q u i t i e s m a r k e t s may g i v e some c l u e t o i t s r a p i d g r o w t h . 7 The d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by C a n a d i a n s a v e r s w i l l be c i t e d as a s e c o n d f a c t o r . I t w i l l be shown t h a t C a n a d i a n s a r e v e r y a g g r e s s i v e i n v e s t o r s i n t e r m s o f s e e k i n g h i g h e r r a t e s o f r e t u r n and t h e a s s u m p t i o n o f r i s k a s s o c i a t e d w i t h h i g h e r r e t u r n s . I t w i l l a l s o be shown t h a t C a n a d i a n i n v e s t o r s h a v e b e e n m o v i n g up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n f o r some t i m e . The i m p l i c a t i o n s t h i s m i g h t have f o r t h e m u t u a l f u n d i n d u s t r y i s t h a t as f i n a n c i a l s o p h i s t i c a t i o n d e v e l o p s , i n v e s t o r s s e e k o u t i n t e r m e d i a r i e s t h a t c a n o f f e r a g r e a t e r amount o f i n v e s t m e n t c o u n s e l l i n g and i n v e s t m e n t management; m u t u a l f u n d s a r e renown f o r s u c h s e r v i c e s . The t h i r d f a c t o r - : t o be s u g g e s t e d as c r e a t i n g p u b l i c i n t e r e s t i n m u t u a l f u n d s i s t h e t r e n d i n Canada t o w a r d s i n d i r e c t e q u i t y i n v e s t m e n t t h r o u g h f i n a n c i a l i n t e r m e d i a r i e s . T h i s t r e n d i s t h e r e s u l t o f t h r e e m a j o r p r o b l e m s i n t h e f i n a n c i a l community w h i c h have d i s c o u r a g e d d i r e c t p a r t i c i p a t i o n by i n v e s t o r s i n t h e e q u i t i e s m a r k e t s . The c l a s s s t r u c t u r e o f i n v e s t o r s i n t h e s t o c k m a r k e t , t h e s u p p l y o f and demand f o r C a n a d i a n e q u i t i e s and t h e a t t i t u d e o f t h e f i n a n c i a l c o mmunity t o w a r d t h e s m a l l i n v e s t o r a r e t h e t h r e e p r o b l e m s w h i c h m e r i t d i s c u s s i o n . I n C h a p t e r V, t h e m u t u a l f u n d i n d u s t r y i s c o n s i d e r e d i n l i g h t o f i t s p r o s p e c t s f o r f u t u r e g r o w t h and d e v e l o p m e n t . T h i s w i l l be a t t e m p t e d by c i t i n g some o f t h e f a c t o r s t h a t w i l l c o n t i n u e t o e n h a n c e t h e g r o w t h o f t h e i n d u s t r y . 8 These f a c t o r s w i l l be o f a s o c i a l and t e c h n o l o g i c a l n a t u r e , and w i l l f a v o u r t h e m u t u a l f u n d i n d u s t r y b e c a u s e o f p a r a l l e l d e v e l o p m e n t s t a k i n g p l a c e w i t h i n t h e i n d u s t r y . G r o w t h w i t h i n t h e i n d u s t r y i t s e l f w i l l f a v o u r some o r g a n i z a t i o n s more t h a n o t h e r s . A p r e d i c t i o n i s made t h a t t h e i n n o v a t o r s w i t h i n t h e i n d u s t r y w i l l b e n e f i t most t h r o u g h t h e r e w a r d s t h e y w i l l r e c e i v e f o r c r e a t i n g new demands. T h r e e r e c e n t i n n o v a t i o n s t o be m e n t i o n e d a r e t h e f o r m a t i o n o f f i n a n c i a l c o m p l e x e s , i m p r o v e d f i n a n c i a l c o u n s e l l i n g and t h e d e v e l o p m e n t o f v e n t u r e f u n d s . B a s i c a l l y , t h e o v e r a l l theme o f t h e c h a p t e r i s t o l o o k a t t h e p o t e n t i a l o f t h e m u t u a l f u n d i n d u s t r y i n l i g h t o f new demands w h i c h w i l l d e v e l o p f o r f i n a n c i a l s e r v i c e s , and t h e i n n o v a t i o n s t h a t may c r e a t e new demands. C h a p t e r VI , i s t h e f i n a l c h a p t e r •afttftebkfcag.ns 'a--summ^ry and m a j o r c o n c l u s i o n s o f t h e s t u d y . I V . LIMITATIONS OF THE STUDY I t was e m p h a s i z e d e a r l i e r i n t h i s c h a p t e r t h a t t h i s i s p r i m a r i l y a s t u d y a b o u t t h e g r o w t h o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . T h u s , t h i s p a p e r s h o u l d i n no way be c o n s i d e r e d as an e x h a u s t i v e s t u d y o f m u t u a l f u n d s . A l t h o u g h s p e c i f i c i n f o r m a t i o n i s p r o v i d e d a b o u t t h e i n d u s t r y i n C h a p t e r I I I , t h i s m a t e r i a l has m a i n l y b e e n i n c l u d e d f o r t h e p u r p o s e o f p r o v i d i n g t h e r e a d e r w i t h b a c k g r o u n d 9 i n f o r m a t i o n r e l e v a n t t o t h e a n a l y s i s o f g r o w t h d i s c u s s e d i n l a t e r c h a p t e r s . I t i s i m p o r t a n t f o r t h e r e a d e r t o a p p r e c i a t e t h a t t h e ma i n p u r p o s e o f t h i s s t u d y i s t o i s o l a t e t h e r e a s o n s w h i c h h a v e e n a b l e d t h e C a n a d i a n m u t u a l f u n d i n d u s t r y t o i n c r e a s e i t s a s s e t s a t a r a p i d p a c e s i n c e 1957. F u r t h e r , t o e x a m i n e t h e f a c t o r s w h i c h w i l l a s s i s t t h e m u t u a l f u n d i n d u s t r y t o m a i n t a i n i t s r e l a t i v e g r o w t h p o s i t i o n i n t h e f u t u r e . A c o m p r e h e n s i v e s t u d y o f t h e m u t u a l f u n d i n d u s t r y w o u l d be a monumental t a s k . F o r t u n a t e l y , i n d i v i d u a l s i n t e r e s t e d i n t h e many f a c e t s o f t h i s i n d u s t r y w i l l h ave an o p p o r t u n i t y t o e x a m i n e i t s o p e r a t i o n s i n d e t a i l when, t h e r e p o r t o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s i s p u b l i s h e d i n December 1969. A c o n s i d e r a b l e p o r t i o n o f t h e s t a t i s t i c a l i n f o r m a t i o n i n c l u d e d i n t h i s C o m m i t t e e ' s r e p o r t was p r e p a r e d by t h e w r i t e r and c o u l d h a v e been i n c l u d e d i n t h i s p a p e r . To a v e r y l i m i t e d e x t e n t some o f t h i s s t a t i s t i c a l i n f o r m a t i o n has been i n c o r p o r a t e d ; h o w e v e r , i t was t h e f e e l i n g o f t h e w r i t e r t h a t d u p l i c a t i o n o f i n f o r m a t i o n w o u l d s e r v e no w o r t h w h i l e p u r p o s e . I t i s , t h e r e f o r e , t h e hope o f t h e w r i t e r t h a t a s m a l l c o n t r i b u t i o n t o t h e body o f k n o w l e d g e o f t h e m u t u a l f u n d i n d u s t r y w i l l be p r o v i d e d by t h i s t h e s i s i n as much as t h e t o p i c o f g r o w t h i s n o t c o v e r e d i n ; d e t a i l i n t h e r e p o r t o f t h e C o m m i t t e e . 10 A s e c o n d l i m i t a t i o n o f t h i s s t u d y i s t h a t i t o n l y t o u c h e s l i g h t l y upon t h e i m p o r t a n c e o f t h e c a p i t a l m a r k e t and t h e r o l e o f f i n a n c i a l i n t e r m e d i a r i e s i n t h i s m a r k e t . N o t h i n g w i l l be s a i d as t o t h e s i z e , f e a t u r e s o r e f f i c i e n c y o f t h e C a n a d i a n c a p i t a l m a r k e t o r t h e e x t e n t o f f i n a n c i n g i n t h e C a n a d i a n economy. The r o l e p l a y e d by C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s i n t h e c a p i t a l m a r k e t w i l l be e x p r e s s e d p u r e l y i n t e r m s o f t h e i r c l a i m s - c o n v e r t i n g f u n c t i o n . W i t h t h e e x c e p t i o n o f t h e m u t u a l f u n d i n d u s t r y , i t i s n o t i n t e n d e d t o e x p l a i n t h e r o l e s p l a y e d by i n d i v i d u a l f i n a n c i a l i n t e r m e d i a r i e s i n t h e c a p i t a l m a r k e t . Nor i s i t i n t e n d e d t o d e f i n e o t h e r f i n a n c i a l i n t e r m e d i a r i e s , e x p l a i n what t h e y do, how t h e y o p e r a t e o r t h e r e a s o n s f o r t h e i r g r o w t h . I n o t h e r w o r d s , t h e m a i n c o n c e r n o f t h i s p a p e r i s t o f o c u s on t h e C a n a d i a n m u t u a l f u n d i n d u s t r y as a f i n a n c i a l i n t e r m e d i a r y and n o t t o be o v e r l y c o n c e r n e d w i t h t h e c h a r a c t e r i s t i c s o f o t h e r C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . V. DEFINITIONS OF TERMSi USED The f o l l o w i n g l i s t o f d e f i n i t i o n s a r e a p p l i c a b l e t o t h e e n t i r e p a p e r , u n l e s s t h e c o n t e x t o t h e r w i s e i m p l i e s : B r o k e r s . Where u s e d w i t h r e f e r e n c e t o t h e s a l e o f m u t u a l f u n d s h a r e s , r e f e r s t o t h e s a l e o f s u c h s h a r e s by o r t h r o u g h f i r m s d u l y q u a l i f i e d i n t h e i r j u r i s d i c t i o n s o f o p e r a t i o n t o engage i n t r a d i n g i n s e c u r i t i e s and 11 w h i c h s e l l m u t u a l f u n d s h a r e s as one p a r t o f a more g e n e r a l s e c u r i t i e s b u s i n e s s . S a l e s made by o r t h r o u g h s u c h f i r m s a r e t r e a t e d as made by b r o k e r s e v e n i f t h e p a r t i c u l a r s a l e s m a n c o n c e r n e d i s engaged on a f u l l - t i m e b a s i s i n th e s a l e o f m u t u a l f u n d s h a r e s . D i r e c t S a l e s F o r c e . Where u s e d w i t h r e f e r e n c e t o th e s a l e o f m u t u a l f u n d s h a r e s , r e f e r s t o t h e s a l e o f s u c h s h a r e s by o r t h r o u g h p e r s o n s o r c o m p a n i e s a s s o c i a t e d by c o n t r a c t o r o t h e r w i s e w i t h t h e F u n d , t h e D i s t r i b u t i o n Company o r t h e Management Company, b u t does n o t i n c l u d e s a l e s t h r o u g h b r o k e r s o r an i n d e p e n d e n t s a l e s f o r c e . D i s t r i b u t i o n Company. Means t h e p e r s o n p r i n c i p a l l y r e s p o n s i b l e f o r e f f e c t i n g t h e d i s t r i b u t i o n t o t h e p u b l i c o f m u t u a l f u n d s h a r e s , s u b j e c t t o t h e b o a r d o f d i r e c t o r s o f t h e Fund o r t o o t h e r r e l e v a n t a u t h o r i t y , w h e t h e r s u c h r e s p o n s i b i l i t y a r i s e s u n d e r a c o n t r a c t w i t h t h e Fund o r w i t h t h e Management Company. I f t h e r e i s no s e p a r a t e p e r s o n w i t h s u c h r e s p o n s i b i l i t y , t h e words " D i s t r i b u t i o n Company" may r e f e r t o t h e Management Company. Fund o r M u t u a l Fund. E x c e p t where t h e c o n t e x t i n d i c a t e s t h a t t h e r e f e r e n c e i s t o m u t u a l f u n d s g e n e r a l l y , means any C a n a d i a n o p e n - e n d e d i n v e s t m e n t company o r t r u s t . I n d e p e n d e n t S a l e s F o r c e . Means a l l s a l e s m e n who s e l l m u t u a l f u n d s h a r e s , and who: (a) a r e n o t b r o k e r s o r e m p l o y e d by b r o k e r s , as d e f i n e d ; (b) a l s o s e l l s h a r e s o r u n i t s i s s u e d by m u t u a l f u n d s o t h e r t h a n f u n d s a s s o c i a t e d w i t h t h e Management Company; a n d , ( c ) a r e n o t e m p l o y e d by o r i n d e p e n d e n t c o n t r a c t o r s o f t h e Management Company, t h e D i s t r i b u t i o n Company o r c o m p a n i e s r e l a t e d t o them. Management Company. Means t h e p e r s o n p r i n c i p a l l y r e s p o n s i b l e f o r a d v i s i n g t h e Fund c o n c e r n i n g t h e s e l e c t i o n and s u p e r v i s i o n o f p o r t f o l i o s e c u r i t i e s . The " D i s t r i b u t i o n Company" r e f e r s t o t h e same company as th e Management Company i f t h e two f u n c t i o n s a r e n o t s e p a r a t e d w i t h r e f e r e n c e t o t h e Fund. V I . S T A T I S T I C A L DATA I n c l u d e d i n t h i s p a p e r a r e a few s t a t i s t i c a l t a b l e s e x t r a c t e d f r o m t h e f i n a l d r a f t c h a p t e r s o f t h e r e p o r t o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 12 As e x p l a i n e d p r e v i o u s l y , t h e s e t a b l e s were p r e p a r e d by t h e w r i t e r f r o m i n f o r m a t i o n c o l l e c t e d f r o m t h e m u t u a l f u n d i n d u s t r y by t h e s t a f f o f t h i s C o m m i t t e e . I f t h e s o u r c e o f i n f o r m a t i o n i s n o t s t a t e d on a p a r t i c u l a r t a b l e i t c a n be assumed t h a t a s i m i l i a r t a b l e w i l l a p p e a r i n t h e p u b l i s h e d r e p o r t o f t h i s C o m m i t t e e . T h e r e a r e o t h e r s t a t i s t i c a l f i g u r e s i n c l u d e d i n t e x t w h i c h h a v e n o t b e e n f o o t n o t e d as t o s o u r c e o f i n f o r m a t i o n . I n s u c h c a s e s , t h e s t a t i s t i c s were p r e p a r e d f r o m r e p l i e s s u b m i t t e d t o The C a n a d i a n C o m m i t t e e on M u t u a l Fund and I n v e s t m e n t C o n t r a c t s i n r e s p o n s e t o p r e l i m i n a r y and f i n a l q u e s t i o n n a i r e s c i r c u l a t e d t o t h e m u t u a l f u n d i n d u s t r y . F o r t h i s r e a s o n , i t was i m p o s s i b l e t o s p e c i f y a l l t h e documents u s e d t o . g e n e r a t e t h e s t a t i s t i c a l f i g u r e s r e f e r r e d t o i n t h i s p a p e r . I n C h a p t e r I V , t h e r e a r e t h r e e s e c t i o n s r e l y i n g p a r t l y on s t a t i s t i c a l d a t a t o show t h e s u p p l y o f , and t h e demand f o r C a n a d i a n e q u i t i e s . S t a t i s t i c a l i n f o r m a t i o n i n t h e s e p a r t i c u l a r s e c t i o n s has o n l y b e e n p r o v i d e d up u n t i l t h e end o f 1966. The w r i t e r s e r i o u s l y c o n s i d e r e d u p d a t i n g t h i s m a t e r i a l t o t h e end o f 1968, b u t d e c i d e d a g a i n s t d o i n g so b e c a u s e o f f r e q u e n t r e f e r e n c e i n t h e s e s e c t i o n s t o t h e " Y o r k S t u d y " w h i c h a l s o r e l i e d upon s t a t i s t i c a l i n f o r m a t i o n f o r t h e end o f 1966.*2/ 2 G. R. Conway, The S u p p l y o f , and Demand f o r C a n a d i a n E q u i t i e s , ( T o r o n t o : The T o r o n t o S t o c k E x c h a n g e , S e p t e m b e r 1 9 6 8 ) , " C o n s p e c t u s " . 13 Adhering to comparable s t a t i s t i c a l i n f o r m a t i o n has added to the c l a r i t y of these s e c t i o n s . CHAPTER I I CANADIAN FINANCIAL INTERMEDIARIES AND THE CAPITAL MARKET I n t h i s c h a p t e r we w i l l be c o n c e r n e d w i t h t h e i m p o r t a n c e o f a c a p i t a l m a r k e t and t h e r o l e o f f i n a n c i a l i n t e r m e d i a r i e s . As a d i r e c t c o n s e q u e n c e we w i l l o b s e r v e t h e g r o w t h and d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . Some i n t e r m e d i a r i e s h ave grown f a s t e r t h a n o t h e r s . On t h i s t o p i c we w i l l be i n t e r e s t e d i n c o n f i r m i n g t h e l e a d e r s h i p p o s i t i o n h e l d by t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . As a s t a r t , we w i l l s ee t h e v a l u e o f t h e c a p i t a l m a r k e t and f i n a n c i a l i n t e r m e d i a r i e s i n t h e p r o c e s s o f e c o n o m i c d e v e l o p m e n t . The t e r m " c a p i t a l m a r k e t " w i l l be d e f i n e d , f o l l o w e d by an e x p l a n a t i o n o f t h e f u n c t i o n s o f t h e f i n a n c i a l i n t e r m e d i a r i e s i n t e r m s o f t h e i r r o l e i n t h e c a p i t a l m a r k e t . S e c o n d l y , t h e r e w i l l be a r e v i e w o f t h e i n s t i t u t i o n a l d e v e l o p m e n t p r o c e s s w h i c h w i l l encompass t h e h i s t o r y , g r o w t h and c o n c e n t r a t i o n o f r e s o u r c e s among C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . F i n a l l y , t h e r e w i l l be a c o n c i s e d i s c u s s i o n c o n c e r n i n g t h e g r o w t h a t t a i n e d by t h e C a n a d i a n m u t u a l f u n d i n d u s t r y i n r e l a t i o n t o o t h e r m a j o r C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . 15 I . THE CAPITAL MARKET AND ROLE OF FINANCIAL INTERMEDIARIES Canada has e x p e r i e n c e d a t r e m e n d o u s change i n t h e l a s t c e n t u r y due t o e c o n o m i c g r o w t h , t e c h n o l o g i c a l a d v a n c e s , new e d u c a t i o n a l p r o c e s s e s , g r e a t e r m o b i l i t y , a u t o m a t i o n and c o m p u t e r i z a t i o n . W i t h o u t t h e e x i s t e n c e o f a c a p i t a l m a r k e t and i n s t i t u t i o n a l m a c h i n e r y t o s t r e a m l i n e t h i s m a r k e t i t w o u l d have been i m p o s s i b l e f o r t h i s c o u n t r y t o d e v e l o p a t s u c h a r e m a r k a b l e p a c e . I t has been t h e e x i s t e n c e o f t h e c a p i t a l m a r k e t and t h e f i n a n c i a l i n t e r m e d i a r i e s o p e r a t i n g i n t h i s m a r k e t t h a t have l a r g e l y made p o s s i b l e t h e p r o c e s s o f c a p i t a l f o r m a t i o n . On t h e s u b j e c t o f c a p i t a l m a r k e t s and f i n a n c i a l i n t e r m e d i a r i e s , H e r b e r t E. D o u g a l l , s t a t e s t h a t i n a p r i m i t i v e s o c i e t y t h e s a v e r s and u s e r s o f c a p i t a l were l a r g e l y t h e same, a l t h o u g h , t h r o u g h b a r t e r some e x c h a n g e o f c a p i t a l goods f o r consumer goods o c c u r r e d . But t h e r e was no f i n a n c i n g p r o b l e m . He a l s o s t a t e s t h a t i n a modern c a p i t a l i s t i c economy i n s t r u m e n t s r e p r e s e n t i n g money and c l a i m s t o money a r e e s s e n t i a l f o r t h e s p e c i a l i z a t i o n and t h e d i v i s i o n o f l a b o u r and f o r t h e t r a n s f e r o f s a v i n g s t o t h o s e who i n v e s t i n c a p i t a l g o o d s . C a p i t a l f o r m a t i o n , he s u g g e s t s , w o u l d be v i r t u a l l y i m p o s s i b l e w i t h o u t money and a m a r k e t . 16 F u r t h e r m o r e , e x t e n s i v e i n s t i t u t i o n a l m a c h i n e r y i s n e c e s s a r y t o c h a n n e l t h e money v a l u e o f s a v i n g s g e n e r a t e d by some u n i t s i n t h e economy t o t h o s e who have use f o r t h e s e s a v i n g s . He c o n c l u d e s t h a t i t i s t h e e x i s t e n c e o f t h e s e m a r k e t s t h a t l a r g e l y makes p o s s i b l e t h e p r o c e s s 3 o f c a p i t a l f o r m a t i o n . D o u g a l l a l s o a t t e m p t s t o c l a r i f y what s h o u l d be c o n s i d e r e d as a r e a s o n a b l e d e f i n i t i o n o f t h e " c a p i t a l m a r k e t s " . To q u o t e h i m , " T h e r e i s no s u c h t h i n g as a m a r k e t f o r c a p i t a l , t h a t i s , t h e e c o n o m i c c a p i t a l goods t h e m s e l v e s . But t h e r e i s a m a r k e t , o r r a t h e r a g r o u p o f m a r k e t s , f o r t h e d o l l a r i n s t r u m e n t s t h a t r e p r e s e n t e i t h e r t i t l e t o , o r c l a i m s t o , c a p i t a l , and t o t h e o t h e r r e s o u r c e s owned by g o v e r n m e n t , b u s i n e s s , and i n d i v i d u a l s . T h e r e f o r e , t h e " c a p i t a l m a r k e t s " s h o u l d be t a k e n t o mean t h e m a r k e t s where i n t e r m e d i a t e and l o n g - t e r m f u n d s a r e g a t h e r e d and made a v a i l a b l e t o b u s i n e s s e s , g o v e r n m e n t s and i n d i v i d u a l s , and where i n s t r u m e n t s t h a t a r e a l r e a d y o u t s t a n d i n g a r e t r a n s f e r r e d . The r o l e p l a y e d by t h e f i n a n c i a l i n s t i t u t i o n s i n t h e t r a n s f e r p r o c e s s i s t h a t o f m i d d l e m e n b e t w e e n t h e s a v e r s i n o u r s o c i e t y and t h o s e who w i s h t o b o r r o w t h e f u n d s p r o v i d e d by t h e s e s a v e r s . I n i t s r o l e as H e r b e r t E. D o u g a l l , C a p i t a l M a r k e t s and I n s t i t u t i o n s , P r e n t i c e - H a l l , E n g l e w o o d C l i f f s , New J e r s e y , 1965 , p . 3 . I b i d . p.4. 17 i n t e r m e d i a r y t h e f i n a n c i a l i n s t i t u t i o n c hanneIs f u n d s f r o m s a v e r s t o b o r r o w e r s by p r o v i d i n g t h e f i n a n c i a l a s s e t s s a v e r s want and t h e f u n d s b o r r o w e r s r e q u i r e . They a c c o m p l i s h t h i s t r a n s f o r m a t i o n by i s s u i n g t h e i r own i n s t r u m e n t s s u c h as d e p o s i t s , s h a r e s , o r c e r t i f i c a t e s f o r t h e l e n d e r s t o b u y , and use t h e f u n d s r e c e i v e d t o p u r c h a s e i n s t r u m e n t s s u c h as c o r p o r a t e s t o c k , c o r p o r a t e b o n d s , m o r t g a g e s and so f o r t h i s s u e d by u l t i m a t e b o r r o w e r s . By o f f e r i n g f i n a n c i a l a s s e t s t h a t d i f f e r i n l i q u i d i t y , i n m a t u r i t y , i n y i e l d and i n r i s k , t h e i n s t i t u t i o n s c an a t t r a c t f u n d s f r o m a w i d e v a r i e t y o f l e n d e r s . A t t h e same t i m e t h e y c a n o f f e r c o n s i d e r a b l e f l e x i b i l i t y w i t h r e s p e c t t o t e r m s o f b o r r o w i n g t h a t w i l l s a t i s f y a l m o s t a l l t y p e s o f b o r r o w e r s . I t s h o u l d be c l a r i f i e d , h o w e v e r , t h a t n o t e v e r y f i n a n c i a l i n t e r m e d i a r y s t a n d s as a d i r e c t m i d d l e m a n b e t w e e n b o r r o w e r s and s a v e r s . Some f i n a n c i a l g r o u p s , s u c h as t h e s a l e s f i n a n c e c o m p a n i e s , l i n k u l t i m a t e b o r r o w e r s and o t h e r i n t e r m e d i a r i e s . I n a d d i t i o n , t h e s t o c k e x c h a n g e s , and i n v e s t m e n t d e a l e r s p r o v i d e t h e n e c e s s a r y f a c i l i t i e s f o r m a r k e t i n g and t r a d i n g t h e d e b t and e q u i t y i n s t r u m e n t s o f b o r r o w e r s . 18 I I . THE DEVELOPMENT OF CANADIAN FINANCIAL INTERMEDIARIES Now t h a t t h e r o l e f i n a n c i a l i n t e r m e d i a r i e s p l a y i n t h e c a p i t a l m a r k e t has b een s t a t e d , i t i s p o s s i b l e t o p r o v i d e a b r i e f a n a l y s i s o f t h e h i s t o r y , g r o w t h , and d e v e l o p m e n t o f f i n a n c i a l i n t e r m e d i a r i e s i n Canada f r o m 1957 t o 1968. H i s t o r y o f C a n a d i a n F i n a n c i a l I n t e r m e d i a r i e s The numerous C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s a r e e s s e n t i a l l y a c r e a t i o n o f t h e n i n e t e e n t h c e n t u r y , a l t h o u g h a g r e a t number o f d i f f e r e n t t y p e s d i d n o t make t h e i r a p p e a r a n c e u n t i l t h e p r e s e n t c e n t u r y . I n f a c t , some o f o u r m a j o r f i n a n c i a l i n s t i t u t i o n s , s u c h as t h e i n v e s t m e n t c o m p a n i e s , t r u s t e e d p e n s i o n f u n d s , c r e d u n i o n s , s a l e s f i n a n c e and consumer l o a n c o m p a n i e s were s t i l l unknown a t t h e t u r n o f t h e c e n t u r y o r w i t h o u t p r a c t i c a l i m p o r t a n c e . The a p p e a r a n c e o f t h e d i f f e r e n t t y p e s o f f i n a n c i a l i n t e r m e d i a r i e s may be o b s e r v e d i n F i g u r e 1, w h i c h i n d i c a t e s t h e d e c a d e s i n w h i c h t h e d i f f e r e n t t y p e s o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s f i r s t came i n t o e x i s t e n c e . I t i s shown on t h i s f i g u r e t h a t o f t h e n i n e t e e n t y p e s o f f i n a n c i a l i n t e r m e d i a r i e s o r f i n a n c i a l g r o u p s d i s t i n g u i s h e d , o n l y s e v e n o r i g i n a t e d i n t h e n i n e t e e n t h c e n t u r y . The r e m a i n i n g t w e l v e i n t e r m e d i a r i e s made t h e i r f i r s t a p p e a r a n c e i n t h e t w e n t i e t h c e n t u r y . FIGURE 1 APPEARANCE OF SELECTED FINANCIAL INSTITUTIONS IN CANADA, BY DECADES 181Q 1820 183Q 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 -19 -29 -39 -49 -59 -69 -79 -89 -99 -09 -19 -29 -39 -49 -59 Ranks, and Deposit I n s t i t u t i o n s : Bank o f Canada C h a r t e r e d Banks Quebec S a v i n g s Banks C r e d i t U n i o n s T r u s t Companies M o r t g a g e Loan Companies L i f e I n s u r a n c e and P e n s i o n s : L i f e I n s u r a n c e T r u s t e e d P e n s i o n Funds F i r e § C a s u a l t y - C ompanies O t h e r F i n a n c i a l I n s t i t u t i o n s S a l e s F i n a n c e Consumer Loan M u t u a l Funds C l o s e d - E n d Funds I n v e s t m e n t D e a l e r s CMHC Farm Loan B o a r d I n d u s t r i a l D e v e l o p m e n t Bank I n d u s t r i a l E s t a t e s A l b e r t a M u n i c i p a l F i n a n c i a l C o r p o r a t i o n X 20 G r o w t h o f F i n a n c i a l I n t e r m e d i a r i e s i n Canada I n o r d e r t o o b s e r v e how C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s have p e r f o r m e d i n r e l a t i o n t o one a n o t h e r we c a n l o o k a t t h e t r e n d s i n t h e e s s e n t i a l q u a n t i t a t i v e f e a t u r e s o f t h e m a j o r f i n a n c i a l i n s t i t u t i o n s s i n c e 1957. T a b l e I , shows t h e a g g r e g a t e g r o w t h i n a s s e t s o f t h e n i n e m a j o r C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s f r o m 1957 t o 1968. The f i g u r e s p r e s e n t e d i n t h i s t a b l e c l e a r l y show.' i m p r e s s i v e r a t e s o f g r o w t h f o r t h e s e n i n e f i n a n c i a l i n s t i t u t i o n s d u r i n g t h e e l e v e n y e a r p e r i o d . One i n d i c a t i o n as t o how o u t s t a n d i n g t h i s g r o w t h has b e e n i s t o compare t h e g r o w t h o f t h e s e i n s t i t u t i o n s w i t h t h a t o f t h e economy as a w h o l e . Compared on t h i s b a s i s t h e a s s e t s o f t h e s e i n t e r m e d i a r i e s were $26.4 b i l l i o n o r 83% o f G.N.P. a t t h e end o f 1957. By t h e end o f 1968, t h e i r a s s e t s had e x p a n d e d t o $73.7 b i l l i o n o r 1 0 9 % . G r o w t h r a t e s f o r t h e n i n e m a j o r f i n a n c i a l i n s t i t u t i o n s , m e a s u r e d by t h e v a l u e o f t h e i r a s s e t s d u r i n g t h e 1957 - 1968 p e r i o d , have f o r t h e most p a r t b e e n u n e v e n . W h i l e a l l t h e s e o r g a n i z a t i o n s i n c r e a s e d i n s i z e d u r i n g t h e e l e v e n y e a r p e r i o d , d i f f e r e n c e s i n t h e r a t e s o f e x p a n s i o n were s i g n i f i c a n t and can be s e e n by l o o k i n g a g a i n a t T a b l e I . I t i s a p p a r e n t t h a t t h e most o u t s t a n d i n g g r o w t h i n a s s e t s has b e e n a c h i e v e d by C a n a d i a n m u t u a l f u n d s f o l l o w e d by t r u s t c o m p a n i e s and c r e d i t u n i o n s r e s p e c t i v e l y . By way o f c o m p a r i s o n t h e two l a r g e s t C a n a d i a n f i n a n c i a l TABLE I GROWTH IN TOTAL ASSETS OF MAJOR CANADIAN FINANCIAL INTERMEDIARIES, ( ) 1957 t o 1968 ($ m i l l i o n s ) ASSETS PER CENT PER CENT OF TOTAL INCREASE GROWTH ASSETS (DECREASE) 1957 1968 1957 - 68 1957 1968 C a n a d i a n M u t u a l Funds 220 2 , 743 1,146 (2) . 8 3 . 7 2.9 C h a r t e r e d Banks 12,417 29,321 136 47 .0 39 . 8 (7.2) C r e d i t U n i o n s and C a i s s e s P o p u l a i r e s 852 4,278 402 3 . 3 5 .8 2 .5 C l o s e d - E n d I n v e s t m e n t Companies 240 656 173 .9 .9 - L i f e I n s u r a n c e Companies ( C a n a d i a n o n l y ) 7,104 14,850 (3) 109 26 . 8 20 . 2 (6.6) M o r t g a g e Loan Companies 690 2,977 331 2 .6 4.0 1 .4 S a l e s F i n a n c e and Consumer Loan C ompanies 1 ,684 4,927 192 6 .4 6.7 . 3 T r u s t Companies 774 4,972 542 2 .9 6 . 7 3.8 T r u s t e e d P e n s i o n Funds 2 ,460 8,960 (4) 264 9 . 3 12.2 2.9 T o t a l 26,441 73,684 100 .0% 10 0.0% G.N.P. ( M a r k e t P r i c e s ) 31,909 67,368 T o t a l as p e r c e n t o f G.N.P. 83% 109% (1) A s s e t s a r e a t book v a l u e s . (2) P e r c e n t a g e g r o w t h a t m a r k e t v a l u e s (1957 - $305 m i l l i o n , 1968 - $3,410 m i l l i o n ) - 1018%. (3) 1968 f i g u r e e s t i m a t e d on b a s i s o f 15% g r o w t h 1966 t o 1967 and 1967 t o 1968. (4) 1968 f i g u r e e s t i m a t e d on b a s i s o f 11% g r o w t h 1966 t o 1967. SOURCE:-Dominion B u r e a u o f S t a t i s t i c s , B u s i n e s s F i n a n c i a l S t a t i s t i c s B a l a n c e S h e e t s , S e l e c t e d F i n a n c i a l I n s t i t u t i o n s , V a r i o u s I s s u e s 1967 and 1968, O t t a w a : Queen's P r i n t e r , C a t a l o g u e No. 61-006. - D o m i n i o n B u r e a u o f S t a t i s t i c s , T r u s t e e d P e n s i o n P l a n s F i n a n c i a l S t a t i s t i c s , 1967, O t t a w a : Queen's P r i n t e r , C a t a l o g u e No. 74-2 0 1 , November 1968. - R e p o r t o f t h e S u p e r i n t e n d e n t o f I n s u r a n c e o f C a n a d a , v a r i o u s y e a r l y i s s u e s . 22 i n s t i t u t i o n s , t h e c h a r t e r e d b a n k s and l i f e i n s u r a n c e c o m p a n i e s , r e c o r d e d t h e s m a l l e s t g r o w t h i n a s s e t s . I f i n d i v i d u a l e n l a r g e m e n t i s o b s e r v e d on t h e b a s i s o f p e r c e n t a g e g a i n s made i n r e l a t i o n t o t h e t o t a l a s s e t s o f t h i s s e l e c t e d g r o u p o f i n s t i t u t i o n s , t h e r e s u l t s become e v e n more i n t e r e s t i n g . A g l i m p s e a t t h e l a s t two c o l u m n s o f T a b l e I , shows t h a t t h e c h a r t e r e d b a n k s s h a r e o f a g g r e g a t e a s s e t s f e l l f r o m 4 7 . 0 % i n 1957 t o 39.8% i n 1968. Among t h e n o n - m o n e t a r y f i n a n c i a l i n t e r m e d i a r i e s , t h e C a n a d i a n l i f e i n s u r a n c e c o m p a n i e s l o s t a 6.6% s h a r e o f a g g r e g a t e a s s e t s d u r i n g t h e same p e r i o d . The b i g g e s t r e - d i s t r i b u t i o n f a v o u r e d t h e t r u s t c o m p a n i e s , m u t u a l f u n d s and t r u s t e e d p e n s i o n f u n d s . I I I . SUMMARY T h i s c o m p l e t e s a v e r y l i m i t e d s t u d y o f t h e c a p i t a l m a r k e t and t h e g r o w t h and d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . A l t h o u g h t h e r e v i e w was q u i t e s h o r t i t d i d s e r v e t h e p u r p o s e o f s h o w i n g t h e h i s t o r y , g r o w t h and c o n c e n t r a t i o n o f r e s o u r c e s among C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s as w e l l as c l e a r l y d e s c r i b i n g t h e r o l e o f t h e s e i n t e r m e d i a r i e s i n t h e c a p i t a l m a r k e t . I n a d d i t i o n , we now know w h i c h o f t h e n i n e m a j o r f i n a n c i a l i n s t i t u t i o n s h a v e grown more r a p i d l y t h a n o t h e r s f r o m 1957 t o 1968. 23 On a b a s i s o f g r o w t h and r e - d i s t r i b u t i o n o f a s s e t s t h e m u t u a l f u n d s , t r u s t c o m p a n i e s , and t r u s t e e d p e n s i o n f u n d s showed r e m a r k a b l e g a i n s w h i l e Canada's two l a r g e s t f i n a n c i a l i n s t i t u t i o n s , t h e c h a r t e r e d b a n k s and l i f e i n s u r a n c e c o m p a n i e s , s u f f e r e d c o n s i d e r a b l y . Of p a r t i c u l a r i n t e r e s t i s t h e t r e m e n d o u s a s s e t e x p a n s i o n a t t a i n e d by C a n a d i a n m u t u a l f u n d s , e s p e c i a l l y when we r e c o g n i z e t h a t t h i s i n d u s t r y i s a r e l a t i v e l y r e c e n t a d d i t i o n t o t h e v a s t a r r a y o f f i n a n c i a l i n t e r m e d i a r i e s . A c l o s e r e x a m i n a t i o n o f t h i s p a r t i c u l a r f i n a n c i a l i n s t i t u t i o n s h o u l d g i v e some i n s i g h t i n t o i t s r o l e i n t h e c a p i t a l m a r k e t , r e a s o n s f o r i t s r a p i d g r o w t h and g r o w t h p o t e n t i a l i n t h e n e a r f u t u r e . CHAPTER I I I CANADIAN MUTUAL FUNDS AS FINANCIAL INTERMEDIARIES We now r e a l i z e where t h e C a n a d i a n m u t u a l f u n d i n d u s t r y s t a n d s i n t e r m s o f g r o w t h r e l a t i v e t o o t h e r m a j o r f i n a n c i a l i n s t i t u t i o n s . What we do n o t know i s what m u t u a l f u n d s a r e , how t h e y a r e o r g a n i z e d , how t h e y have grown i n s i z e , how t h e y d i f f e r f r o m o t h e r f i n a n c i a l i n s t i t u t i o n s , what r e l a t i o n s h i p s t h e y have t o o t h e r f i n a n c i a l i n s t i t u t i o n s , what b e n e f i t s o r s e r v i c e s t h e y p r o v i d e and how t h e y a r e s o l d t o t h e p u b l i c . P r o v i d i n g c o n c i s e i n f o r m a t i o n on t h e s e t o p i c s r e p r e s e n t s t h e p u r p o s e o f t h i s c h a p t e r . A f t e r t h e r e a d e r has g a i n e d a f a i r u n d e r s t a n d i n g o f m u t u a l f u n d s and t h e i r r o l e as f i n a n c i a l i n t e r m e d i a r i e s , i t w i l l be p o s s i b l e t o exa m i n e some o f t h e p r e d o m i n a n t f a c t o r s t h a t have a s s i s t e d t h e g r o w t h o f t h e m u t u a l f u n d i n d u s t r y . L a t e r i n t h e c h a p t e r we w i l l r e v i e w two o f t h e s e f a c t o r s . The f i r s t i s t h e a t t r a c t i v e p r o d u c t t h e i n d u s t r y has f o r s a l e . The s e c o n d i s t h e means by w h i c h t h e m u t u a l f u n d p r o d u c t i s m a r k e t e d . I n C h a p t e r I V , we w i l l go one s t e p f u r t h e r by e x a m i n i n g some o f t h e f a c t o r s w h i c h c r e a t e d p u b l i c i n t e r e s t i n t h e i n v e s t m e n t p a c k a g e s o l d by m u t u a l f u n d s . 25 I . MUTUAL FUNDS AS INVESTMENT COMPANIES In s h o r t , m u t u a l f u n d s a r e a f o r m o f i n v e s t m e n t company. An i n v e s t m e n t company i s a f i n a n c i a l o r g a n i z a t i o n t h a t s e l l s i t s own s h a r e s o r u n i t s t o t h e p u b l i c and i n v e s t s t h e p r o c e e d s . U n l i k e o t h e r f i n a n c i a l i n s t i t u t i o n s , t h e a c t i v i t y o f i n v e s t i n g i n s e c u r i t i e s i s t h e i r p r i n c i p a l f u n c t i o n and r e a s o n f o r e x i s t a n c e . The j u s t i f i c a t i o n f o r an i n v e s t m e n t company i n o u r f i n a n c i a l community i s t h a t i t e n a b l e s i n v e s t o r s , t h r o u g h a p o o l i n g o f s a v i n g s , t o o b t a i n a p r o f e s s i o n a l l y managed p o r t f o l i o o f s e c u r i t i e s . S e r v i n g as a m e d i a t h r o u g h w h i c h i n d i v i d u a l i n v e s t o r s a c q u i r e an i n d i r e c t s t a k e i n bonds and s t o c k s , t h e s e c o m p a n i e s have had a g r e a t i n f l u e n c e upon i n v e s t o r b e h a v i o u r and on t h e s e c u r i t i e s m a r k e t s i n g e n e r a l . T h e i r r o l e has b e e n t o f u n n e l s a v i n g s i n t o o u t s t a n d i n g s e c u r i t i e s i n t h e s e c o n d a r y m a r k e t s r a t h e r t h a n t o f i n a n c e new c a p i t a l i n v e s t m e n t . The two t y p e s o f i n v e s t m e n t c o m p a n i e s a r e known as m u t u a l f u n d s and c l o s e d - e n d ( l e v e r a g e d and n o n - l e v e r a g e d ) i n v e s t m e n t c o m p a n i e s . M u t u a l f u n d s and t h e n o n - l e v e r a g e d c l o s e d - e n d c o m p a n i e s a r e i n t h e u n i q u e p o s i t i o n among f i n a n c i a l i n s t i t u t i o n s o f h a v i n g no s i g n i f i c a n t amount o f l i a b i l i t i e s . T h e i r o n l y d e b t s a r e c u r r e n t l i a b i l i t i e s i n c i d e n t t o r e g u l a r b u s i n e s s o p e r a t i o n s and t h e y c o n s t i t u t e a r e l a t i v e l y s m a l l p e r c e n t a g e o f t o t a l a s s e t s . 26 T h u s , t h e r e i s a v e r y l a r g e m a r g i n o f e q u i t y c a p i t a l ; a l m o s t t h e e n t i r e r i g h t - h a n d s i d e o f t h e b a l a n c e s h e e t i s r e p r e s e n t e d by o u t s t a n d i n g c a p i t a l s t o c k . So f a r as t h e use o f a s s e t s t o s u p p o r t l i a b i l i t i e s i s c o n c e r n e d , t h e s e c o m p a n i e s have v e r y l i t t l e n e e d f o r s t a b i l i t y o f p r i n c i p l e i n t h e i r i n v e s t m e n t p o r t f o l i o s . I t i s p o s s i b l e t o g e n e r a l i z e t h a t o p e r a t i n g e x p e n s e s impose no s i g n i f i c a n t l i m i t a t i o n on t h e i r a b i l i t y t o t o l e r a t e f l u c t u a t i o n s i n i n v e s t m e n t i n c o m e . I t i s , t h e r e f o r e , o b v i o u s t h a t s u c h o r g a n i z a t i o n s a r e a b l e t o assume c o n s i d e r a b l e f i n a n c i a l r i s k . F o r t h i s r e a s o n , i n v e s t m e n t c o m p a n i e s have c o n s i d e r a b l e l a t i t u d e i n t h e t y p e s o f i n v e s t m e n t s t h e y s e l e c t f o r t h e i r p o r t f o l i o s . The o n l y s e l e c t i o n l i m i t a t i o n s a r e t h o s e w r i t t e n i n t o t h e p r o s p e c t u s o f a m u t u a l f u n d o r i n t h e c o r p o r a t e c h a r t e r and b y - l a w s o f a c l o s e d - e n d company. One n o r m a l l y f i n d s , h o w e v e r , t h a t o p e n - e n d f u n d s r e s t r i c t t h e i r i n v e s t m e n t s t o t h e more p o p u l a r i s s u e s l i s t e d on t h e o r g a n i z e d e x c h a n g e s w h i c h a r e c o n s i d e r e d t o be h i g h l y m a r k e t a b l e . The r e a s o n f o r t h i s t e n d e n c y e v o l v e s f r o m t h e f a c t t h a t u n s o p h i s t i c a t e d i n v e s t o r s p r e f e r c o r p o r a t e names t h e y r e c o g n i z e and have c o n f i d e n c e i n ; n a t u r a l l y t h i s a l s o adds s a l e s a p p e a l . I t has been t h e t r e n d f o r c o n v e n t i o n a l i n v e s t m e n t c o m p a n i e s t o s e l e c t s t o c k i s s u e s w i t h good d i v i d e n d r e c o r d s and t o s t a y a l m o s t f u l l y i n v e s t e d w i t h l i t t l e r e g a r d t o t h e p r e v a i l i n g l e v e l o f s t o c k p r i c e s . 27 Such c o m p a n i e s a l s o t e n d t o a v o i d m a j o r changes- i n t h e c o m p o s i t i o n o f t h e i r p o r t f o l i o s b e c a u s e o f t h e a d v e r s e e f f e c t s t h a t may r e s u l t i f t h e i r j u d g e m e n t i s w r o n g . The m a i n a r e a o f c o n c e n t r a t i o n i n t h i s t h e s i s i s w i t h t h e i n v e s t m e n t company known as a m u t u a l f u n d . As some c o n f u s i o n may a r i s e as t o t h e d i f f e r e n c e b e t w e e n m u t u a l f u n d s and o t h e r i n v e s t m e n t c o m p a n i e s i t i s w o r t h w h i l e m a k i n g t h e d i s t i n c t i o n . The m a i n d i s t i n c t i o n among i n v e s t m e n t c o m p a n i e s , as was a l r e a d y m e n t i o n e d , i s b e t w e e n " c l o s e d - e n d " and " o p e n - e n d " c o m p a n i e s . These t e r m s r e f e r t o t h e manner i n w h i c h t h e o r g a n i z a t i o n s s e l l t h e i r s e c u r i t i e s t o o b t a i n money f o r i n v e s t i n g . A n o t h e r d i s t i n g u i s h i n g f e a t u r e i s t h a t c l o s e d - e n d c o m p a n i e s a r e u s u a l l y managed by t h e i r d i r e c t o r s and o f f i c e r s w i t h o u t management s e r v i c e f r o m a n o t h e r f i r m , a p r a c t i c e t h a t i s i n c o n t r a s t t o t h e management a r r a n g e m e n t u s e d by most o f t h e open-end c o m p a n i e s and w i l l be d i s c u s s e d i n more d e t a i l i n a l a t e r s e c t i o n . D i r e c t o r s o f c l o s e d - end c o m p a n i e s a r e o f t e n o f f i c e r s o r p a r t n e r s o f b r o k e r a g e f i r m s , i n v e s t m e n t b a n k i n g h o u s e s , o r c o m m e r c i a l b a n k s . A l t h o u g h b o t h t y p e s o f i n v e s t m e n t c o m p a n i e s have t h e i r own s e p a r a t e f e a t u r e s , t h e amount o f p o r t f o l i o a s s e t s p e r s h a r e i s an i m p o r t a n t c o n s i d e r a t i o n i n b o t h t y p e s when e s t i m a t i n g t h e v a l u e o f t h e i r s h a r e s o r u n i t s i s s u e d . P o r t f o l i o a s s e t s p e r s h a r e i s c a l c u l a t e d by t a k i n g t h e m a r k e t v a l u e o f t h e i n v e s t m e n t s and o t h e r a s s e t s o f t h e i n v e s t m e n t company, l e s s t h e l i a b i l i t i e s , 28 and d i v i d i n g t h e r e s u l t a n t f i g u r e by t h e number o f s h a r e s o u t s t a n d i n g . F o r e x a m p l e , i f an i n v e s t m e n t company's n e t a s s e t s on a c e r t a i n d a t e a r e w o r t h $10 m i l l i o n and t h e r e a r e one m i l l i o n s h a r e s o u t s t a n d i n g , t h e n e t a s s e t v a l u e p e r s h a r e t h a t day i s $10. N a t u r a l l y , t h e n e t a s s e t v a l u e v a r i e s as t h e v a l u e o f t h e s e c u r i t i e s i n t h e p o r t f o l i o c h a n g e . I f s t o c k p r i c e s d r o p , f o r e x a m p l e , t h e n e t a s s e t v a l u e p e r s h a r e may a l s o d r o p . I f s t o c k p r i c e s r i s e , t h e n e t a s s e t v a l u e p e r s h a r e n o r m a l l y r i s e s . As a g e n e r a l r u l e , t h e movement o f i n v e s t m e n t c o m p a n i e s n e t a s s e t v a l u e s c o i n c i d e f a i r l y c l o s e l y w i t h c h a n g e s i n s t o c k m a r k e t p r i c e s b e c a u s e i n v e s t m e n t c o m p a n i e s and t h e s t o c k m a r k e t i n d i c i e s c o n t a i n a r e p r e s e n t a t i v e c r o s s - s e c t i o n o f s h a r e s a v a i l a b l e t o i n v e s t o r s . Open-End I n v e s t m e n t Companies ( M u t u a l F u n d s ) M u t u a l f u n d s a r e o r g a n i z a t i o n s t h a t have t h e r i g h t t o s e l l c o n t i n u o u s l y new s h a r e s o r u n i t s t o t h e p u b l i c and t o r e - p u r c h a s e o r redeem t h e s e s h a r e s o r u n i t s a t any t i m e and i n any amount a t t h e s h a r e h o l d e r ' s o p t i o n . A p r e c i s e d e f i n i t i o n o f a m u t u a l f u n d w i l l be p r o p o s e d by The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s i n i t ' s r e p o r t on t h e C a n a d i a n m u t u a l f u n d i n d u s t r y e x p e c t e d t o be p u b l i s h e d i n December, 1969 . 29 The p r o p o s e d d e f i n i t i o n i s h e r e i n r e p r o d u c e d w i t h t h e s u g g e s t i o n t h a t i n t e r e s t e d r e a d e r s r e f e r t o t h e m u t u a l f u n d r e p o r t f o r a d e t a i l e d p r e s e n t a t i o n o f how t h e d e f i n i t i o n was d e v e l o p e d and t o f o l l o w - u p on t h e e x c e p t i o n s r e f e r r e d t o i n t h e d e f i n i t i o n . "We recommend: t h a t t h e t e r m ' m u t u a l f u n d ' s h o u l d be d e f i n e d , s u b j e c t t o t h e e x c e p t i o n s recommended i n t h e n e x t s e c t i o n , t o i n c l u d e any o r g a n i z a t i o n w h i c h i s s u e s , o f f e r s f o r i s s u a n c e , o r has o u t s t a n d i n g i n s t r u m e n t s ( w h e t h e r c a l l e d s h a r e s , u n i t s , o r by any o t h e r t e r m ) t h a t e n t i t l e t h e h o l d e r t o r e c e i v e on demand o r w i t h i n a s p e c i f i e d p e r i o d a f t e r demand, an amount computed by r e f e r e n c e t o t h e v a l u e o f a p r o p o r t i o n a t e i n t e r e s t i n t h e a s s e t s o f t h e i s s u i n g o r g a n i z a t i o n . I f t h e r e d e m p t i o n p r i c e i s computed by r e f e r e n c e t o t h e v a l u e o f a p r o p o r t i o n a t e i n t e r e s t i n a s p e c i f i e d p o r t f o l i o o f a s s e t s s u c h as a s e p a r a t e f u n d o r t r u s t a c c o u n t , t h a t p o r t f o l i o i s t r e a t e d u n d e r t h i s d e f i n i t i o n as t h e i s s u i n g o r g a n i z a t i o n and t h e r e f o r e as an e n t i t y w h i c h i s ( a g a i n s u b j e c t t o t h e e x c e p t i o n s i n t h e n e x t s e c t i o n ) a m u t u a l f u n d " . 5 F u r t h e r t o t h i s d e f i n i t i o n , i t i s i m p o r t a n t t o keep i n mind t h a t an i n v e s t o r who h o l d s s h a r e s o r u n i t s o f a m u t u a l f u n d a c q u i r e s them f r o m t h e m u t u a l f u n d o r f r o m o t h e r d i s t r i b u t i n g o r g a n i z a t i o n s . T h e r e i s no o p e n - m a r k e t t r a d i n g as m u t u a l f u n d s h a r e s a r e n o t l i s t e d on any C a n a d i a n s t o c k e x c h a n g e . The m a r k e t f o r t h e i r s a l e i s t h e i s s u i n g company, t h r o u g h t h e p r i v i l e g e o f r e d e m p t i o n . A l l s h a r e s a r e s o l d a t n e t a s s e t v a l u e per- s h a r e p l u s a , . c e r t a i n p e r c e n t a g e o f a s s e t v a l u e . The d e f i n i t i o n o f a -mutual f u n d has b een e x t r a c t e d f r o m a d r a f t c o p y o f C h a p t e r V o f t h e u n p u b l i s h e d r e p o r t o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 30 The premium above n e t a s s e t v a l u e i s c a l l e d t h e " l o a d " -- b a s i c a l l y r e p r e s e n t i n g a s a l e s c o m m i s s i o n f o r t h e s a l e s m a n p l u s a s m a l l m a r g i n o f p r o f i t f o r t h e d i s t r i b u t i o n company. I n a m a j o r i t y o f c a s e s t h i s a c q u i s i t i o n c h a r g e f a l l s i n t h e r a n g e o f 8% t o 9% o f t h e o f f e r i n g p r i c e w i t h t h e p e r c e n t a g e f a l l i n g as t h e amount o f money i n v e s t e d i n c r e a s e s . Most p r i c e s f o r m u t u a l f u n d s h a r e s o r u n i t s a r e p u b l i s h e d i n n e w s p a p e r s w i t h a " b i d " and " a s k " q u o t a t i o n . The " a s k " p r i c e i s a p p r o x i m a t e l y t h e sum o f t h e " b i d " p r i c e p l u s t h e a c q u i s i t i o n c h a r g e . I f t h e i n v e s t o r w a n t s t o s e l l h i s s h a r e s , he w i l l r e c e i v e t h e " b i d " p r i c e . I f he w i s h e s t o buy m u t u a l f u n d s h a r e s he must pay t h e " a s k " p r i c e . C o m p u t a t i o n o f t h e p u b l i c o f f e r i n g p r i c e o f m u t u a l f u n d s e c u r i t i e s i s c o m p l i c a t e d by t h e f u n d s ' p r a c t i c e o f r e l a t i n g t h e a c q u i s i t i o n c h a r g e t o t h e o f f e r i n g p r i c e r a t h e r t h a n t h e n e t a s s e t v a l u e o f t h e s h a r e s . F o r e x a m p l e , s u p p o s e a company's n e t a s s e t v a l u e p e r s h a r e i s $10 and t h e a c q u i s i t i o n c h a r g e o f 8% i s l e v i e d on t h e o f f e r i n g p r i c e . The o f f e r i n g p r i c e (X) i s made up o f t h e n e t a s s e t v a l u e o f $10 p l u s t h e a c q u i s i t i o n c h a r g e o f 8% o f X, o r .0800X. C a l c u l a t i o n : X-.0800X = 10.00 .9200X = 10.00 X = 1 0 . 8 7 Net A s s e t V a l u e : $10.00 P l u s 8% o f p u b l i c o f f e r i n g : .8 7 P u b l i c o f f e r i n g : $10.87 Thus t h e c h a r g e i s 8.7% o f n e t a s s e t v a l u e . 31 The s t a n d a r d p r a c t i c e f o r r e d e e m i n g s h a r e s i s f o r t h e m u t u a l f u n d t o r e p u r c h a s e i t s s h a r e s a t n e t a s s e t v a l u e p e r s h a r e , a l t h o u g h i n a few c a s e s a s m a l l d i s c o u n t ( u s u a l l y n o t more t h a n 1%) i s c h a r g e d f o r t h e p r i v i l e g e o f r e d e m p t i o n . B e c a u s e r e d e m p t i o n i s one o f t h e f e a t u r e s o f f e r e d by a m u t u a l f u n d i t i s e s s e n t i a l f o r t h e d i s t r i b u t i o n company t o engage i n a c o n t i n u o u s s a l e s programme t o p r e v e n t r e d e m p t i o n s f r o m s h r i n k i n g t h e a s s e t v a l u e o f t h e m u t u a l f u n d . P u t s i m p l y , t h e a s s e t g r o w t h o f an i n d i v i d u a l f u n d depends upon: (1) t h e e x c e s s o f s h a r e s i s s u e d o v e r s h a r e s r e d e e m e d , s o l d t o e x i s t i n g and new s h a r e h o l d e r s ; (2) any i n c r e a s e i n t h e m a r k e t v a l u e o f t h e p o r t f o l i o . I n C a n a d a , a s t u d y o f 11 m u t u a l f u n d s was p e r f o r m e d by t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , and showed t h a t 65% o f t h e i n c r e a s e i n n e t a s s e t v a l u e s i n t h e d e c a d e e n d i n g i n 1961 r e s u l t e d f r o m an i n f l o w o f new f u n d s and 35% f r o m c a p i t a l a p p r e c i a t i o n . ^ From 1961 t o 1967, new s a l e s o f m u t u a l f u n d s h a r e s c o n t r i b u t e d a b o u t 69% t o t h e g r o w t h i n t o t a l n e t a s s e t s . ^ R e p o r t o f t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , O t t a w a : Queen's P r i n t e r and c o n t r o l l e r o f S t a t i o n a r y , 1964, p . 2 5 5 . P e r c e n t a g e b a s e d on s t a t i s t i c a l i n f o r m a t i o n c o l l e c t e d by The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 32 C l o s e d - E n d I n v e s t m e n t Companies P r i o r t o t h e d e p r e s s i o n o f t h e 1930's c l o s e d - e n d i n v e s t m e n t c o m p a n i e s were q u i t e p o p u l a r i n Canada and t h e U n i t e d S t a t e s . * * T h i s t y p e o f i n v e s t m e n t company s e l l s a l l i t s common s t o c k i n one o f f e r i n g . I t h a s , t h e r e f o r e , a f i x e d number o f s h a r e s o u t s t a n d i n g e q u a l t o t h e number o f f e r e d a t t h e t i m e o f f o r m a t i o n o f t h e company. T h e r e may be a d d i t i o n a l s t o c k o f f e r i n g s , b u t n o t on a c o n t i n u a l b a s i s . S h a r e s may be p u r c h a s e d o n l y f r o m e x i s t i n g s h a r e h o l d e r s o f f e r i n g t h e i r s t o c k f o r s a l e on t h e s t o c k e x c h a n g e s o r on t h e " o v e r - t h e - c o u n t e r " m a r k e t ; t h e r e f o r e s h a r e p r i c e i s s e t by s u p p l y and demand c o n d i t i o n s . U n l i k e m u t u a l f u n d s h a r e s t h e n e t a s s e t v a l u e has no d i r e c t b e a r i n g on t h e p r i c e a t w h i c h t h e c l o s e d - e n d s h a r e s may t r a d e a t i n t h e m a r k e t . F o r t h i s r e a s o n , c l o s e d - e n d s h a r e s may be p u r c h a s e d o r s o l d a t a " d i s c o u n t " b e l o w n e t a s s e t v a l u e p e r s h a r e o r a t a "premium" above a s s e t v a l u e p e r s h a r e d e p e n d i n g on t h e m a r k e t c o n d i t i o n s a t t h e t r a n s a c t i o n t i m e . N o r m a l l y , t h e d i s c o u n t s f r o m n e t a s s e t v a l u e t e n d t o w i d e n d u r i n g a d e c l i n i n g s t o c k m a r k e t and t o n a r r o w d u r i n g a r i s i n g m a r k e t ; t h u s m a k i n g c l o s e d - e n d s h a r e s s l i g h t l y more v o l a t i l e t h a n t h e s t o c k m a r k e t i n g e n e r a l . F o r an a c c o u n t o f t h e h i s t o r y and d e v e l o p m e n t o f t h e i n v e s t m e n t company i n d u s t r y , see B u i l o c k , H u g h , The S t o r y o f I n v e s t m e n t C o m p a n i e s , C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k , 1960. 33 The v o l a t i l i t y a s s o c i a t e d w i t h t h e s h a r e s o f c l o s e d - e n d c o m p a n i e s , h o w e v e r , u s u a l l y comes as a r e s u l t o f t h e i r p o l i c y o f i s s u i n g s e n i o r d e b t i n o r d e r t o o b t a i n " l e v e r a g e " . T h i s f a c t o r s h o u l d be c o n s i d e r e d by i n v e s t o r s i n t e r e s t e d i n p u r c h a s i n g s h a r e s o f c l o s e d - e n d c o m p a n i e s i n as much as l e v e r a g e can c a u s e t h e m a r k e t v a l u e o f s u c h s h a r e s t o f l u c t u a t e more t h a n s t o c k p r i c e s i n g e n e r a l . Many c l o s e d - e n d i n v e s t m e n t c o m p a n i e s , p a r t i c u l a r l y p r i o r t o 1930, i s s u e d s e n i o r c l a s s e s o f s e c u r i t i e s i n s i g n i f i c a n t a m o u n t s , f o r p u r p o s e s o f l e v e r a g e . T h i s f a c t o r a c c e n t u a t e d t h e l o s s e s s u f f e r e d by t h e ; i r i n v e s t o r s i n t h e d e p r e s s i o n , l o s s e s w h i c h were so l a r g e t h a t c l o s e d - e n d i n v e s t m e n t c o m p a n i e s h a v e b e e n c o m p a r a t i v e l y u n i m p o r t a n t i n t h e U n i t e d S t a t e s e v e r s i n c e . The e f f e c t o f t h e e c o n o m i c d e p r e s s i o n f o r h o l d e r s o f C a n a d i a n c l o s e d - e n d i n v e s t m e n t company s e c u r i t i e s were n o t , g e n e r a l l y s p e a k i n g , as d i s a s t e r o u s as was t r u e i n t h e U n i t e d S t a t e s . T h i s may i n p a r t g i v e s u b s t a n c e t o t h e f a c t t h a t , p r o p o r t i o n a t e t o t h e m u t u a l f u n d i n d u s t r y , c l o s e d - e n d i n v e s t m e n t c o m p a n i e s a r e now c o n s i d e r a b l y l a r g e r i n Canada t h a n i n t h e U n i t e d S t a t e s . I n C a n a d a , a g g r e g a t e a s s e t s o f c l o s e d - e n d i n v e s t m e n t c o m p a n i e s a t t h e end o f 1967 were r o u g h l y 9 $768 m i l l i o n ; an amount e q u a l t o a b o u t 28.8% o f t h e t o t a l n e t a s s e t s o f C a n a d i a n o r g a n i z e d m u t u a l f u n d s b e i n g s o l d t o C a n a d i a n s at. t h a t d a t e . 9 D o m i n i o n B u r e a u o f S t a t i s t i c s , B u s i n e s s F i n a n c i a l S t a t i s t i c s B a l a n c e S h e e t s , S e l e c t e d F i n a n c i a l I n s t i t u t i o n s , F o u r t h Q u a r t e r 1967., O t t a w a : Queen's P r i n t e r , May 1968 , T a b l e 5A, p.10. A s s e t s a r e g i v e n a t m a r k e t v a l u e . 34 The c o r r e s p o n d i n g f i g u r e i n t h e U n i t e d S t a t e s a t t h e end o f S e p t e m b e r 1968 was 7 . 8 % . 1 0 Now t h a t t h e d i s t i n c t i o n has been made b e t w e e n m u t u a l f u n d s and c l o s e d - e n d i n v e s t m e n t c o m p a n i e s , i t i s p o s s i b l e t o d i s c u s s some o f t h e c h a r a c t e r i s t i c s o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y w i t h o u t r i s k i n g t h e d a n g e r o f c o n f u s i o n . To p r o v i d e t h e r e a d e r w i t h an a p p r e c i a t i o n o f t h e s c o p e o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y we w i l l r e v i e w t h o s e i t e m s w h i c h b e s t d e s c r i b e t h e o p e r a t i o n s o f t h e i n d u s t r y . S p e c i f i c a l l y , t h e f o l l o w i n g s e c t i o n s w i l l d e s c r i b e t h e o r g a n i z a t i o n , g r o w t h , c l a s s i f i c a t i o n and s e r v i c e a s p e c t o f C a n a d i a n m u t u a l f u n d s . I n a d d i t i o n , t h e r e w i l l be s e c t i o n s c o v e r i n g t h e r e l a t i o n s h i p b e t w e e n m u t u a l f u n d s and o t h e r f i n a n c i a l i n s t i t u t i o n s and m u t u a l f u n d c h a n n e l s o f d i s t r i b u t i o n . .. I I . ORGANIZATION OF CANADIAN MUTUAL FUNDS The d i f f e r e n c e s among m u t u a l f u n d s e x t e n d t o t h e i r l e g a l f o r m o f o r g a n i z a t i o n . I n C a n a d a , f u n d s may be i n c o r p o r a t e d o r u n i n c o r p o r a t e d . P e r c e n t a g e f i g u r e p r o v i d e d by The I n v e s t m e n t Company I n s t i t u t e , New Y o r k , N.Y., 10006, i n a l e t t e r a d d r e s s e d t o The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 35 I n c o r p o r a t e d f u n d s , b o t h p r o v i n c i a l and f e d e r a l , e s t a b l i s h a l e g a l i d e n t i t y i n t h e i r c h o s e n j u r i s d i c t i o n by a p p l y i n g f o r and r e c e i v i n g l e t t e r s p a t e n t . U n i n c o r p o r a t e d f u n d s t a k e two ma i n f o r m s ; t h e i n d e p e n d e n t f u n d s e s t a b l i s h u n d e r t r u s t i n d e n t u r e s , and t h e t r u s t company f u n d s w h i c h a r e d i v i s i o n a l o p e r a t i o n s o f p a r e n t t r u s t c o m p a n i e s . In s p i t e o f t h i s d i s t i n c t i o n , t h e g e n e r a l c h a r a c t e r i s t i c s , t o g e t h e r w i t h t h e f a c t t h a t t h e o p e r a t i o n o f a m u t u a l f u n d i s a b u s i n e s s e n t e r p r i s e , has r e s u l t e d i n some i m p o r t a n t o r g a n i z a t i o n a l and o p e r a t i o n a l s i m i 1 i a r i t i e s t h a t a r e t r u e o f a l m o s t a l l m u t u a l f u n d s ; t r u s t e e d o r i n c o r p o r a t e d . T h i s i s so b e c a u s e o f t h e n e c e s s i t y t o p r o v i d e a means w h e r e b y t h e p r o m o t e r s may r e c e i v e t h e i r r e w a r d s w h i l e p r o f i t s and l o s s e s on t h e f u n d s p o r t f o l i o i s p a s s e d t h r o u g h t o m u t u a l f u n d s h a r e h o l d e r s o r u n i t h o l d e r s . I n o t h e r f i n a n c i a l i n s t i t u t i o n s , p o r t f o l i o p r o f i t s o r l o s s e s a r e n o t p a s s e d t h r o u g h t o p u b l i c s h a r e h o l d e r s . Most i n s t i t u t i o n s , w h i c h i n c l u d e t h e c h a r t e r e d b a n k s , i n s u r a n c e c o m p a n i e s and t r u s t c o m p a n i e s , r a i s e money m a i n l y t h r o u g h t h e i s s u a n c e o f f i n a n c i a l i n s t r u m e n t s t h a t p r o m i s e f i x e d r a t e s o f r e t u r n . T h e i r p r o m o t e r s o b t a i n o r g a n i z a t i o n a l r e t u r n s p r i m a r i l y t h r o u g h o w n e r s h i p o f e q u i t y s e c u r i t i e s i s s u e d by t h e f i n a n c i a l i n s t i t u t i o n . Such s e c u r i t i e s r e c e i v e t h e b e n e f i t o f e a r n i n g s on t h e a s s e t s o f t h e i n s t i t u t i o n i n e x c e s s o f what i s r e q u i r e d t o p r o v i d e t h e f i x e d r e t u r n t o t h e h o l d e r s 36 o f d e b t i n s t r u m e n t s and t o pay o t h e r e x p e n s e s . T h i s p r o c e d u r e i s n o t p o s s i b l e i n t h e c o n t e x t o f m u t u a l f u n d s b e c a u s e o f t h e n e c e s s i t y t o p a s s p r o f i t s o r l o s s e s t h r o u g h t o m u t u a l f u n d s h a r e h o l d e r s . I t i s t r a d i t i o n a l f o r m u t u a l f u n d o r g a n i z e r s t o o b t a i n t h e i r b e n e f i t s f r o m two s o u r c e s : c o m p e n s a t i o n f o r a d m i n i s t r a t i o n and i n v e s t m e n t management, and p r o f i t s on t h e i s s u a n c e o f s h a r e s o r u n i t s o f t h e m u t u a l f u n d . I n o r d e r t h a t s u c h b e n e f i t s may t a k e t h e f o r m o f o r g a n i z a t i o n a l p r o f i t s r a t h e r t h a n o f s a l a r y , t h e o r g a n i z e r s c a u s e t h e a d m i n i s t r a t i o n and i n v e s t m e n t management o f t h e m u t u a l f u n d , and t h e d i s t r i b u t i o n o f i t s s h a r e s o r u n i t s , t o be c a r r i e d on by s e p a r a t e f i r m s i n w h i c h t h e o r g a n i z e r s o r t h e i r s u c c e s s o r s h o l d t h e e q u i t y o w n e r s h i p . The o r g a n i z a t i o n t h a t p e r f o r m s t h e a d m i n i s t r a t i o n and i n v e s t m e n t management i s r e f e r r e d t o as t h e "management company" and t h e o r g a n i z a t i o n t h a t d i s t r i b u t e s s h a r e s o r u n i t s i s c a l l e d t h e " d i s t r i b u t i o n company"; i t i s i m p o r t a n t t o r e a l i z e t h a t t h e s e two c o m p a n i e s a r e o f t e n t h e same. The method o f o r g a n i z a t i o n j u s t d e s c r i b e d i s u n i v e r s a l i n t h e C a n a d i a n m u t u a l f u n d i n d u s t r y , and has a n o t h e r a d v a n t a g e i n a d d i t i o n t o t h e f a c t t h a t i t f a c i l i t a t e s t h e r e c e i p t o f a p r o m o t i o n a l r e w a r d . I n s e v e r a l c a s e s , a m u t u a l f u n d i s o r g a n i z e d n o t as an i n d e p e n d e n t c o m m e r c i a l e n t e r p r i s e b u t t o be c a r r i e d on i n c o n j u n c t i o n w i t h o t h e r o r g a n i z a t i o n s . 37 In s u c h c a s e s , t h e r e s p o n s i b l e p e r s o n s do n o t d e v o t e t h e i r f u l l - t i m e t o t h e o p e r a t i o n s o f t h e m u t u a l f u n d , and i t w o u l d be t r o u b l e s o m e f o r them t o be c o m p e n s a t e d by means o f a s a l a r y . Even where t h e s e p e r s o n s a r e e n g a ged on a f u l l - t i m e b a s i s i n m u t u a l f u n d o p e r a t i o n s t h e y may be r e s p o n s i b l e f o r s e v e r a l m u t u a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s o r g a n i z e d t o a p p e a l t o a w i d e v a r i e t y o f i n v e s t o r s . Any o t h e r a r r a n g e m e n t t h a n a l l o c a t i o n o f t h e a d m i n s t r a t i o n , management and d i s t r i b u t i o n f u n c t i o n s w o u l d c a u s e c o n s i d e r a b l e d i f f i c u l t y and i n c o n v e n i e n c e i n t h i s and o t h e r s i t u a t i o n s . I t i s f o r t h e s e r e a s o n s t h a t d e l e g a t i o n o f t h e s e f u n c t i o n s ( e x t e r n a l i z a t i o n o f management) i s u n i v e r s a l i n t h e C a n a d i a n m u t u a l f u n d i n d u s t r y , a l t h o u g h p r e s u m a b l y a m u t u a l f u n d c o u l d be o r g a n i z e d i n w h i c h t h e f u n c t i o n s a r e i n t e r n a l i z e d and p e r f o r m e d by e m p l o y e e s o f t h e , ^ j 11 A few m u t u a l f u n d s i n t h e U n i t e d S t a t e s mutua1 f u n d . have been o r g a n i z e d i n t h i s manner. A good e x a m p l e o f s u c h an a r r a n g e m e n t i n t h e U n i t e d S t a t e s i s M a s s a c h u s e t t s 12 I n v e s t o r s T r u s t ("MIT"). * * F o r t h e d e f i n i t i o n o f an i n t e r n a l l y managed f u n d s e e : A S t u d y o f M u t u a l F u n d s , p r e p a r e d f o r t h e S e c u r i t i e s and E x c h a n g e C o m m i s s i o n by t h e W h a r t o n S c h o o l o f F i n a n c e and Commerce, U n i o n C a l e n d a r No.955, A u g u s t 28, 1962. C h a p t e r I I , p.37. 12 The l a r g e s t i n t e r n a l l y managed m u t u a l f u n d i n t h e U n i t e d S t a t e s , M a s s a c h u s s e t t s I n v e s t o r s T r u s t , had a s s e t s o f a p p r o x i m a t e l y $2.4 b i l l i o n a t t h e end o f 1968. F o r a d i s c u s s i o n o f t h e o r g a n i z a t i o n o f t h i s m u t u a l f u n d , s e e t h e R e p o r t o f t h e S e c u r i t i e s and E x c h a n g e C o m m i s s i o n on t h e P u b l i c P o l i c y I m p l i c a t i o n s o f I n v e s t m e n t Company G r o w t h , House R e p o r t 2337, 8 9 t h Cong. 2nd s e s s . , 1966 , pp. 49 and 105. 38 I f c o n s i d e r e d i n t h e c o n t e x t o f t h e i r r e l a t i o n s h i p w i t h o t h e r f i n a n c i a l i n t e r m e d i a r i e s , s i g n i f i c a n t d i f f e r e n c e s e x i s t among m u t u a l f u n d s . Some f u n d s a r e c r e a t e d as m i n o r s e c t i o n s o f t h e o p e r a t i o n s o f f i n a n c i a l i n t e r m e d i a r i e s p r i n c i p a l l y e ngaged i n o t h e r f i n a n c i a l a c t i v i t i e s . O t h e r s f r o m p a r t s o f f i n a n c i a l c o m p l e x e s w h i c h w i l l be d i s c u s s e d i n C h a p t e r V. T h e r e a r e y e t o t h e r s s t a r t e d by o r g a n i z a t i o n s e n g a ged e x c l u s i v e l y o r p r i n c i p a l l y i n t h e o p e r a t i o n o f m u t u a l f u n d s . An a p p r e c i a t i o n o f t h e s e d i f f e r e n t a r r a n g e m e n t s i s e s s e n t i a l t o an u n d e r s t a n d i n g o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . They a r e c o n s i d e r e d i n t h e n e x t s e c t i o n . I I I . MUTUAL FUND RELATIONSHIPS TO OTHER FINANCIAL INSTITUTIONS T h e r e a r e many m u t u a l f u n d s c r e a t e d t o be o p e r a t e d i n c o n j u n c t i o n w i t h o t h e r o r g a n i z a t i o n s . S e v e r a l b r o k e r a g e f i r m s have f o u n d i t a r e w a r d i n g way t o meet t h e needs o f s m a l l e r c l i e n t s who w i s h t h e i r s a v i n g s t o be managed on a d i s c r e t i o n a r y b a s i s . A d m i n i s t r a t i o n and o t h e r e x p e n s e s make s u c h i n v e s t m e n t management c o s t l y u n l e s s t h e f u n d s i n v e s t e d a r e s u b s t a n t i a l . T h r o u g h an i n h o u s e m u t u a l f u n d , s a v i n g s f r o m a number o f c l i e n t s c a n be c o m b i n e d f o r i n v e s t m e n t i n a s i n g l e p o r t f o l i o ' . One s u c h i i n h o u s e m u t u a l f u n d , F i r s t H a r f u n d L i m i t e d , was c r e a t e d by H a r r i s and P a r t n e r s L t d . t o p r o v i d e f o r t h e p o r t i o n o f i t s c l i e n t s ' managed a c c o u n t s i n v e s t e d i n s e c u r i t i e s o f U n i t e d S t a t e s c o r p o r a t i o n s . 39 I n a l l c a s e s , t h e b r o k e r a g e f i r m a c t s b o t h as t h e management company and d i s t r i b u t i o n company. The m u t u a l f u n d f a c i l i t y o f t e n f o r m s a c o m p a r a t i v e l y s m a l l p a r t o f t h e b u s i n e s s o p e r a t i o n s c a r r i e d on by t h e b r o k e r a g e f i r m , w h i c h c o n s i d e r s i t m e r e l y as an a t t r a c t i v e s e r v i c e f o r i t s s m a l l e r c l i e n t s , a l t h o u g h i n v e s t o r s i n t h e m u t u a l f u n d may i n c l u d e i n d i v i d u a l s who a r e n o t a c t u a l c l i e n t s o f t h e i n v e s t m e n t f i r m . A p p l i c a t i o n s s i m i l a r o r i d e n t i c a l t o t h o s e f o l l o w e d by b r o k e r a g e f i r m s have s t i m u l a t e d o t h e r f i n a n c i a l i n s t i t u t i o n s t o c r e a t e o r t o p a r t i c i p a t e i n t h e c r e a t i o n o f m u t u a l f u n d s . A t t h e end o f 1968, t h r e e C a n a d i a n c h a r t e r e d b a n k s were a b l e t o a r r a n g e i n v e s t m e n t s by t h e i r c u s t o m e r s i n m u t u a l f u n d s t h a t a r e a s s o c i a t e d w i t h t h e b a n k s . A t t h e same d a t e , 20 C a n a d i a n t r u s t c o m p a n i e s were a l s o d i s t r i b u t i n g i n v e s t m e n t f u n d s f o r p u b l i c p a r t i c i p a t i o n . Banks and t r u s t c o m p a n i e s r e g a r d t h e m u t u a l f u n d as an a d d i t i o n a l s e r v i c e t o e x i s t i n g c l i e n t s . The t r e n d t o w a r d s t h e e s t a b l i s h m e n t o f C a n a d i a n f i n a n c i a l c o m p l e x e s has become w e l l r e c o g n i z e d i n r e c e n t y e a r s . Such c o m p l e x e s d i f f e r i n a p p r o a c h f r o m a b r o k e r a g e f i r m , bank o r t r u s t company t h a t o r g a n i z e s a m u t u a l f u n d t o o f f e r an a t t r a c t i v e s e r v i c e t o c l i e n t s . B a s i c a l l y , t h e y c o n s i s t o f a number o f f i n a n c i a l o r g a n i z a t i o n s , e a c h c o n c e n t r a t i n g on a d i f f e r e n t t y p e o f f i n a n c i a l s e r v i c e . 40 I n v a r i a b l y , t h e y i n c l u d e a t l e a s t one m u t u a l f u n d , w h i c h may be s e p a r a t e f r o m t h e o t h e r f i n a n c i a l o r g a n i z a t i o n s t h a t f o r m p a r t o f t h e f i n a n c i a l c o m p l e x b u t i s more u s u a l l y o p e r a t e d i n c o n j u n c t i o n w i t h one o r more o f them. A d e t a i l e d d i s c u s s i o n o f t h e s e a r r a n g e m e n t s has been d e f e r r e d u n t i l C h a p t e r V. I V . CANADIAN MUTUAL FUND GROWTH STAT I S T I C S I t was made a p p a r e n t i n an e a r l i e r d i s c u s s i o n , t h a t t h e i m p r e s s i v e g r o w t h o f C a n a d i a n m u t u a l f u n d s has o c c u r r e d w i t h i n a r e a s o n a b l y s h o r t p e r i o d o f t i m e . The o l d e s t C a n a d i a n m u t u a l f u n d , C a n a d i a n I n v e s t m e n t Fund L t d . , was i n c o r p o r a t e d i n 1932; t h e f i r s t U n i t e d S t a t e s f u n d came i n t o b e i n g i n t h e 1 9 2 0 ' s . By 1940 t h e two m a j o r f u n d s i n Canada were t h e one m e n t i o n e d above and Commonwealth I n t e r n a t i o n a l C o r p o r a t i o n s L i m i t e d , h a v i n g c o m b i n e d t o t a l a s s e t s i n t h a t y e a r o f a p p r o x i m a t e l y $7.5 m i l l i o n . The C a n a d i a n m u t u a l f u n d i n d u s t r y d i d n o t , h o w e v e r , s w i n g i n t o i t s p e r i o d o f a c c e l e r a t e d g r o w t h u n t i l t h e m i d - 1 9 5 0 ' s . D e t a i l e d f i g u r e s f o r t h e e n t i r e p e r i o d a r e n o t a v a i l a b l e , b u t a t t h e end o f 1950 t o t a l n e t a s s e t s o f m u t u a l f u n d s q u a l i f i e d f o r s a l e i n Canada a g g r e g a t e d a p p r o x i m a t e l y $46 m i l l i o n . The c o r r e s p o n d i n g f i g u r e a t t h e end o f 1 9 6 1 , i n c l u s i v e o f t r u s t company i n v e s t m e n t f u n d s , was $795 m i l l i o n . 41 From t h a t t i m e , a s s e t s have g e n e r a l l y c o n t i n u e d t o e x p a n d a t a r a p i d r a t e as p u b l i c demand f o r e q u i t i e s has d e v e l o p e d and as t h e number o f newcomers t o t h e m u t u a l f u n d i n d u s t r y has i n c r e a s e d . By t h e end o f 1967, a g g r e g a t e t o t a l n e t a s s e t s o f i n v e s t m e n t f u n d s o f f e r e d f o r p u b l i c i n v e s t m e n t by C a n a d i a n t r u s t c o m p a n i e s was a p p r o x i m a t e l y $158 m i l l i o n ; t h e v a l u e o f s h a r e s h e l d by C a n a d i a n s i n U n i t e d S t a t e s m u t u a l f u n d s q u a l i f i e d f o r s a l e i n Canada was a p p r o x i m a t e l y $104 m i l l i o n ; and t h e t o t a l n e t a s s e t s o f C a n a d i a n m u t u a l f u n d s q u a l i f i e d f o r s a l e i n Canada was a p p r o x i m a t e l y $2,508 m i l l i o n , 13 f o r a g r a n d t o t a l o f $2,770 m i l l i o n . The number o f m u t u a l f u n d s shows a c o r r e s p o n d i n g l y r a p i d i n c r e a s e . A t t h e end o f 1967, t h e r e were 118 o r g a n i z a t i o n s q u a l i f i e d as m u t u a l f u n d s f o r s a l e i n one o r more p r o v i n c e s o f C a n a d a ; an a p p r o x i m a t e s u b d i v i s i o n o f t h i s f i g u r e was 19 i n v e s t m e n t f u n d s o f f e r e d by t r u s t c o m p a n i e s , 12 U n i t e d S t a t e s m u t u a l f u n d s and 87 C a n a d i a n m u t u a l f u n d s . By t h e end o f 1968, t h e number q u a l i f i e d had i n c r e a s e d t o 13 (6, s u b d i v i d e d i n t o 20, 19 and 97 i n t h e t h r e e c a t e g o r i e s r e s p e c t i v e l y . I t s h o u l d be n o t e d t h a t t h e s e f i g u r e s do n o t a g r e e w i t h p u b l i s h e d f i g u r e s c i r c u l a t e d by o t h e r i n f o r m a t i o n s e r v i c e s . T h e s e f i g u r e s have b e e n p r e p a r e d by t h e s t a f f o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s on t h e b a s i s o f s u b m i t t e d s t a t i s t i c a l m a t e r i a l and a c c o r d i n g t o t h e t e r m s o f t h e recommended d e f i n i t i o n o f a m u t u a l f u n d . 42 V. BENEFITS ATTACHED TO MUTUAL FUND OWNERSHIP T h e r e a r e s e v e r a l we 1 1 - p u b l i c i z e d n o n - m o n e t a r y b e n e f i t s a s s o c i a t e d w i t h t h e p u r c h a s e o f s h a r e s o r u n i t s o f a m u t u a l f u n d . A l t h o u g h t h e p r i n c i p a l r e a s o n f o r m a k i n g an i n v e s t m e n t i s t o o b t a i n p r e s e n t o r f u t u r e i ncome o r c a p i t a l g a i n s , t h e r e a r e c e r t a i n l y o t h e r c o n s i d e r a t i o n s t h a t i n f l u e n c e t h e i n v e s t o r i n s e l e c t i n g a s u i t a b l e i n v e s t m e n t . The i n v e s t m e n t must be c o n s i s t e n t w i t h t h e d e g r e e o f r i s k he i s w i l l i n g t o assume, t h e l e v e l o f l i q u i d i t y he d e s i r e s , t h e manner by w h i c h he i s a b l e t o i n v e s t and t h e t i m e he c a n d e v o t e t o ma n a g i n g h i s i n v e s t m e n t s . I n l i g h t o f t h e s e p r o b l e m s , t h e n o n - m o n e t a r y b e n e f i t s o f f e r e d by m u t u a l f u n d s a r e o f t e n c i t e d as w o r k i n g i n f a v o u r o f t h e m u t u a l f u n d i n v e s t o r . The p r i n c i p a l i t e m s o f f e r e d by t h e d i s t r i b u t o r s and managers o f f u n d s a r e p r o f e s s i o n a l l y managed, d i v e r s i f i e d i n v e s t m e n t p o r t f o l i o s t h a t c a n be p u r c h a s e d i n e i t h e r l a r g e o r s m a l l q u a n t i t i e s . P r o f e s s i o n a l Management M u t u a l f u n d p o r t f o l i o s a r e s u p e r v i s e d on a c o n t i n u a l b a s i s by p e o p l e w i t h e x p e r i e n c e i n i n v e s t i n g , b a c k e d by c o m p e t e n t r e s e a r c h and t h e use o f t e c h n i c a l a i d s t o m a r k e t a n a l y s i s . Some f u n d s have t h e i r own s e c u r i t y a n a l y s t s b u t a r e n o r m a l l y b a c k e d up by a s e p a r a t e management company. 43 As w e l l as a c t i n g as s e c u r i t y a n a l y s t s t h e managers a r e a l s o t r a i n e d f i e l d i n v e s t i g a t o r s a b l e t o o b t a i n p e r t i n e n t o p e r a t i n g i n f o r m a t i o n t h r o u g h d i r e c t c o m m u n i c a t i o n w i t h c o r p o r a t e o f f i c i a l s . T h i s e n a b l e s t h e f u n d t o have a c o n t i n u o u s and i n t i m a t e s t u d y o f c o r p o r a t e management, i t s p r o b l e m s , and t h e c a l i b e r o f t h e i n d i v i d u a l s i n v o l v e d . D i v e r s i f i c a t i o n A n o n - s p e c i a l i z e d m u t u a l f u n d n o r m a l l y i n v e s t s i n a c a r e f u l l y d i v e r s i f i e d g r o u p o f s e c u r i t i e s made up o f s h o r t and l o n g - t e r m bonds o f g o v e r n m e n t s and c o r p o r a t i o n s , p r e f e r r e d s h a r e s and common s t o c k . T hese i n v e s t m e n t s encompass s e v e r a l i n d u s t r i e s and s e v e r a l c o m p a n i e s w i t h i n an i n d u s t r y . The i n v e s t o r , w i t h o n l y a s m a l l amount o f c a p i t a l t o i n v e s t c o u l d o n l y p u r c h a s e a few s t o c k s , and h i s s u c c e s s r e s t s s o l e l y on what h a p p e n s t o t h e s e s t o c k s . H owever, by i n v e s t i n g a s i m i l i a r amount o f c a p i t a l i n a m u t u a l f u n d he o b t a i n s an i n t e r e s t i n many s t o c k s ; t h e r e b y , c u s h i o n i n g t h e e f f e c t s o f a s h a r p p r i c e f l u c t u a t i o n o f an i n d i v i d u a l s e c u r i t y . T h i s r e d u c t i o n o f r i s k i s an o b v i o u s a d v a n t a g e t o t h e i n v e s t o r i f t h e m u t u a l f u n d i s p r o p e r l y d i v e r s i f i e d . L i q u i d i t y and M a r k e t a b i l i t y U n l i k e most s t o c k s and o t h e r f o r m s o f i n v e s t m e n t , t h e v a l u e o f m u t u a l f u n d s h a r e s o r u n i t s a r e n o t i n f l u e n c e d by t h e s u p p l y o f and demand f o r them. T h i s i s t h e r e a s o n why an i n v e s t o r can s e l l h i s . 44 m u t u a l f u n d s h a r e s a t any t i m e f o r t h e i r n e t a s s e t v a l u e . N e v e r t h e l e s s , t h e n e t a s s e t v a l u e i s i n d i r e c t l y a f f e c t e d by e q u i t y m a r k e t s u p p l y and demand f a c t o r s b e c a u s e t h e s e c u r i t i e s t h e m u t u a l f u n d h o l d s a r e s u b j e c t t o s u c h f a c t o r s . R e g u l a r i t y o f I n v e s t i n g M u t u a l f u n d s h a r e s may be b o u g h t on a lump- sum b a s i s , o r on an a c c u m u l a t i o n b a s i s . M u t u a l f u n d d i s t r i b u t i o n c o m p a n i e s make i t p o s s i b l e t o i n v e s t r e l a t i v e l y s m a l l amounts m o n t h l y o r q u a r t e r l y . D i v i d e n d s may a l s o be r e - i n v e s t e d a u t o m a t i c a l l y a t n e t a s s e t v a l u e w i t h o u t a s a l e s c h a r g e . B a s i c a l l y , t h e m u t u a l f u n d s o f f e r two t y p e s o f p l a n s : V o l u n t a r y a c c u m u l a t i o n p l a n . T h i s d i f f e r s f r o m t h e r e g u l a r lump-sum p u r c h a s e o f m u t u a l f u n d s h a r e s o r u n i t s i n t h a t i t e n a b l e s t h e i n v e s t o r t o buy f r a c t i o n a l s h a r e s f r o m h i s a g r e e d - upon p e r i o d i c p a y m e n t , and c a n a u t o m a t i c a l l y p r o v i d e f o r r e - i n v e s t m e n t o f a l l d i v i d e n d s . The s a l e s c o m m i s s i o n i s c h a r g e d i n t h e same manner as i t w o u l d be u n d e r a r e g u l a r lump- sum p u r c h a s e . These l e v e 1 - c h a r g e , v o l u n t a r y a c c u m u l a t i o n p l a n s have no s p e c i f i c t i m e d u r a t i o n and t h e i n v e s t o r may d i s c o n t i n u e t h e p l a n a t any t i m e w i t h o u t p e n a l t y . 45 P r e p a i d o r C o n t r a c t u a l P l a n . T h i s t y p e o f p l a n has a f i x e d d u r a t i o n and t h e i n v e s t o r i s p e n a l i z e d i f he does n o t meet h i s commitment. The i n v e s t o r s i g n s a c o n t r a c t s t a t i n g t h a t he w i l l i n v e s t a p r e - d e t e r m i n e d amount o f money on a r e g u l a r b a s i s f o r a s p e c i f i e d number o f i n s t a l l m e n t s . P e n a l t y f o r n o n - c o m p l e t i o n a r i s e s f r o m t h e manner i n w h i c h t h e s a l e s c o m m i s s i o n f o r t h e e n t i r e i n v e s t m e n t i s t a k e n f r o m t h e e a r l y p ayments made by t h e c o n t r a c t u a l p l a n h o l d e r . F o r e x a m p l e , i f he a g r e e s t o i n v e s t $25 p e r month f o r f i v e y e a r s t h e s a l e s c o m m i s s i o n i s c a l c u l a t e d as a p e r c e n t a g e o f t h e e n t i r e $1,500 i n v e s t m e n t . The l a r g e s t p o r t i o n o f c o m m i s s i o n ( n o r m a l l y 50%) i s l e v i e d a g a i n s t t h e f i r s t t w e l v e i n s t a l l m e n t s . I f t h e p l a n h o l d e r does n o t c o m p l e t e t h e c o n t r a c t , t h e s a l e s c o m m i s s i o n p a i d c a n n o t be r e c o v e r e d . The argument s t r e s s e d by t h e m u t u a l f u n d i n d u s t r y i n f a v o u r o f t h i s t y p e o f a r r a n g e m e n t i s t h a t i t f o r c e s i n d i v i d u a l s t o s a v e . An i n d i v i d u a l may t h i n k t w i c e b e f o r e d e c i d i n g t o c a n c e l h i s c o n t r a c t u a l p l a n e s p e c i a l l y when he r e a l i z e s t h e amount he w o u l d l o s e on p r e v i o u s l y p a i d - i n amounts. C o n v e n i e n c e N o r m a l l y an i n v e s t o r who p u r c h a s e s m u t u a l f u n d s h a r e s o r u n i t s makes o n l y one i n v e s t m e n t 46 c h o i c e i n h i s l i f e t i m e . He r e c e i v e s d i v i d e n d s and r e g u l a r f i n a n c i a l s t a t e m e n t s f r o m t h e m u t u a l f u n d r a t h e r t h a n a s t a t e m e n t f r o m e v e r y company i n w h i c h t h e f u n d i n v e s t s . I t i s r e l a t i v e l y e a s y t o buy and s e l l m u t u a l f u n d s h a r e s and r e l i e v e s him o f c o n t i n u o u s a d m i n i s t r a t i v e r e s p o n s i b i l i t i e s . T h e s e a r e r e a l a d v a n t a g e s t o t h e i n v e s t o r p r o v i d i n g t h a t t h e m u t u a l f u n d he i n v e s t s i n i s w e l l managed. D o l l a r - C o s t A v e r a g i n g I f an i n v e s t o r b uys t h e same s h a r e s a t v a r y i n g p r i c e s , and i n v e s t s t h e same d o l l a r amount e a c h t i m e , t h e a v e r a g e c o s t p e r s h a r e w i l l be l e s s t h a n t h e a v e r a g e o f t h e p r i c e s . T h i s i s so b e c a u s e h i s money w i l l buy more s h a r e s when p r i c e s a r e low t h a n when p r i c e s a r e h i g h . I f s t o c k p r i c e s c o n t i n u e t o move upward o v e r t h e l o n g t e r m i t a l s o i m p r o v e s t h e c h a n c e s t h a t h i s i n v e s t m e n t p e r f o r m a n c e w i l l be p r o f i t a b l e . M u t u a l f u n d s make use o f t h i s t e c h n i q u e t h r o u g h t h e i r a c c u m u l a t i o n p l a n s w h i c h e n a b l e t h e i n v e s t o r t o p u r c h a s e a c o n s t a n t d o l l a r amount o f s h a r e s on a r e g u l a r b a s i s and t o p u r c h a s e f r a c t i o n a l s h a r e s . V a r i e t y o f M u t u a l Funds Some management c o m p a n i e s o r g a n i z e and manage a " m u t u a l f u n d c o m p l e x " . T h i s t e r m i s s p e c i f i c a l l y d e f i n e d as a number o f m u t u a l f u n d s h a v i n g d i f f e r e n t i n v e s t m e n t p o l i c i e s b u t o n l y one i n v e s t m e n t manager. 47 As e x p l a i n e d i n t h e P u b l i c P o l i c y R e p o r t o f t h e S.E.C.14 m u t u a l f u n d c o m p l e x e s e n a b l e a m u t u a l f u n d a d v i s e r t o r e a c h a b r o a d e r c r o s s - s e c t i o n o f p o t e n t i a l i n v e s t o r s and t o o f f e r e a c h i n v e s t o r t h e o p p o r t u n i t y t o a p p o r t i o n h i s a g g r e g a t e m u t u a l f u n d i n v e s t m e n t among s e v e r a l f u n d s w i t h d i f f e r e n t o b j e c t i v e s . M ost s h a r e h o l d e r s o f a m u t u a l f u n d b e l o n g i n g t o s u c h a c o m p l e x have t h e o p t i o n o f s w i t c h i n g t o o t h e r f u n d s w i t h i n t h e c o m p l e x a t a r e d u c e d s a l e s l o a d , no s a l e s l o a d , o r upon payment o f a m i n i m a l e x c h a n g e c h a r g e . T h i s p o l i c y a p p l i e s i n Canada and t h e U n i t e d S t a t e s . I n C a n a d a , t h e l a r g e s t m u t u a l f u n d c o m p l e x i s managed by The I n v e s t o r s G r o u p . T h e r e a r e , h o w e v e r , s e v e r a l o t h e r o r g a n i z a t i o n s w h i c h f i t t h e "'mutual f u n d c o m p l e x " d e f i n i t i o n . To g i v e some i n d i c a t i o n o f t h e s i z e o f t h e s e c o m p l e x e s r e f e r t o T a b l e I I . T h i s t a b l e i d e n t i f i e s t h e c o n s t i t u e n t c o m p a n i e s and g i v e s t h e a s s e t s (as o f December 3 1 , 1967) o f t h e f i v e l a r g e s t C a n a d i a n m u t u a l f u n d c o m p l e x e s . The 17 f u n d s l i s t e d i n t h e s e f i v e c o m p l e x e s h e l d r o u g h l y 78% o f a l l C a n a d i a n m u t u a l f u n d a s s e t s as a t December 3 1 , 1967. R e p o r t o f t h e S e c u r i t i e s and E x c h a n g e C o m m i s s i o n on t h e P u b l i c P o l i c y I m p l i c a t i o n s o f I n v e s t m e n t Company G r o w t h , U n i o n . C a l e n d a r No. 1046, December 2 , 1966. p. 47. 48 TABLE I I CANADA'S F I V E LARGEST MUTUAL FUND COMPLEXES AS AT DECEMBER 3 1 , 1967 Management Company and names o f A g g r e g a t e Net A s s e t s f u n d s i n t h e m u t u a l f u n d c o m p l e x o f c o m p l e x ($ m i l l i o n s ) The I n v e s t o r s Group 915.5 (a) I n v e s t o r s G r o w t h Fund o f Canada L t d . (b) I n v e s t o r s M u t u a l o f Canada L t d . ( c ) I n v e s t o r s I n t e r n a t i o n a l M u t u a l Fund L t d . (d) P r o v i d e n t M u t u a l Fund L t d . U n i t e d Funds Management L t d . 399.8 (a) U n i t e d A c c u m u l a t i v e Fund L t d . (b) U n i t e d A m e r i c a n Fund L t d . ( c ) U n i t e d V e n t u r e Fund L t d . (d) U n i t e d Funds Canada I n t e r n a t i o n a l L t d . A.G.F. Management L t d . 257.8 (a) A m e r i c a n G r o w t h Fund L t d . (b) C a n a d i a n T r u s t e e d Income Fund ( c ) E u r o p e a n G r o w t h Fund L t d . (d) G r o w t h E q u i t y Fund L t d . C a n a d i a n C h a n n i n g C o r p o r a t i o n L t d . 123.0 (a) Commonwealth I n t e r n a t i o n a l C o r p o r a t i o n L t d . (b) Commonwealth I n t e r n a t i o n a l L e v e r a g e Fund L t d . C a p i t a l Management L t d . 121.7 (a) A l l - C a n a d i a n Compound Fund (b) A l l - C a n a d i a n D i v i d e n d Fund ( c ) A l l - C a n a d i a n V e n t u r e Fund TOTAL ASSETS AT MARKET VALUE $1,817.8 SOURCE: The f i l e s o f t h e C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s 49 T e m p o r a r y W i t h r a w a l T h e r e a r e s e v e r a l m u t u a l f u n d s t h a t o f f e r t h e s h a r e h o l d e r o r u n i t h o l d e r t h e r i g h t t o w i t h d r a w a l l o r a p o r t i o n o f h i s i n v e s t m e n t w i t h t h e o p p o r t u n i t y o f r e i n v e s t i n g i t a t a l a t e r d a t e w i t h o u t a s a l e s c h a r g e . The t e r m s u n d e r s u c h an o p t i o n d i f f e r f r o m f u n d t o f u n d w i t h some b e i n g more r e s t r i c t i v e t h a n o t h e r s . R e g a r d l e s s o f t h e c a s e , t h i s r i g h t does p r o v i d e t h e m u t u a l f u n d i n v e s t o r w i t h a s e c o n d a r y s o u r c e o f l i q u i d i t y t h a t can be r e a d i l y c o n v e r t e d i n t o c a s h a t l i t t l e o r no c o s t . T h i s l i s t o f b e n e f i t s o b t a i n e d by i n v e s t i n g i n m u t u a l f u n d s h a r e s o r u n i t s by no means r e p r e s e n t s a l l t h e i n d u c e m e n t s o f f e r e d by t h e i n d u s t r y t o e n c o u r a g e i n v e s t o r s t o a l l o c a t e t h e i r l o n g - t e r m s a v i n g s t o t h e m u t u a l f u n d v e h i c l e . T h e r e i s no q u e s t i o n , h o w e v e r , t h a t t h e s e s e r v i c e s h a v e h e l p e d t h e m u t u a l f u n d i n d u s t r y t o grow a t a r a p i d r a t e i n t h e l a s t d e c a d e . From t h e l i s t r e v i e w e d , one i s l e f t w i t h t h e i m p r e s s i o n t h a t t h e m u t u a l f u n d i n d u s t r y i s c o n c e r n e d w i t h t i m e i t s e l f , r a t h e r t h a n t i m i n g , o r g u e s s i n g m a r k e t a c t i o n , as t h e s e c r e t o f i n v e s t m e n t s u c c e s s . "What t o buy? When? What t o do t h e n ? " T h e s e a r e t h e q u e s t i o n s w h i c h e v e r y i n v e s t o r must a n s w e r i n t h e c o n t e m p l a t i o n and p r o s e c u t i o n o f any i n v e s t m e n t a c t i o n . 50 The m u t u a l f u n d i n d u s t r y i s b a s e d upon t h e p r e m i s e o f r e d u c i n g i n v e s t m e n t r i s k s , t h r o u g h d i v e r s i f i c a t i o n r a t h e r t h a n a t t e m p t i n g t o f i n d " t h e g e t r i c h q u i c k s t o c k " . I t p r e s u m e s , i n f a c t demands, t h a t a r e a s o n a b l e p e r i o d o f t i m e i s n e c e s s a r y f o r t h e s u c c e s s f u l c o n c l u s i o n o f an i n v e s t m e n t e x p e r i e n c e . ^ V I . MUTUAL FUND CHANNELS OF DISTRIBUTION The g r o w t h r a t e o f m u t u a l f u n d s owes much t o t h e e f f e c t i v e d i s t r i b u t i o n t e c h n i q u e s d e v e l o p e d by m u t u a l f u n d d i s t r i b u t i o n c o m p a n i e s . An a n a l y s i s o f t h e c h a n n e l s o f d i s t r i b u t i o n f o r m u t u a l f u n d s h a r e s o r u n i t s w i l l e n a b l e t h e r e a d e r t o see how s u c c e s s f u l t h e i n d u s t r y has b e e n i n s h o w i n g t h e i n s t r u m e n t s and s e r v i c e s i t has t o o f f e r t o t h e p u b l i c . The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s has made t h e f o l l o w i n g s t a t e m e n t i n i t s r e p o r t w h i c h sums up t h e i m p o r t a n c e o f l o o k i n g 16 a t t h e m a r k e t i n g s i d e o f t h e m u t u a l f u n d i n d u s t r y . Hugh A. J o h n s o n , J o h n s o n ' s I n v e s t m e n t Company C h a r t s , n i n e t e e n t h a n n u a l e d i t i o n , B u f f a l o , New Y o r k , 1967, p. X V I I I . Q u o t a t i o n t a k e n f r o m t h e f i n a l d r a f t o f C h a p t e r I I , p a r a g r a p h 2.02, o f t h e u n p u b l i s h e d R e p o r t o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 51 "An o f t - q u o t e d a p h o r i s m o f t h e m u t u a l f u n d i n d u s t r y i s t h a t s h a r e s o r u n i t s o f m u t u a l f u n d s ' a r e n o t b o u g h t , t h e y ' r e s o l d . L i k e many a p h o r i s m s , t h i s r e p r e s e n t s an o v e r - s i m p l i f i c a t i o n o f a c o m p l i c a t e d s i t u a t i o n b u t c o n t a i n s a s i g n i f i c a n t e l e m e n t o f t r u t h . T r a d i t i o n a l l y , t h e m a r k e t f o r m u t u a l f u n d s h a r e s o r u n i t s has b e e n r e g a r d e d as a m a r k e t i n w h i c h p o t e n t i a l p u r c h a s e r s must be c o n v i n c e d t h a t t h e s u g g e s t e d i n v e s t m e n t i s d e s i r a b l e and a p p r o p r i a t e f o r them." Up u n t i l t h e t i m e o f w r i t i n g , t h e m u t u a l f u n d i n d u s t r y has u s e d t h r e e main c h a n n e l s o f d i s t r i b u t i o n i n t h e s a l e o f m u t u a l f u n d s h a r e s o r u n i t s t o t h e p u b l i c : d i r e c t s a l e f o r c e s , b r o k e r s , and i n d e p e n d e n t s a l e s f o r c e s . I t s h o u l d be made c l e a r t h a t n o t a l l d i s t r i b u t i o n c o m p a n i e s use a l l t h r e e c h a n n e l s . Some m u t u a l f u n d s managed by b r o k e r a g e f i r m s a r e a v a i l a b l e o n l y t h r o u g h t h a t f i r m . The d i s t r i b u t i o n c o m p a n i e s g e a r e d t o a l a r g e r m a r k e t u s u a l l y p l a c e e m p h a s i s e i t h e r on s a l e s t h r o u g h a d i r e c t s a l e s f o r c e o r on b r o k e r s and i n d e p e n d e n t s e l l e r s . The methods v a r y and depend t o a l a r g e e x t e n t upon p o l i c y and t r a d i t i o n . R e v i e w e d h i s t o r i c a l l y , s a l e s t h r o u g h b r o k e r s who h a n d l e m u t u a l f u n d s h a r e s o r u n i t s as p a r t o f a g e n e r a l s e c u r i t i e s b u s i n e s s f o r m t h e o l d e s t c h a n n e l f o r t h e i r d i s t r i b u t i o n i n C a n a d a . Two e x a m p l e s o f f u n d s u s i n g t h i s t e c h n i q u e a r e C a n a d i a n I n v e s t m e n t F u n d , L t d . and Commonwealth I n t e r n a t i o n a l C o r p o r a t i o n L i m i t e d . B o t h f u n d s were e s t a b l i s h e d i n 1932 and s o l d t h r o u g h b r o k e r s . S a l e s t h r o u g h b r o k e r s c o n t i n u e d t o be t h e p r i m a r y s a l e s o u t l e t u n t i l t h e m i d - 1 9 5 0 ' s . 52 D i r e c t s a l e s f o r c e s b e gan t o grow r a p i d l y i n t h e l a t e f i f t i e s and now s u r p a s s b r o k e r s i n i m p o r t a n c e as a c h a n n e l o f d i s t r i b u t i o n , e ven t h o u g h a l a r g e v olume o f m u t u a l f u n d s h a r e s s t i l l c o n t i n u e t o be s o l d t h r o u g h b r o k e r a g e f i r m s . I n s t a t i s t i c a l t e r m s , i n 1967, 66% o f t o t a l s a l e s o f m u t u a l f u n d s h a r e s o r u n i t s ( n o t i n c l u d i n g t r u s t company i n v e s t m e n t f u n d s ) were made t h r o u g h d i r e c t s a l e s f o r c e s , 30% t h r o u g h b r o k e r s , and t h e b a l a n c e o f 4% t h r o u g h i n d e p e n d e n t s a l e s f o r c e s 1 7 and o t h e r d i r e c t c h a n n e l s . The r e a d e r can see f r o m t h e s t a t i s t i c s i n t h e p r e c e e d i n g p a r a g r a p h , t h a t t h e most i m p o r t a n t c h a n n e l o f d i s t r i b u t i o n f o r m u t u a l f u n d s i n Canada i s t h e d i r e c t s a l e s f o r c e s . The f i r s t o f t h e s e were e s t a b l i s h e d i n t h e l a t e 1930's and e a r l y 1 9 4 0 ' s . One o f t h e e a r l y d i r e c t f o r c e s was e s t a b l i s h e d by t h e Commonwealth I n t e r n a t i o n C o r p o r a t i o n L i m i t e d , w h i c h was m e n t i o n e d above as an e a r l y u s e r o f b r o k e r s f o r t h e s a l e o f i t s s h a r e s . I t ' s d i s t r i b u t i o n company and t h o s e o f a few o t h e r m u t u a l f u n d s e s t a b l i s h e d f o r c e s o f s a l e s m e n who s o l d s h a r e s o r u n i t s o f one o r more m u t u a l f u n d s u n d e r common management. D e s p i t e t h e i r l a t e i n t r o d u c t i o n , t h e d i r e c t s a l e s f o r c e s grew i n i m p o r t a n c e w i t h t h e g r e a t e s t i n c r e a s e i n number o f s a l e s m e n o c c u r r i n g d u r i n g t h e 1 9 5 0 ' s . 17 S t a t i s t i c s c o m p i l e d by t h e s t a f f o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . 53 Two l a r g e m u t u a l f u n d o r g a n i z a t i o n s w h i c h d e v e l o p e d t h e i r s a l e s f o r c e s d u r i n g t h i s p e r i o d were I n v e s t o r s M u t u a l o f Canada L t d . and U n i t e d A c c u m u l a t i v e Fund L t d . I n 1950, I n v e s t o r s S y n d i c a t e f o r m e d t h e f o r m e r company and b e gan s e l l i n g s h a r e s t o t h e p u b l i c . I n 1957, U n i t e d A c c u m u a l t i v e Fund L t d . was e s t a b l i s h e d and d i s t r i b u t e d t o t h e p u b l i c by U n i t e d I n v e s t m e n t S e r v i c e s L t d . and U n i t e d I n v e s t m e n t S e r v i c e s (Quebec) L t d . The M u t u a l Fund C o m m i t t e e , c o l l e c t e d d e t a i l e d s t a t i s t i c s on C a n a d i a n d i r e c t s a l e s f o r c e s t h a t o f f e r e d s h a r e s o r u n i t s o f a m u t u a l f u n d o r o f a s s o c i a t e d m u t u a l f u n d s q u a l i f i e d f o r s a l e i n Canada a t December 3 1 , 1967, and h a v i n g a g g r e g a t e t o t a l n e t a s s e t s a t t h a t d a t e o v e r $5 m i l l i o n . I n t h i s c a t e g o r y t h e r e were 2,725 f u l l o r p a r t - t i m e s a l e s m e n a t t h e end o f 1962, and t h e c o r r e s p o n d i n g f i g u r e a t t h e end o f 1967 was 5,682. T h r o u g h o u t t h i s p e r i o d , t h e p e r c e n t a g e o f p a r t - t i m e s a l e s m e n r e m a i n e d r e a s o n a b l y s t a b l e a t a b o u t 15% o f t h e t o t a l . I n a d d i t i o n t o t h e s e f i g u r e s , t h e r e were 140 s a l e s m e n a t t h e end o f 1967 a s s o c i a t e d w i t h d i r e c t s a l e s f o r c e s s e l l i n g m u t u a l f u n d s w i t h t o t a l n e t a s s e t s l e s s t h a n $5 m i l l i o n . T a b l e I I I , l i s t s t h e s e v e n l a r g e s t d i s t r i b u t i o n c o m p a n i e s i n Canada as w e l l as p r o v i d i n g o t h e r i n t e r e s t i n g i n f o r m a t i o n . CANADIAN MUTUAL FUND DISTRIBUTION COMPANIES WITH OVER 200 SALESMEN AS AT JUNE":' 30 , 1967 No. o f F u l l P r i n c i p a l I n v e s t m e n t § P a r t - t i m e O b j e c t i v e s o f t h e Name o f D i s t r i b u t i o n Company S a l e s m e n M u t u a l Funds D i s t r i b u t e d M u t u a l F u n d s * - g r o w t h 1. U n i t e d I n v e s t m e n t S e r v i c e s 2,236 U n i t e d A c c u m u l a t i v e Fund L t d . - maximum c a p i t a l g a i n L t d . - income U n i t e d A m e r i c a n Fund L t d - g r o w t h - maximum c a p i t a l g a i n 2. I n v e s t o r s S y n d i c a t e L i m i t e d 804 I n v e s t o r s G r o w t h Fund o f Canada L t d - g r o w t h I n v e s t o r s I n t e r n a t i o n a l M u t u a l Fund L t d . . - g r o w t h I n v e s t o r s M u t u a l o f Canada L t d . - s t a b i l i t y 3. F e d e r a t e d I n v e s t m e n t s L t d . 434 F e d e r a t e d F i n a n c i a l Fund L t d . . . . - g r o w t h w i t h s t a b i l i t y F e d e r a t e d G r o w t h Fund L t d - g r o w t h 4. I.O.S. o f Canada L t d . 410 Regent Fund L t d - g r o w t h - maximum c a p i t a l g a i n 5. A .G.R. Management L i m i t e d 399 A m e r i c a n G r o w t h Fund L i m i t e d . . . . - g r o w t h - maximum c a p i t a l g a i n C a n a d i a n T r u s t e e d Income F u n d . . . - income - s e c u r i t y - s t a b i l i t y E u r o p e a n G r o w t h Fund L i m i t e d . . . . - g r o w t h - maximum c a p i t a l g a i n Growth E q u i t y Fund L i m i t e d - maximum c a p i t a l g a i n - g r o w t h 6. A l l - C a n a d i a n Group A l l - C a n a d i a n Compound Fund - g r o w t h V D i s t r i b u t o r s L i m i t e d 306 A l l - C a n a d i a n D i v i d e n d Fund - maximum c a p i t a l g a i n A l l - C a n a d i a n V e n t u r e Fund L t d . . . - maximum c a p i t a l g a i n - g r o w t h 7. C a n a d i a n C h a n n i n g C o r p o r a t i o n Commonwealth I n t e r n a t i o n a l L t d . 239 C o r p o r a t i o n L i m i t e d - b a l a n c e d f u n d Commonwealth I n t e r n a t i o n a l L e v e r a g e Fund L t d - g r o w t h * The i n f o r m a t i o n i n t h e l a s t column was s u p p l i e d by t h e o r g a n i z a t i o n s t h e m s e l v e s . On 55 A l l e x c e p t one o f t h e d i r e c t s a l e s f o r c e s i n c l u d e d i n t h i s t a b l e d i s t r i b u t e more t h a n one m u t u a l f u n d , and t h a t e x c e p t i o n was c h a n g e d r e c e n t l y when I.O.S. o f Canada L t d . began d i s t r i b u t i n g t h e s h a r e s o f I.O.S. V e n t u r e Fund L t d . The d e v e l o p m e n t o f m u t u a l f u n d s u n d e r common management was d i s c u s s e d i n an e a r l i e r s e c t i o n and i s i n l a r g e p a r t a r e s u l t o f t h e use o f d i r e c t s a l e s f o r c e s . The r e a d e r w i l l r e c a l l f r o m t h e d i s c u s s i o n i n t h a t s e c t i o n t h a t f r o m t h e management c o m p a n i e s p o i n t o f v i e w i t was d e s i r a b l e t o have a v a i l a b l e a c h o i c e o f m u t u a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s . One a d d i t i o n a l a s p e c t o f d i r e c t s a l e s f o r c e s s h o u l d be m e n t i o n e d , and t h i s i s t h a t t h e y a r e e x p e n s i v e t o c r e a t e . F o r t h i s r e a s o n o n l y o r g a n i z a t i o n s p r e p a r e d t o make a s u b s t a n t i a l i n v e s t m e n t a r e a b l e t o d e v e l o p an e f f e c t i v e d i r e c t s a l e s f o r c e . T h i s i s p o s s i b l y one r e a s o n why t h e U n i t e d and I n v e s t o r s o r g a n i z a t i o n s were b o t h s t a r t e d by l a r g e o r g a n i z a t i o n s f r o m t h e U n i t e d S t a t e s . B e c a u s e o f t h e e x p e n s e i n v o l v e d , t h e d i r e c t s a l e s f o r c e a s p e c t o f t h e i n d u s t r y i s d o m i n a t e d by a c o m p a r a t i v e l y s m a l l number o f o r g a n i z a t i o n s . T h i s d o m i n a t i o n e x t e n d s r i g h t a c r o s s Canada as i s made c l e a r by T a b l e IV . TABLE IV CONCENTRATION OF DIRECT SALES FORCE SALESMEN BY REGION AT JUNE 30, 1967 R e g i o n No. o f s a l e s - % o f s a l e s m e n i n e a c h g e o g r a p h i c a l a r e a a s s o c i - men a c t i v e a t e d w i t h t h e i n d i c a t e d number o f t h e l a r g e s t d i s t r i b u t i o n c o m p a n i e s L a r g e s t 2 l a r g . 3 l a r g . 4 l a r g . 5 1 a r g A t l a n t i c P r o v i n c e s 357 21 , .6 36 . .4 47 , .6 58 . 5 67 . 8 Quebec 1 ,536 51 , . 0 64 . . 7 71 , . 9 79 . 0 85 . 1 O n t a r i o 1,528 46 , . 3 63 , . 8 73 , .6 81 . 2 87.3 M a n i t o b a 224 56 . .3 74 , .6 86 , . 2 93 . 8 98 . 7 S a s k a t c h e w a n 399 25 , . 3 44 , . 9 60 , . 7 75 .4 82 . 5 A l b e r t a 660 34 . .4 55 , . 0 67 , . 7 75 . 8 83.5 B r i t i s h C o l u m b i a 897 47 , . 9 62 , . 3 75 , . 9 82 . 1 87 . 4 5,601 C a nada 5,718 39 , . 1 53 . 2 60 . 8 67 . 9 74 . 9 N o t e : T h i s t a b l e i n d i c a t e s t h e p e r c e n t a g e o f t h e d i r e c t s a l e s f o r c e s a l e s m e n i n e a c h o f t h e g e o g r a p h i c a l r e g i o n s who were a s s o c i a t e d w i t h t h e l a r g e s t , and t h e t w o , t h r e e , f o u r and f i v e l a r g e s t d i s t r i b u t i o n c o m p a n i e s . One d i s t r i b u t i o n company, w i t h t h e s e v e n t h l a r g e s t d i r e c t s a l e s f o r c e i n C a n a d a , c o u l d n o t p r o v i d e a breakdown o f i t s W e s t e r n Canada s a l e s m e n among t h e f o u r W e s t e r n p r o v i n c e s . I t i s t h e r e f o r e n o t r e f l e c t e d i n t h e p e r c e n t a g e s f o r M a n i t o b a , S a s k a t c h e w a n , A l b e r t a and B r i t i s h C o l u m b i a ; i t s t o t a l number o f s a l e s m e n i n t h e f o u r p r o v i n c e s a t June 30, 1967 was 117. 57 The s e c o n d c h a n n e l o f d i s t r i b u t i o n m e n t i o n e d above i s t h r o u g h b r o k e r s . S e v e r a l b r o k e r a g e f i r m s have r e c e n t l y s t a r t e d s e p a r a t e m u t u a l f u n d d e p a r t m e n t s s t a f f e d by i n d i v i d u a l s e n g a ged e x c l u s i v e l y i n t h e s a l e o f m u t u a l f u n d s . Many o f t h e s e s a l e s m e n a c t i v e l y s o l i c i t o r d e r s , f o l l o w i n g p r o c e d u r e s s i m i l i a r t o t h o s e u s e d by d i r e c t s a l e s f o r c e s . B e c a u s e t h e s e s a l e s m e n have s i g n e d s a l e s a g r e e m e n t s w i t h a number o f d i s t r i b u t i o n c o m p a n i e s t h e y a r e a b l e t o p r o v i d e t h e i r c l i e n t s w i t h a c h o i c e among s e v e r a l m u t u a l f u n d s . The t h i r d c h a n n e l o f d i s t r i b u t i o n i s t h e i n d e p e n d e n t s a l e s f o r c e s s p e c i a l i z i n g e x c l u s i v e l y i n t h e s a l e o f m u t u a l f u n d s h a r e s o r u n i t s . These o r g a n i z a t i o n s r e p r e s e n t a r e c e n t d e v e l o p m e n t i n t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . They a r e m a i n l y managed by p e r s o n s who were f o r m e r l y s a l e s m e n on d i r e c t s a l e s f o r c e s . L i k e b r o k e r a g e h o u s e s , e a c h i n d e p e n d e n t s a l e s f o r c e has an a r r a n g e m e n t w i t h t h e d i s t r i b u t i n g c o m p a n i e s o f a number o f m u t u a l f u n d s w h i c h e n a b l e i t t o make a v a i l a b l e a v a r i e t y o f m u t u a l f u n d s t o i t s p o t e n t i a l c u s t o m e r s . I n most c a s e s t h e s a l e s m e n on i n d e p e n d e n t s a l e s f o r c e s r e c e i v e a h i g h e r p r o p o r t i o n o f t h e a c q u i s i t i o n c h a r g e t h a n w o u l d be a v a i l a b l e t o them as members o f d i r e c t s a l e s f o r c e s , s i n c e t h e l a t t e r must a l l o c a t e a s i g n i f i c a n t p o r t i o n o f t h i s c h a r g e t o t h e managers above them. 58 A l t h o u g h t h e g r o w t h o f t h e i n d e p e n d e n t s a l e s f o r c e s has b een r a p i d , t h e y a r e s t i l l s m a l l by c o m p a r i s o n w i t h o t h e r c h a n n e l s o f d i s t r i b u t i o n . As a t J u n e 30, 1967, i t i s e s t i m a t e d t h a t t h e r e were a b o u t 35 s u c h o r g a n i z a t i o n s i n e x i s t a n c e i n C a nada. The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s was a b l e t o c o l l e c t d e t a i l e d i n f o r m a t i o n on 17 s u c h o r g a n i z a t i o n s and f o u n d them t o have a t o t a l o f 341 f u l l o r p a r t - t i m e s a l e s m e n . V I I . SUMMARY We have s e e n t h a t m u t u a l f u n d s a r e f i n a n c i a l i n t e r m e d i a r i e s w h i c h s e l l t h e i r f i n a n c i a l i n s t r u m e n t s t o t h e p u b l i c and i n v e s t t h e p r o c e e d s i n s t o c k s , b o n d s , and i n t h e money m a r k e t . They e n a b l e s m a l l i n v e s t o r s , t h r o u g h t h e p o o l i n g o f s a v i n g s , t o o b t a i n a p r o f e s s i o n a l l y managed d i v e r s i f i e d p o r t f o l i o o f s e c u r i t i e s . They a r e , b a s i c a l l y , i n v e s t m e n t c o m p a n i e s b u t have c e r t a i n d i s t i n g u i s h i n g f e a t u r e s w h i c h s e t them a p a r t f r o m o t h e r i n v e s t m e n t c o m p a n i e s . These d i s t i n g u i s h i n g f e a t u r e s were c o v e r e d i n a d e f i n i t i o n o f a m u t u a l f u n d w h i c h b r i e f l y s t a t e d t h a t a m u t u a l f u n d i s an o r g a n i z a t i o n t h a t s t a n d s p r e p a r e d t o redeem i t s i s s u e d s e c u r i t i e s on demand by t h e h o l d e r a t n e t a s s e t v a l u e p e r s h a r e o r u n i t . C l o s e d - e n d o r g a n i z a t i o n s , a l s o c l a s s i f i e d as i n v e s t m e n t c o m p a n i e s , do n o t o f f e r t h i s f e a t u r e . 59 M u t u a l f u n d s a r e u s u a l l y o r g a n i z e d i n one o f t h r e e ways; t h e y a r e i n c o r p o r a t e d p r o v i n c i a l l y o r f e d e r a l l y , u n i n c o r p o r a t e d u n d e r a t r u s t i n d e n t u r e , o r an u n i n c o r p o r a t e d t r u s t e e d m u t u a l f u n d o f a t r u s t company. R e g a r d l e s s o f t h e i r l e g a l f o r m o f o r g a n i z a t i o n a m u t u a l f u n d g r o u p i s u s u a l l y s t r u c t u r e d so t h a t t h e r e a r e two o r more o r g a n i z a t i o n s i n v o l v e d . These w o u l d be t h e m u t u a l f u n d , t h e management company and s o m e t i m e s a d i s t r i b u t i o n company i f i t i s n o t p a r t o f t h e management company. T h i s s t r u c t u r e a l l o w s p o r t f o l i o p r o f i t s o r l o s s e s t o be p a s s e d d i r e c t l y on t o t h e p a r t i c i p a n t s i n t h e m u t u a l f u n d . The management company i s c o m p e n s a t e d by some f o r m o f r e m u n e r a t i o n , u s u a l l y r e f e r r e d t o as a management f e e and t h e d i s t r i b u t i o n company i s c o m p e n s a t e d t h r o u g h t h e c o m m i s s i o n s r e c e i v e d on t h e s a l e o f m u t u a l f u n d s h a r e s o r u n i t s . T h i s t y p e o f s t r u c t u r e a l s o a l l o w s t h e management company and s a l e s company t o a c t on t h e b e h a l f o f more t h a n one m u t u a l f u n d . I t i s t h e s e f e a t u r e s t h a t d i s t i n g u i s h a m u t u a l f u n d f r o m o t h e r f i n a n c i a l i n s t i t u t i o n s . On t h e o t h e r h a n d , i t was a l s o shown t h a t r e l a t i o n s h i p s can e x i s t b e t w e e n m u t u a l f u n d s and o t h e r i n s t i t u t i o n s . Many b r o k e r a g e f i r m s , b a n k s and t r u s t c o m p a n i e s have become a s s o c i a t e d w i t h o r o f f e r m u t u a l f u n d s t o t h e i r c l i e n t s . The t o p i c o f m u t u a l f u n d g r o w t h was d i s c u s s e d a l t h o u g h i t had been b r i e f l y t o u c h e d upon i n C h a p t e r I I . 60 I n t h i s c h a p t e r , h o w e v e r , t h e g r o w t h f i g u r e s u s e d were b a s e d on t h e f i n d i n g s o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , who o n l y i n c l u d e d m u t u a l f u n d s t h a t f i t t e d i t s s u g g e s t e d d e f i n i t i o n . L a t e r i n t h e c h a p t e r we o b s e r v e d t h e n o n - m o n e t a r y b e n e f i t s o r s e r v i c e s p r o v i d e d t o i n v e s t o r s who p u r c h a s e m u t u a l f u n d s h a r e s o r u n i t s . These b e n e f i t s i n e s s e n c e r e p r e s e n t t h e p a c k a g e o r p r o d u c t t h e m u t u a l f u n d i n d u s t r y o f f e r s . The l i s t o f b e n e f i t s i n c l u d e d p r o f e s s i o n a l management, p o r t f o l i o d i v e r s i f i c a t i o n , l i q u i d i t y , r e g u l a r i o f i n v e s t i n g , c o n v e n i e n c e s , d o l l a r - c o s t a v e r a g i n g , v a r i e t y o f m u t u a l f u n d s and t e m p o r a r y w i t h d r a w a l . I t was i m p l i e d t h a t t h e p r o d u c t t h e i n d u s t r y has t o o f f e r i s a t t r a c t i v e t o t h e i n v e s t o r who w i s h e s t o a l l o c a t e h i s l o n g - t e r m s a v i n g s t o an i n s t i t u t i o n t h a t w i l l i n v e s t h i s s a v i n g s i n t h e e q u i t i e s m a r k e t s , c o n t i n u e t o manage t h e s e s a v i n g s on a p r o f e s s i o n a l b a s i s and h a n d l e t h e a d m i n i s t r a t i v e f e a t u r e s a s s o c i a t e d w i t h s u c h i n v e s t m e n t s . The l a s t s e c t i o n o f t h e c h a p t e r p r o v i d e d a rundown o f t h e v a r i o u s c h a n n e l s o f d i s t r i b u t i o n t h r o u g h w h i c h m u t u a l f u n d s h a r e s o r u n i t s a r e s o l d . I n r e c e n t y e a r s t h e d i r e c t s a l e s f o r c e s have p l a y e d t h e p r e d o m i n a n t r o l e i n t h e m a r k e t i n g o f s h a r e s f o l l o w e d by b r o k e r s and i n d e p e n d e n t s a l e s f o r c e s . The p u r p o s e o f t h i s c h a p t e r has b e e n a c c o m p l i s h e d i n t h a t t h e r e a d e r now knows what m u t u a l f u n d s a r e , 61 how t h e y a r e o r g a n i z e d , how t h e i n d u s t r y has grown i n s i z e , how f u n d s d i f f e r f r o m o t h e r f i n a n c i a l i n s t i t u t i o n s , what r e l a t i o n s h i p s t h e y have t o o t h e r f i n a n c i a l i n s t i t u t i o n s and what b e n e f i t s t h e y p r o v i d e . Much more t h a n t h i s , he knows what t h e m u t u a l f u n d p r o d u c t i s and how i t i s d i s t r i b u t e d . In one r e s p e c t t h e m u t u a l f u n d i n d u s t r y i s no d i f f e r e n t f r o m many o t h e r f i r m s t h a t have p r o d u c t s f o r s a l e . I f s u c h a f i r m i s t o grow i t must be a b l e t o s e l l i t s p r o d u c t , w h i c h i n t u r n c a l l s f o r an a c c e p t a n c e o f t h e p r o d u c t on t h e p a r t o f t h e p o t e n t i a l p u r c h a s e r , and an a g g r e s s i v e s a l e s f o r c e t o go o u t and s e l l t h e p r o d u c t . I n t h i s c h a p t e r , among o t h e r t h i n g s , we have l o o k e d a t t h e p r o d u c t t h e m u t u a l f u n d i n d u s t r y has t o o f f e r . We have a l s o l o o k e d a t t h e means by w h i c h t h e p r o d u c t i s d i s t r i b u t e d . B o t h t h e a t t r a c t i v e n e s s o f t h e p r o d u c t and t h e a b i l i t y o f t h e i n d u s t r y t o s e l l i t s p r o d u c t has g r e a t l y a s s i s t e d t h e i n d u s t r y t o grow a t a r a p i d p a c e . These two f a c t o r s a l o n e , h o w e v e r , c a n n o t be a t t r i b u t e d w i t h a l l t h e c r e d i t f o r t h e r a p i d g r o w t h o f t h e m u t u a l f u n d i n d u s t r y s i n c e 1957 i n as much as t h e y b o t h depend upon p u b l i c demand f o r t h e i n s t r u m e n t s and s e r v i c e s t h e i n d u s t r y has t o o f f e r . The c r e a t i o n o f p u b l i c i n t e r e s t i n t h e m u t u a l f u n d p r o d u c t i s t h e s u b j e c t o f t h e n e x t c h a p t e r . CHAPTER IV PUBLIC ACCEPTANCE OF MUTUAL FUNDS I n C h a p t e r I I , we saw t h a t d u r i n g t h e p e r i o d s i n c e 1957, t h e g r o w t h r a t e o f m u t u a l f u n d s e x c e e d e d t h a t o f o t h e r m a j o r f i n a n c i a l i n s t i t u t i o n s . T h i s s i t u a t i o n owes much t o t h e p a c k a g e t h e m u t u a l f u n d i n d u s t r y o f f e r s and t h e e f f e c t i v e d i s t r i b u t i o n t e c h n i q u e s d e v e l o p e d by m u t u a l f u n d d i s t r i b u t i o n c o m p a n i e s , b u t c o u l d n o t have o:c_o.urrr_e_.d w i t h o u t i n c r e a s i n g p u b l i c i n t e r e s t i n e q u i t y i n s t r u m e n t s , and t h e a c c e p t a n c e o f m u t u a l f u n d s as t h e p r i n c i p a l f i n a n c i a l i n s t i t u t i o n f o r s u c h i n v e s t m e n t . What has g e n e r a t e d p u b l i c i n t e r e s t i n t h e m u t u a l f u n d p r o d u c t ? T h e r e have o b v i o u s l y b e e n some p r e d o m i n a n t f a c t o r s w h i c h have a l t e r e d t h e p r e f e r e n c e s by s a v e r s f o r t h e s e r v i c e s and o b l i g a t i o n s o f f e r e d by t h e m u t u a l f u n d i n d u s t r y o v e r t h o s e o f f e r e d by o t h e r f i n a n c i a l i n t e r m e d i a r i e s . B a s i c a l l y , t h e r e a r e two ways i n w h i c h p r e f e r e n c e s f o r t h e s e r v i c e s p r o v i d e d by f i n a n c i a l i n s t i t u t i o n s a r e c r e a t e d . The f i r s t i s c r e a t e d by a s h i f t i n t h e l e v e l o f e c o n o m i c d e v e l o p m e n t , a c h a n g i n g a t t i t u d e o f i n d i v i d u a l s a v e r s and i n t h e wants and needs o f b o r r o w e r s a t a p a r t i c u l a r p e r i o d i n t i m e . I n s t i t u t i o n s t h a t b e n e f i t f r o m t h i s t y p e o f p r e f e r e n c e a r e t h o s e t h a t can r e s p o n d t o t h e c h a n g i n g n e e d s o f a d e v e l o p i n g 63 economy by p r o v i d i n g t h e d e s i r e d f i n a n c i a l i n s t r u m e n t s and s e r v i c e s . The s e c o n d t y p e o f p r e f e r e n c e i s c r e a t e d t h r o u g h i n n o v a t i o n s by f i n a n c i a l i n s t i t u t i o n s w h i c h a l t e r n a t i v e l y c r e a t e new demands. T h i s s e c o n d t y p e o f p r e f e r e n c e w i l l be t h e t o p i c o f d i s c u s s i o n i n t h e n e x t c h a p t e r . I n t h i s c h a p t e r we w i l l e x a m i n e t h e f o r m e r t y p e o f p r e f e r e n c e . I n d o i n g so i t w i l l be n e c e s s a r y t o i s o l a t e t h e p r e d o m i n a n t f a c t o r s t h a t have a i d e d t h e C a n a d i a n m u t u a l f u n d i n d u s t r y i n e x p a n d i n g i t s a s s e t s . The t e r m , a i d e d , i s s t r e s s e d h e r e , b e c a u s e t h e C a n a d i a n m u t u a l f u n d i n d u s t r y was q u i c k t o r e c o g n i z e c h a n g i n g p r e f e r e n c e s and r e a c t e d by p r o v i d i n g t h e w i d e r a n g e o f f i n a n c i a l i n s t r u m e n t s and s e r v i c e s demanded by s a v e r s . Some o f t h e s e i n s t r u m e n t s and s e r v i c e s were e x p l a i n e d i n t h e p r e v i o u s c h a p t e r and n e e d n o t be r e p e a t e d h e r e . What i s w o r t h r e p e a t i n g i s t h a t C h a p t e r I I I , p r o v i d e d a b a s i c d e f i n i t i o n o f a m u t u a l f u n d , i t s r o l e as a f i n a n c i i n t e r m e d i a r y and what i t has t o o f f e r t o s a v e r s as a f i n a n c i a l i n s t i t u t i o n . I t i s now p o s s i b l e t o show t h e f a c t o r s t h a t have c r e a t e d t h e demand f o r t h e f i n a n c i a i n s t r u m e n t s and s e r v i c e s o f f e r e d by C a n a d i a n m u t u a l f u n d s What t h e n a r e t h e m a j o r f a c t o r s t h a t have s h i f t e d t h i s p a r t i c u l a r i n s t i t u t i o n i n t o t h e g r o w t h l i m e l i g h t ? T h e r e a r e t h r e e m a j o r f a c t o r s t h a t a p p e a r t o be most i n f l u e n t i a l - an i n c r e a s e i n p e r s o n a l n e t s a v i n g s , t h e d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by s a v e r s , 64 and a marked p r e f e r e n c e f o r s a v i n g t h r o u g h c e r t a i n f i n a n c i a l i n s t i t u t i o n s . B e f o r e p r o c e e d i n g w i t h t h e a n a l y s i s o f t h e s e f a c t o r s i t s h o u l d be m e n t i o n e d t h a t t h e y have a l s o a i d e d t h e g r o w t h o f a few o t h e r f i n a n c i a l i n s t i t u t i o n s . F o r t h i s r e a s o n , t h i s c h a p t e r w i l l n o t be d e v o t e d e x c l u s i v e l y t o a d i s c u s s i o n of- t h e i m p a c t t h e s e f a c t o r s have had upon t h e g r o w t h o f t h e m u t u a l f u n d i n d u s t r y . I f o t h e r f i n a n c i a l i n s t i t u t i o n s h ave b e n e f i t e d i n t e r m s o f g r o w t h , t h e y t o o w i l l be m e n t i o n e d . By d o i n g s o , t h e r e a d e r w i l l have some a p p r e c i a t i o n o f t h e c o m p e t i t i o n f a c i n g t h e m u t u a l f u n d i n d u s t r y i n t h e f u t u r e . I . PERSONAL NET SAVINGS B r o a d l y s p e a k i n g , a l l f i n a n c i a l i n t e r m e d i a r i e s have b e n e f i t e d f r o m t h e r i s e i n p e r s o n a l n e t s a v i n g s as w e l l as by a d e v e l o p i n g s o c i a l c o n s c i o u s n e s s t h a t s t r e s s e s t h e r e s p o n s i b i l i t i e s o f b o t h g o v e r n m e n t and p r i v a t e o r g a n i z a t i o n s t o p r o v i d e c o n t i n u o u s i ncome payments d u r i n g p e r i o d s o f h i g h unemployment as w e l l as d u r i n g o l d age. I n r e s p o n s e t o t h i s t r e n d t h e f i n a n c i a l i n s t i t u t i o n s have d e v e l o p e d numerous programmes t o f a c i l i t a t e t h e s a v i n g s p r o c e s s and a t t r a c t f u n d s I Q f r o m t h e e x p a n d i n g m i d d l e income c l a s s . 18 S i d n e y R o b l i n s , The S e c u r i t i e s M a r k e t s O p e r a t i o n s and I s s u e s , The F r e e P r e s s , New Y o r k , 1966 , p. 215. 65 N e v e r t h e l e s s , t h e r e a r e some f i n a n c i a l i n s t i t u t i o n s t h a t have b e n e f i t e d more t h a n o t h e r s as s a v e r s have a l l o c a t e d t h e i r f u n d s t o t h o s e i n s t i t u t i o n s who c o u l d b e s t f u l f i l t h e i r d e s i r e d s a v i n g s o b j e c t i v e s . L e t us e x a m i n e t h e g r o w t h i n p e r s o n a l n e t s a v i n g s i n an a t t e m p t t o see why t h e m u t u a l f u n d i n d u s t r y i n p a r t i c u l a r has b e n e f i t e d f r o m t h e c h a n g i n g d e s i r e s o f s a v e r s . In Canada t h e r e has been a s t r o n g t e n d e n c y s i n c e 1961 f o r p e r s o n a l n e t s a v i n g s t o s u r p a s s t h e g r o w t h i n p e r s o n a l d i s p o s a b l e i n c o m e . ^ T h i s t e n d e n c y can be o b s e r v e d by r e f e r r i n g t o F i g u r e 2, and T a b l e V. As i n d i v i d u a l s i n c r e a s e t h e amount o f income t h e y a l l o c a t e t o s a v i n g s c o m b i n e d w i t h a g r e a t e r c o n c e r n o v e r t h e r e t u r n s o b t a i n e d on t h e i r s a v i n g s , t h e g r e a t e r w i l l be t h e g r o w t h o f f i n a n c i a l i n s t i t u t i o n s e x p a n d i n g t h e i r f i e l d s o f a c t i v i t i e s i n t h e a r e a s demanded by s a v e r s S i n c e 1966 t h e p e r s o n a l n e t s a v i n g r a t e has t e n d e d t o l e v e l o f f . The p o s s i b l e e x p l a n a t i o n f o r t h i s m i g h t be b a s e d on a c o m b i n a t i o n o f d e m o g r a p h i c c h a n g e s and r a p i d l y r i s i n g p r i c e s . Y o u n g e r c o n s u m e r s who a r e n o t c o n s i d e r e d t o be h i g h s a v e r s , a r e b e c o m i n g a l a r g e r p r o p o r t i o n o f t h e t o t a l p o p u l a t i o n . M o r e o v e r , i n t h e f a c e o f r a p i d p r i c e i n c r e a s e s , h i g h e r t a x r a t e s , and more c o m p u l s o r y w e l f a r e p a y m e n t s , t h e r e a p p e a r s t o be m e r i t t o an a r g u m e n t " t h a t c o n s u m e r s a r e w i l l i n g t o d e c r e a s e t h e i r s a v i n g r a t e and t o b o r r o w h e a v i l y i n o r d e r t o m a i n t a i n g r o w t h i n t h e i r r e a l s t a n d a r d o f l i v i n g . 1160 1%H 1%S 1166 1%7 116 & t '" P e r s o n a l Net S a v i n g as a % o f P e r s o n a l D i s p o s a b l e Income TART.F V TABLE V PERSONAL INCOME, EXPENDITURES, AND SAVINGS IN CANADA - 1957 - 1968 FIS C A L PERSONAL PERSONAL PERSONAL PERSONAL NET PERCENTAGE PERCENTAGE GROWTH YEAR DISPOSABLE EXPENDITURES NET SAVING AS A % GROWTH IN PER. IN PERSONAL NET INCOME SAVING OF PER. D I S . I N . D I S . INCOME SAVINGS MIL . $ MIL . $ MIL . $ % % % 1957 21,274 -20,072 1,202 5 . 7 5 .6 -8.9 1958 22,880 -21,245 1 ,635 7 . 1 7.5 36 . 0 1959 23,948 -22,591 1,357 5 . 7 4 . 7 -17.0 1960 25,075 -23,540 1 ,535 6.1 4 . 7 13 . 1 1961 26,011 -24,466 1 ,545 5 .9 3 . 7 . 7 1962 28,243 -25,926 2,317 8 . 2 8.6 50 . 0 1963 30 ,018 -27,487 2,531 8.4 6 .3 9 . 3 1964 31,725 -29,666 2,059 6 .5 5.7 -18.6 1965 35,145 -32,061 3,088 8 . 8 10 . 8 49 .9 1966 38,579 -34,848 3 ,731 9.7 9 . 8 20 . 8 1967 41 , 709 -37,714 3,995 9 .6 8 . 1 7 . 1 1968 44,964 -40 ,916 4,048 9 .0 7 . 8 1 . 3 SOURCE : Bank o f Canada S t a t i s t i c a l Summary, S u p p l e m e n t 1965. A l s o t h e June M o n t h l y S t a t i s t i c a l Summary, 1969. ON 68 I f h i s t o r y r e p e a t s i t s e l f , i t i s u n l i k e l y t h a t i n f l a t i o n c o n s c i o u s n e s s w i l l be e r a s e d f r o m t h e minds o f s a v e r s . T h e r e i s h a r d l y a day t h a t p a s s e s when C a n a d i a n s do n o t h e a r a b o u t t h e d i s a d v a n t a g e s o f i n f l a t i o n . One a p p r o a c h open t o t h e p u b l i c f o r i n f l a t i o n p r o t e c t i o n i s t o i n v e s t i n e q u i t i e s o f c o r p o r a t i o n s . O v e r t h e y e a r s , many i n v e s t o r s have e a r n e d s u b s t a n t i a l r e w a r d s by p u t t i n g t h e i r s a v i n g s t o work i n c o r p o r a t i o n s . P r o o f o f t h i s l i e s i n an e x t e n s i v e s t u d y u n d e r t a k e n by L a w r e n c e F i s h e r and James H. L o r i e a t t h e c e n t r e f o r R e s e a r c h i n S e c u r i t y P r i c e s a t t h e U n i v e r s i t y 2 0 o f C h i c a g o . T h e i r s t u d y shows how an i n v e s t o r w o u l d have f a i r e d i n t e r m s o f a v e r a g e a n n u a l r a t e s o f r e t u r n compounded a n n u a l l y , a s s u m i n g e q u a l i n v e s t m e n t s i n t h e common s t o c k s o f e a c h c o r p o r a t i o n l i s t e d on t h e New Y o r k S t o c k E x c h a n g e . T h e r e a r e a number o f t a b l e s p r e s e n t e d i n t h i s a r t i c l e . The most s i g n i f i c a n t t a b l e , h o w e v e r , i s t h e f i r s t one w h i c h shows how an i n v e s t o r f a i r e d w i t h r e i n v e s t m e n t o f d i v i d e n d s b u t w i t h o u t payment o f t a x e s on d i v i d e n d s o r c a p i t a l g a i n s and w i t h o u t c o m m i s s i o n s on l i q u i d a t i o n . I n o t h e r w o r d s , t h e d a t a a r e t h o s e t h a t w o u l d a p p l y t o t h e p o r t f o l i o o f a t a x - e x e m p t i n v e s t o r . L a w r e n c e F i s h e r and James H. L o r i e , " R a t e o f R e t u r n on I n v e s t m e n t s i n Common S t o c k t h e Y e a r - b y - Y e a r R e c o r d 1926 - 1965 ," The J o u r n a l o f B u s i n e s s , J u l y , 1968 , pp^SL-316- 69 B e c a u s e o f t h i s t h e r a t e s o f r e t u r n f o r common s t o c k s shown i n t h e t a b l e can be compared most d i r e c t l y t o t h e compound i n t e r e s t r a t e s p a i d by c h a r t e r e d b a n k s on s a v i n g s i n t h e v a r i o u s p e r i o d s , (1926 t o 1965) and w i t h t h e p u b l i s h e d y i e l d s on most o t h e r i n v e s t m e n t m e d i a , w h i c h a r e a l s o p u b l i s h e d as p r e - t a x f i g u r e s . The s t u d y showed, among o t h e r t h i n g s , t h a t t h e a v e r a g e a n n u a l r a t e o f r e t u r n compounded a n n u a l l y , a s s u m i n g t a x e x e m p t i o n and r e i n v e s t m e n t o f d i v i d e n d s f o r t h e p e r i o d e n d i n g December 1957 t o December 1965 was 17.7%, and f r o m December 1962 t o December 1965 t h e r a t e was 22.6%. The a u t h o r s a d m i t t h a t no one a c t u a l l y makes i n v e s t m e n t s on t h e b a s i s assumed i n t h e i r s t u d y and t h a t i t w o u l d be i m p o s s i b l e t o make a d e f i n i t i v e s t a t e m e n t a b o u t t h e r e l a t i o n s h i p b e t w e e n t h e r a t e s i n t h e t a b l e and t h e r a t e s r e s u l t i n g f r o m a p o l i c y o f random s e l e c t i o n . They s t a t e , h o w e v e r , t h a t i t i s p o s s i b l e t o s a y s o m e t h i n g a b o u t t h e r e l a t i o n s h i p b e t w e e n t h e r a t i o s o f t e r m i n a l w e a l t h t o t h e i n i t i a l i n v e s t m e n t w h i c h a r e i m p l i e d by t h e r a t e s o f t h e t a b l e and t h e c o r r e s p o n d i n g r a t i o s o f t e r m i n a l w e a l t h t o i n i t i a l i n v e s t m e n t t h a t w o u l d 21 r e s u l t f r o m s i m p l e random s e l e c t i o n . 2 1 L o r i e and F i s h e r d e f i n e " s i m p l e random s e l e c t i o n " as • '•'any scheme w h i c h p r o d u c e s e q u a l e x p e c t a t i o n s o f t h e - ; amount o f i n i t i a l i n v e s t m e n t i n e a c h s t o c k - a scheme, f o r e x a m p l e s u c h as e q u a l p r o b a b i l i t i e s o f s e l e c t i o n w i t h e q u a l i n v e s t m e n t i n s e l e c t e d s t o c k s . 70 They sa y t h a t t h e s e r a t i o s w o u l d be t h e same on a v e r a g e . T h a t i s , an i n v e s t o r who s e l e c t e d s t o c k s a t random w o u l d , on a v e r a g e , have ended up w i t h t h e same w e a l t h as t h e i n v e s t o r who e a r n e d t h e r a t e s i n t h e t a b l e . D e s p i t e t h e f a v o u r a b l e r a t e s o f r e t u r n g e n e r a t e d o u t o f t h e L o r i e and F i s h e r s t u d y t h e r e i s , o f c o u r s e an e l e m e n t o f r i s k i n s e c u r i t y o w n e r s h i p - t h e r i s k t h a t any one p e r s o n a t a g i v e n t i m e may l o s e money i n a p a r t i c u l a r s e c u r i t y . T h i s means, t h e r e f o r e , an a l e r t i n v e s t o r must c o n s t a n t l y r e - e x a m i n e h i s e q u i t y h o l d i n g s t o a s s u r e t h a t t h e y c o n t i n u e t o meet h i s i n v e s t m e n t o b j e c t i v e s . B o t h s t o c k p r i c e s and t h e p r o s p e c t s o f c o m p a n i e s and i n d u s t r i e s a r e c o n s t a n t l y c h a n g i n g v a r i a b l e s w h i c h must be w e i g h e d i n p o r t f o l i o p o l i c y and i n v e s t m e n t s e l e c t i o n . To a i d t h e i n v e s t o r i n h i s c o n t i n u a l s e a r c h f o r s e c u r i t i e s o f f e r i n g e x c e p t i o n a l v a l u e , t h e i n v e s t m e n t d e a l e r s and b r o k e r s p r o v i d e t h e s e r v i c e s o f t h e i r r e s e a r c h d e p a r t m e n t s as w e l l as t h e i r own s p e c i a l i z e d e x p e r i e n c e . The b r o k e r a g e c o m m u n i t y , h o w e v e r , i s o n l y one f i n a n c i a l g r o u p t h a t has b e n e f i t e d f r o m t h e d e s i r e f o r i n v e s t m e n t a d v i c e . I t i s q u i t e a p p a r e n t t h a t i n v e s t i n g i n m u t u a l f u n d s i s g r o w i n g a t an i m p r e s s i v e r a t e i n Canada. T h u s , p a r t o f t h e r e a s o n f o r t h e g r o w t h r e c o r d e d by m u t u a l f u n d s i s t h a t t h e y p r o v i d e a c o m b i n a t i o n o f i n v e s t m e n t s e r v i c e s t h a t a p p e a r a t t r a c t i v e t o i n v e s t o r s . 71 Many o f t h e s e s e r v i c e s were e x p l a i n e d i n t h e p r e v i o u s c h a p t e r ; o t h e r s w i l l be d i s c u s s e d i n t h e n e x t c h a p t e r . The d e s i r e by i n d i v i d u a l s f o r i n v e s t m e n t o u t l e t s c a p a b l e o f o f f e r i n g h i g h e r r e t u r n s p e r s a v i n g s d o l l a r i s o n l y one f a c t o r w h i c h a s s i s t e d s e l e c t e d i n s t i t u t i o n s t o e x p a n d t h e i r a s s e t s o v e r t h e y e a r s . A n o t h e r f a c t o r w o r t h c o n s i d e r i n g i s t h a t s t o c k p r i c e s have c l i m b e d c o n s i d e r a b l y o v e r t h e y e a r s and t h o s e i n s t i t u t i o n s t h a t h e l d a s u b s t a n t i a l p o r t i o n o f t h e i r a s s e t s i n e q u i t i e s have b e n e f i t e d f r o m t h e r e w a r d s o f c a p i t a l a p p r e c i a t i o n . The f o u r d i s t i n c t g r o u p s t h a t were i n a p o s i t i o n t o t a k e a d v a n t a g e o f t h e u p s u r g e i n s t o c k p r i c e s a r e l i s t e d i n T a b l e V I . A g l i m p s e a t t h e p o r t i o n o f t h e i r a s s e t s r e p r e s e n t e d by common s t o c k i n r e l a t i o n t o t h e i r y e a r l y p e r c e n t a g e g r o w t h r a t e , c l e a r l y i n d i c a t e s t h e i n f l u e n c e t h i s p a r t i c u l a r f a c t o r has had upon t h e g r o w t h r e c o r d e d by t h e s e g r o u p s . 72 TABLE VI COMPARISON OF GROWTH AND STOCK HOLDINGS OF SELECTED FINANCIAL GROUPS P e r c e n t a g e Change i n A s s e t s Ave r a g e A n n u a l G r o w t h R a t e P e r c e n t o f S t o c k s H e l d t o T o t a l A s s e t s 1. E s t a t e , T r u s t S Ag e n c y A c c o u n t s 1961-1966 2. Open-End M u t u a l Funds 1957-1966 3. C l o s e d - E n d I n v e s tment Companies 1957-1966 • 4. T r u s t e e d P e n s i o n Funds 1956-1966 605 .5% 211.7 130.8 262.5 47-48% 13-14 9-10 12-13 60 .8% 82 . 7 90 .9 16 . 8 F i n a n c i a l I n t e r m e d i a r i e s , a R e f e r e n c e S o u r c e S u r v e y , P u b l i s h e d by t h e E c o n o m i c A n a l y s i s B r a n c h , O f f i c e o f t h e C h i e f E c o n o m i s t , D e p a r t m e n t o f E c o n o m i c s and D e v e l o p m e n t , S e p t e m b e r , 1967. A l t h o u g h t h e e s t a t e , t r u s t and a g e n c y a c c o u n t s a r e n o t c l a s s i f i e d as f i n a n c i a l i n t e r m e d i a r i e s , t h e y were i n c l u d e d b e c a u s e o f t h e g r o w t h i m p l i c a t i o n s f o r t h e t r u s t c o m p a n i e s . A t r u s t company b e i n g a h y b i r d f u n c t i o n i n g b o t h as an a d m i n i s t r a t o r m a n a g i n g a g r e a t many s e p a r a t e e s t a t e , t r u s t and a g e n c y a c c o u n t s and a l s o as a f i n a n c i a l i n s t i t u t i o n . The e s t a t e , t r u s t 73 and a g e n c y a c t i v i t i e s o f t h e t r u s t c o m p a n i e s c o n s i s t o f m a n a g i n g i n d i v i d u a l a s s e t h o l d i n g s f o r a p e r c e n t a g e o r f i x e d f e e . I t i s d i f f i c u l t t o d e t e r m i n e f r o m t h e d i s c u s s i o n i n t h i s s e c t i o n how s a v e r s d e c i d e where t h e y s h o u l d c h a n n e l t h e i r s a v i n g s . C e r t a i n o b v i o u s q u e s t i o n s come t o m i n d . Why a r e some s a v i n g s o u t l e t s p r e f e r r e d o v e r o t h e r s ? A r e s a v e r s b e c o m i n g more s o p h i s t i c a t e d i n t h e i r s a v i n g s a p p r o a c h ? Where w i l l t h e i r s a v i n g s be a l l o c a t e d i n t h e f u t u r e ? Which f i n a n c i a l i n s t i t u t i o n s w i l l b e n e f i t m ost? An a t t e m p t w i l l be made i n s u b s e q u e n t s e c t i o n s t o s h e d some l i g h t on t h e s e u n a n s w e r e d q u e s t i o n s . I I . DEVELOPMENT OF FINANCIAL SOPHISTICATION F o r r e a s o n s i n d i c a t e d a b o v e , t h e d e s i r e o f s a v e r s f o r h i g h e r r e t u r n s on t h e i r s a v i n g s w i l l c o n t i n u e t o r u n a c o n s i s t e n t p a t h i n t h e f u t u r e . T h i s t r e n d w i l l h a v e t r e m e n d o u s i m p l i c a t i o n s f o r t h e f u t u r e g r o w t h o f c e r t a i n f i n a n c i a l i n s t i t u t i o n s . I t w i l l q u i t e p r o b a b l y mean t h a t t r e m e n d o u s c o m p e t i t i v e p r e s s u r e s w i l l be e m e r g i n g among a l l f i n a n c i a l i n s t i t u t i o n s w h i c h w i l l p rompt a b r o a d e n i n g o f t h e r a n g e o f s e r v i c e s o f f e r e d t o t h e p u b l i c and e f f o r t s t o s p r e a d c o s t s o v e r a w i d e r r a n g e o f f i n a n c i a l a c t i v i t i e s . 74 Such p r e s s u r e s may w e l l s t i m u l a t e i n n o v a t i o n s . Leon K e n d a l l p r e s e n t s a v e r y w o r t h w h i l e argument;. 2 2 t o t h i s e f f e c t . I n d i s c u s s i n g t r e n d s i n s a v i n g s , he s u g g e s t s t h a t t h e i n c r e a s e i n p a r t i c i p a t i o n i n t h e s t o c k m a r k e t , t h e i n c r e a s e d number o f i n v e s t m e n t a r t i c l e s f o u n d i n m a g a z i n e s , and t h e a b i l i t y o f i n v e s t o r s t o s u f f e r l o s s e s i n t h e m a r k e t w i t h o u t a l t e r i n g t h e i r c onsumer s p e n d i n g , i n d i c a t e s t h a t t h e U.S. p o p u l a t i o n i n g e n e r a l i s m o v i n g up a s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n . F i g u r e 3, l i s t s t h e o p t i o n s K e n d a l l s e e s a v a i l a b l e t o s a v e r s i n t h e f o r m o f i n v e s t m e n t a l t e r n a t i v e s . I t l i s t s t h e c h o i c e s open t o i n v e s t o r s , r a n k i n g them f r o m t h e m a t t r e s s and c a s h b o x , t o d i r e c t b u s i n e s s i n v e s t m e n t . A t t h e b o t t o m o f t h e f i g u r e one f i n d s g r e a t e r s e c u r i t y , b u t a l e s s e r r e w a r d ; t h e management d e c i s i o n s a r e few. A t t h e t o p , r i s k s a r e l a r g e , b u t t h e p o t e n t i a l r e w a r d s a r e g r e a t ; management d e c i s i o n s f a l l i n g upon t h e i n d i v i d u a l a r e many. G e n e r a l l y s p e a k i n g , t h e f u r t h e r t o w a r d t h e t o p one moves, t h e g r e a t e r t h e p o r t i o n o f e q u i t i e s t o be f o u n d i n an i n v e s t m e n t p o r t f o l i o . The scheme assumes t h a t n o r m a l l y , i n d i v i d u a l s p r o g r e s s f r o m i n d i r e c t Leon T. K e n d a l l , "The New E n v i r o n m e n t F a c i n g F i n a n c i a l I n t e r m e d i a r i e s i n t h e N e x t D e c a d e " , R e a d i n g s i n F i n a n c i a l I n s t i t u t i o n s , H o u g h t o n M i f f i n Company, B o s t o n , 1965, pp. 284-304. 75 FIGURE 3 ZONES OF FINANCIAL SOPHISTICATION P u l l t o w a r d G r e a t e r Reward and G r o w t h NE OF HIGH SOPHISTICATION mand f o r Management D e c i s i o n s by I n d i v i d u a l B u s i n e s s i n v e s t m e n t s R e a l E s t a t e S p e c u l a t i v e s t o c k s S p e c u l a t i v e m u t u a l f u n d s B l u e - c h i p s t o c k s C o r p o r a t e s t o c k s 4 J G S > O Minimum Se c u r i t y Maximum r e w a r d Minimum a v a i l a b i l i t y S p e c u l a t i v e NE OF MODERATE SOPHISTICATION mand f o r D e c i s i o n i n p r i n c i p l e ( a t l e a s t i n i t i a l l y ) B a l a n c e d d i v e r s i f i e d m u t u a l f u n d s C r e d i t u n i o n s S a v i n g s and l o a n A s s o c i a t i o n s <x> c o <4H o e C •H c o u Medium s e c u r i t y Medium r e w a r d Medium av a i 1 ab i 1 i t y C o n s i d e r e d s 1 i g h t l y s p e c u l a t i v e NE OF L I T T L E OR NO SOPHISTICATION Demand f o r Manage- ment D e c i s i o n s ( o r v e r y m i n i m a l ) M u t u a l s a v i n g s b a n k s C o m m e r i c a l Banks Government s a v i n g s bonds Cash box M a t t r e s s / d r a w e r / s o c k s Maximum s e c u r i t y Minimum r e w a r d Maximum a v a i l a b i l i t y Not s p e c u l a t i v e P u l l t o w a r d G r e a t e r S e c u r i t y 76 t o d i r e c t i n v e s t m e n t , and t o f u l l e r p a r t i c i p a t i o n i n e q u i t y o w n e r s h i p . The r a n k i n g does n o t i n any way i n d i c a t e t h e s i z e o f a s s e t h o l d i n g s i n v a r i o u s c a t e g o r i e s . I f K e n d a l l ' s t h e s i s i s v a l i d i n t h e C a n a d i a n s e t t i n g , i t w o u l d mean t h e f i n a n c i a l i n t e r m e d i a r i e s must a l t e r t h e i r p a c k a g e o f f e r i n g t o i n c l u d e a g r e a t e r amount o f i n v e s t m e n t c o u n s e l l i n g and i n v e s t m e n t management. C e r t a i n l y , t h e t r a d i t i o n a l s o u r c e s o f s a v i n g w i l l f a l l by t h e w a y s i d e u n l e s s t h e s e i n t e r m e d i a r i e s r e s p o n d by o f f e r i n g l i a b i l i t i e s w i t h t h e d e s i r e d mix o f a t t r i b u t e s . What t h e n i s t h e s i t u a t i o n i n Canada w i t h r e s p e c t t o K e n d a l l ' s t h e s i s ? T h i s q u e s t i o n must be a n s w e r e d i f v a l i d c o n c l u s i o n s a r e t o be drawn as t o t h e f u t u r e g r o w t h o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s and t h e m u t u a l f u n d i n d u s t r y i n p a r t i c u l a r . I n a t t e m p t i n g t o s u b s t a n t i a t e K e n d a l l ' s t h e s i s i n Canada we must a n a l y z e t h e C a n a d i a n s a v e r i n r e l a t i o n t o t h e z ones o f f i n a n c i a l s o p h i s t i c a t i o n . 77 C a n a d i a n s have h i s t o r i c a l l y b e e n c l a s s i f i e d as " c o n s e r v a t i v e i n v e s t o r s , " m e a n i n g t h a t t h e y were more i n c l i n e d t o i n v e s t i n d e b t s e c u r i t i e s r a t h e r t h a n e q u i t i e s . T h i s myth has r e c e n t l y b e e n c h a l l e n g e d by t h e Y o r k S t u d y , c o m m i s s i o n e d by t h e T o r o n t o S t o c k 23 E x c h a n g e u n d e r t h e d i r e c t i o n o f P r o f e s s o r G. R. Conway. He w r i t e s i n t h i s r e g a r d , " C a n a d i a n s a r e n o t more c o n s e r v a t i v e i n v e s t o r s t h a n A m e r i c a n s . I n f a c t , i n many income g r o u p s , r e l a t i v e l y more C a n a d i a n s i n v e s t i n s t o c k s and t h e y i n v e s t a l a r g e r p r o p o r t i o n o f t h e i r a s s e t s i n e q u i t i e s t h a n do t h e i r U n i t e d S t a t e s c o u n t e r p a r t s Some o f t h e i n t e r e s t i n g s t a t i s t i c s d e v e l o p e d by t h e Y o r k 2 5 S t u d y a r e l i s t e d as f o l l o w s : 1. T h e r e were an e s t i m a t e d 300,000 a d u l t e q u i t y h o l d e r s i n Canada i n 1955, and by 1965 an e s t i m a t e d 700,000 C a n a d i a n e q u i t y h o l d e r s . 2. C a n a d i a n i n d i v i d u a l s a t t h e end o f 1966 owned a p p r o x i m a t e l y 40% o f t o t a l m a r k e t v a l u e o f a l l l i s t e d C a n a d i a n e q u i t i e s . 3. T h r o u g h i n s t i t u t i o n s , C a n a d i a n s owned an a d d i t i o n a l 9% o f t h e t o t a l m a r k e t v a l u e o f a l l l i s t e d C a n a d i a n e q u i t i e s a t t h e end o f 1966. 4. F o r e i g n h o l d i n g s by C a n a d i a n i n d i v i d u a l s and f i n a n c i a l i n s t i t u t i o n s a t t h e end o f 1966 t o t a l l e d $3 b i l l i o n o r 15% o f t o t a l d o m e s t i c and f o r e i g n h o l d i n g s . G. R. Conway, The S u p p l y o f , and Demand f o r , C a n a d i a n E q u i t i e s , ( T o r o n t o : The T o r o n t o S t o c k E x c h a n g e , S e p t e m b e r , 1968) , " C o n s p e c t u s " , pp. 8-12. - I b i d , p .10. I b i d , pp. 8-12. 78 5. The number o f t a x p a y e r s r e p o r t i n g i n t e r e s t as c ompared t o t h e number r e p o r t i n g d i v i d e n d s i s r e l a t i v e l y h i g h e r i n t h e U n i t e d S t a t e s t h a n i n C a n a d a . 6. F i x e d i ncome s e c u r i t i e s g e n e r a l l y f o r m a l a r g e r p r o p o r t i o n o f t h e t o t a l i n v e s t m e n t a s s e t s o f i n d i v i d u a l s i n t h e U n i t e d S t a t e s t h a n i n C a n a d a . These p o i n t s w o u l d l e a d one t o b e l i e v e t h a t C a n a d i a n s a r e d e f i n i t e l y m o v i n g up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n b a s e d on t h e p r e s u m p t i o n made by K e n d a l l t h a t t h e f u r t h e r t o w a r d t h e t o p an i n v e s t o r moves, t h e g r e a t e r t h e p o r t i o n o f e q u i t i e s t o be f o u n d i n h i s i n v e s t m e n t p o r t f o l i o . The l e v e l o f f i n a n c i a l s o p h i s t i c a t i o n i s p a r t l y s u b s t a n t i a t e d by t h e f a c t t h a t t h e new i s s u e s o f e q u i t i e s b r o u g h t t o t h e s t o c k m a r k e t i n 1968 and e a r l y 1969 were r e a d i l y a b s o r b e d . By t h e same t o k e n , o f t h e 53 new c o m p a n i e s l i s t e d on t h e T o r o n t o S t o c k E x c h a n g e l a s t y e a r , t h i r t y became p u b l i c c o m p a n i e s s i n c e 1965. The d i s t r i b u t i o n s were l i m i t e d t o C a n a d i a n s and t h e i s s u e s f u l l y s u b s c r i b e d . T h i s w i l l i n g n e s s on t h e p a r t o f C a n a d i a n i n v e s t o r s t o p u r c h a s e new u n s e a s o n e d i s s u e s i s a c l e a r i n d i c a t i o n t h a t C a n a d i a n s a r e m o v i n g t o w a r d g r e a t e r p a r t i c i p a t i o n i n i n v e s t m e n t s r e q u i r i n g g r e a t e r d e c i s i o n m a k i n g ; t h u s m o v i n g up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n . 79 I I I . INVESTING THROUGH FINANCIAL INSTITUTIONS We have o b s e r v e d t h a t C a n a d i a n s a r e a g g r e s s i v e i n v e s t o r s and p r o b a b l y have been m o v i n g up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n f o r some t i m e . T h i s b e i n g t h e c a s e , i t i s somewhat d i f f i c u l t t o u n d e r s t a n d why i n d i r e c t i n v e s t i n g t h r o u g h f i n a n c i a l i n s t i t u t i o n s s u c h as m u t u a l f u n d s , i s b e c o m i n g more and more p o p u l a r . A c l o s e l o o k a t t h e c l a s s s t r u c t u r e , t h e s u p p l y o f , and t h e demand f o r , C a n a d i a n e q u i t i e s , and t h e a t t i t u d e o f t h e f i n a n c i a l c ommunity t o w a r d t h e s m a l l i n v e s t o r may p r o v i d e some c l u e s as t o why many i n v e s t o r s have p r e f e r r e d t h e m u t u a l f u n d f o r m o f e q u i t y p a r t i c i p a t i o n . C l a s s S t r u c t u r e i n t h e C a n a d i a n E q u i t i e s M a r k e t s A s t r o n g argument': i s e x p r e s s e d by J o h n P o r t e r t h a t t h e c l a s s s t r u c t u r e i n Canada has had a l i m i t i n g e f f e c t on t h e amount o f common s t o c k a v a i l a b l e t o 2 6 m i d d l e c l a s s i n v e s t o r s . He s u g g e s t s t h a t c e n t r a l i z e d o w n e r s h i p has p r o c e e d e d t o t h e p o i n t where t h e r e a r e f r e q u e n t c o m p l a i n t s t h a t t h e r e i s v e r y l i t t l e good s t o c k a v a i l a b l e t o p u r c h a s e ; and as l a r g e h o l d i n g s become c o n s o l i d a t e d dln'the hands o f t h e w e a l t h y , t h e amount o f common s t o c k t r a d e d on t h e C a n a d i a n E x c h a n g e , J o h n P o r t e r , The V e r t i c a l M o s a i c - An A n a l y s i s o f S o c i a l C l a s s on Power i n C a n a d a, U n i v e r s i t y o f T o r o n t o P r e s s , 1965 , p.249. 80 d i m i n i s h e s . H i s b e l i e f i s t h a t a l l p a t t e r n s o f c o n s o l i d a t i o n h ave a s o c i a l c o n s e q u e n c e o f g r e a t i m p o r t a n c e q u i t e a p a r t f r o m any e c o n o m i c e f f e c t s on m a r k e t s . T h i s s o c i a l e f f e c t , he s u g g e s t s i s t h e r e d u c t i o n o f t h e amount o f e q u i t y c a p i t a l a v a i l a b l e f o r e x t e n d i n g s o c i a l p a r t i c i p a t i o n i n o w n e r s h i p o f C a n a d i a n i n d u s t r y . B e c a u s e o f t h i s , he c o n c l u d e s t h a t t h e g r o w t h o f t h e m i d d l e 2 7 l e v e l i n come i n v e s t o r c l a s s i s l i m i t e d . T h i s b e l i e f i s summed up i n t h e f o l l o w i n g q u o t a t i o n : " B o t h income and e s t a t e s t a t i s t i c s g i v e some i n d i c a t i o n o f t h e h e a v y c o n c e n t r a t i o n o f e q u i t y c a p i t a l , and t h e r e f o r e o f t h e c o n t r o l o f t h e p r o d u c t i v e r e s o u r c e s o f t h e s o c i e t y . I t w o u l d seem t h a t Canada does n o t have a l a r g e m i d d l e l e v e l i n v e s t i n g c l a s s . I t i s c l e a r t h a t a good measure o f c o n t r o l r e s t s w i t h a s m a l l g r o u p o f v e r y r i c h o r i n some c a s e s w i t h t h e i r r e p r e s e n t a t i v e s ,\"LO S e l e c t e d s t a t i s t i c s p u b l i s h e d e l s e w h e r e w o u l d c e r t a i n l y t e n d t o c o n f i r m t h a t a m a j o r p o r t i o n o f t h e e q u i t y h o l d i n g s o f C a n a d i a n i n d i v i d u a l s , i n b o t h C a n a d i a n and f o r e i g n e q u i t i e s , i s h e l d by income g r o u p s 2 9 e a r n i n g o v e r $ 1 0,000. I n a d d i t i o n , t h e a v e r a g e h o l d i n g s p e r f a m i l y a r e more t h a n f o u r t i m e s g r e a t e r f o r t h e $10,000 and o v e r income c l a s s t h a n f o r t h e i n come c l a s s i n t h e $7,000 t o $10,000 r a n g e . I b i d . , p. 244. I b i d . , p. 118. A t t h e end o f 1966, 64% o f C a n a d i a n and f o r e i g n e q u i t y h o l d i n g s o f C a n a d i a n i n d i v i d u a l s were h e l d by income g r o u p s e a r n i n g o v e r $10,000. Conway, op . c i t . , p.10. 81 The b a s i s f o r t h i s s t a t e m e n t comes f r o m t h e numbers i n T a b l e V I I . T a k e n t o g e t h e r , t h e p e r c e n t a g e o f h o l d i n g s o f e q u i t i e s by income g r o u p s e a r n i n g o v e r $10,000 and t h e p e r c e n t a g e o f f a m i l i e s o w n i n g s t o c k s and a v e r a g e h o l d i n g s p e r f a m i l y , t e n d t o s t r e n g t h e n t h e argument o f " d e g r e e o f c o n c e n t r a t i o n " p r o f e s s e d by J o h n P o r t e r . TABLE V I I WHO'S IN THE STOCK MARKET P e r c e n t a g e o f f a m i l i e s Income C l a s s o w n i n g s t o c k s A v e r a g e H o l d i n g s U n d e r $1,000 2.7% $ 3,137 $1 ,000-2 ,000 3.1% $ 5,919 $2 ,000-3,000 3.1% $ 6,243 $3,000-4,000 4.0% $ 6,716 $4,000-5,000 4 . 3% $ 5,335 $5 ,000-6 ,000 5.9% $ 4,768 $6,000-7,000 7 . 8% $ 5,733 $7,000-10,000 12.7% $ 4,110 Over $10,000 26 .3% $18,835 D a t a : D o m i n i o n B u r e a u o f S t a t i s t i c s , p u b l i c l y t r a d e d s t o c k s , 1966. 82 The v a l i d i t y o f P o r t e r ' s a r g u m e n t s has d e f i n i t e g r o w t h i m p l i c a t i o n s f o r m u t u a l f u n d s i n t h a t t h e m u t u a l f u n d c o n c e p t i s b a s e d upon p r o v i d i n g t h e s m a l l i n v e s t o r w i t h a p o r t f o l i o o f f e r i n g t h e same b e n e f i t s he m i g h t a c c r u e i f he were c a p a b l e o f e n t e r i n g t h e s t o c k m a r k e t on a s c a l e e q u i v a l e n t t o t h a t o f t h e w e a l t h y i n v e s t o r . P r o f e s s o r Conway has a l s o s u g g e s t e d t h a t f i n a n c i a l i n s t i t u t i o n s w i l l p l a y a m a j o r r o l e i n c h a n n e l i n g t h e s a v i n g s o f t h e l o w e r income g r o u p s i n t o t h e e q u i t i e s m a r k e t s i n t h e f u t u r e . H i s b e l i e f i s summed up i n t h e f o l l o w i n g q u o t a t i o n ; " P r e s u m a b l y , a l a r g e p r o p o r t i o n o f t h e m o n i e s b e i n g a s s e m b l e d by t h e m a j o r C a n a d i a n f i n a n c i a l i n s t i t u t i o n s r e p r e s e n t t h e s a v i n g s o f t h e $10,000 o r l e s s income g r o u p , and i t i s , t h e r e f o r e , q u i t e p r o b a b l e t h a t w i t h i n a few y e a r s c l o s e r t o 40% o f a l l h o l d i n g s o f C a n a d i a n e q u i t i e s by C a n a d i a n s w i l l be h e l d by t h i s income g r o u p . " ^ 0 C a n a d i a n E q u i t i e s - S u p p l y and Demand F a c t o r s The i m p l i c a t i o n s t h e c l a s s s t r u c t u r e has f o r t h e s m a l l i n v e s t o r i s t h a t t h e r e may be a l i m i t e d amount o f d e s i r a b l e common s t o c k a v a i l a b l e f o r h i m t o i n v e s t i n . H i s method o f d e f e n s e , t h e r e f o r e , i n t h e b a t t l e a g a i n s t t h e h a r m f u l e f f e c t s o f i n f l a t i o n may be t o i n v e s t i n t h e e q u i t i e s m a r k e t s t h r o u g h a f i n a n c i a l i n s t i t u t i o n . H owever, i n v e s t i n g t h r o u g h a f i n a n c i a l i n s t i t u t i o n may i n i t s e l f w o r s e n t h e i n d i v i d u a l ' s d i r e c t i n v e s t m e n t o p p o r t u n i t i e s i n t h e f u t u r e . 30 Conway, op c i t . , p. 45. 83 The r e a s o n i s t h a t t h e r a p i d g r o w t h o f e q u i t y p u r c h a s e s by p e n s i o n f u n d s , m u t u a l f u n d s , and i n s u r a n c e c o m p a n i e s has r e d u c e d f u r t h e r t h e p o s s i b i l i t y o f e x t e n d i n g i n v e s t m e n t o p p o r t u n i t i e s t o t h e low and m i d d l e income c l a s s e s . Some p r o o f o f t h i s can be f o u n d t h r o u g h an e x a m i n a t i o n o f t h e s u p p l y o f , and demand f o r , C a n a d i a n e q u i t i e s . The S u p p l y o f C a n a d i a n E q u i t i e s . The new s u p p l y o f C a n a d i a n e q u i t y i s s u e s c o m i n g t o t h e C a n a d i a n s t o c k m a r k e t has been s m a l l f r o m 1962 t o 1 9 6 6 . ^ T h i s l i m i t e d g r o w t h has r e s u l t e d i n p a r t f r o m t h e i n c r e a s i n g i m p o r t a n c e o f m o r t g a g e f i n a n c i n g and f r o m t h e p o s i t i o n i n g o f t h e i n s t a l l m e n t f i n a n c e c o m p a n i e s as an i m p o r t a n t s o u r c e o f l o n g - t e r m f i n a n c i n g f o r some b u s i n e s s e s . S t i l l a n o t h e r d e v e l o p m e n t t h a t has t a k e n p l a c e i n r e c e n t y e a r s has been t h e l e a s , i n g o f b u i l d i n g s and e q u i p m e n t , p a r t i c u l a r l y c a r s and t r u c k s . A l s o u n d e r " l e a s e b a c k a r r a n g e m e n t s " , w i d e l y u s e d i n s h o p p i n g c e n t r e and b u i l d i n g f i n a n c i n g , t h e t e n a n t a g r e e s t o pay t h e owner a s p e c i f i e d r e n t a l f o r an a g r e e d p e r i o d , and o f t e n has t h e s u b s e q u e n t o p t i o n t o p u r c h a s e . The n e t new e q u i t y f i n a n c i n g o v e r f o u r y e a r s 1962 t o 1966 was $1.9 b i l l i o n o r a b o u t 8% o f t h e m a r k e t v a l u e o f a l l l i s t e d C a n a d i a n c o m p a n i e s a t t h e b e g i n n i n g o f t h e p e r i o d . Conway op. c i t . p . 3 3 . 84 I n e f f e c t , l o n g - t e r m d e b t has been i n c u r r e d , a l t h o u g h no s e c u r i t i e s h ave been i s s u e d and no 32 l i a b i l i t y a p p e a r s on t h e b o r r o w e r ' s b a l a n c e s h e e t . The r e s u l t o f t h e s e t r e n d s c o m b i n e d w i t h o t h e r f a c t o r s , ( w i d e n o n r e s i d e n t o w n e r s h i p o f s t o c k , t h e s m a l l s i z e o f many C a n a d i a n c o m p a n i e s , and t h e g o v e r n m e n t o w n e r s h i p o f many u t i l i t i e s ) h a v e t e n d e d t o r e s t r i c t t h e s u p p l y o f e q u i t i e s a v a i l a b l e 3 3 t o t h e C a n a d i a n p u b l i c . O m i t t e d a b o v e , b u t l i k e l y t h e most i n f l u e n t i a l f a c t o r c a u s i n g t h e s q u e e z e on t h e s u p p l y o f C a n a d i a n e q u i t i e s i s t h a t t h e m a j o r s h a r e o f f i n a n c i n g n e eds o f C a n a d i a n b u s i n e s s e s comes f r o m r e t a i n e d e a r n i n g s , d e p r e c i a t i o n and d e p l e t i o n a l l o w a n c e s . D u r i n g t h e p e r i o d 1957 t o 1965, r e t a i n e d e a r n i n g s p l u s c a p i t a l c o n s u m p t i o n a l l o w a n c e s f l u c t u a t e d b e t w e e n 90% and 110% o f t o t a l b u s i n e s s f i x e d c a p i t a l f o r m a t i o n . I n 1966, i n t e r n a l f i n a n c i n g d r o p p e d t o 78% o f t o t a l b u s i n e s s s p e n d i n g . A v i v i d p i c t u r e o f t h e r o l e t h a t i n t e r n a l f u n d s p l a y e d i n f i n a n c i n g b u s i n e s s s p e n d i n g i n e a c h o f t h e y e a r s 1957 t o 1966, i s p r o v i d e d i n F i g u r e 4. T h i s r e p r e s e n t a t i o n i s e x p a n d e d i n F i g u r e 5, t o show t h e p e r c e n t a g e b r e a k d o w n o f f i n a n c i n g o f t o t a l d o m e s t i c c a p i t a l f o r m a t i o n i n s t e a d 3 2 R e p o r t o f t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , Queen's P r i n t e r and C o n t r o l l e r o f S t a t i o n e r y , O t t a w a , 1966, C h a p t e r 3. 33 I b i d . , p. 41 . FIGURE 4 INTERNAL CORPORATE FINANCING 85 11<&S 11S«1 j I860 I 1 M SCALE: B I L L I O N S OF DOLLARS SOURCE: BANK OF CANADA, ST A T I S T I C A L SUMMARY, SUPPLEMENT 1966. _ T o t a l Business Spending (Bus. F i x e d C a p i t a l Formatior - Corporate Retained Earnings D - C a p i t a l Consumption Allowances FIGURE PERCENTAGE BREAKDOWN OF THE FINANCING OF DOMESTIC CAPITAL FORMATION 86 SCALE: PERCENTAGE SOURCE: BANK OF CANADA, S T A T I S T I C A L SUMMAj SUPPLEMENT 1966. KEY - Other L i a b i l i t i e s and Transactions - Net New Issue of Corporate Bonds - Net New Issue of Corporate Stock - Corporate Retained Earnings • - C a p i t a l Consumption Allowances 8 7 o f j u s t t h e f i n a n c i n g o f new m a c h i n e r y and non- r e s i d e n t i a l c o n s t r u c t i o n . I t i s o b v i o u s t h a t s l i g h t l y g r e a t e r t h a n t w o - t h i r d s o f t o t a l a v a i l a b l e s o u r c e s f o r f i n a n c i n g d o m e s t i c c a p i t a l f o r m a t i o n i n i t s b r o a d e s t c o n c e p t was r e p r e s e n t e d by g r o s s s a v i n g s o f b u s i n e s s e s and s l i g h t l y l e s s t h a n o n e - t h i r d was p r o v i d e d by e x t e r n a l s o u r c e s . I t i s a l s o i n t e r e s t i n g t o o b s e r v e t h a t t h e i n t e r n a l f i n a n c i n g p o r t i o n , as drawn on F i g u r e 5, i n c r e a s e d f r o m i t s 1957 p o s i t i o n o f 65% t o a h i g h o f 79% i n 1961 and t h e n d e c l i n e d s t e a d i l y t o a b o u t 62% i n 1966. P a r t o f t h e e x p l a n a t i o n f o r t h i s d e c l i n e c a n be b a s e d on t h e v a r i o u s c h a n g e s made i n g o v e r n m e n t a l p u b l i c p o l i c y a i m e d a t r e s t r a i n i n g i n c r e a s e s i n b u s i n e s s f i x e d i n v e s t m e n t (17 t o 20% r a n g e f o r t h e t h r e e y e a r s e n d i n g i n 1966) t o more s u s t a i n a b l e r a t e s . To c u r b e x p a n s i o n two m e a s u r e s were i n t r o d u c e d i n t h e M a r c h t 1966 F e d e r a l B u d g e t , n o t a b l y a r e d u c t i o n i n d e p r e c i a t i o n a l l o w a n c e s on a l a r g e v a r i e t y o f new p l a n t and e q u i p m e n t o b t a i n e d b e t w e e n t h e d a t e o f t h e B u d g e t and O c t o b e r , 1 9 6 7 , and s e c o n d l y t h e i n t r o d u c t i o n o f a 5 p e r c e n t r e f u n d a b l e t a x on c o r p o r a t e c a s h f l o w ( b r o a d l y , a f t e r - t a x p r o f i t s p l u s d e p r e c i a t i o n ) i n e x c e s s o f $30 , 0 0 0 . 3 4 3 4 1966 Bank o f Canada A n n u a l R e p o r t o f t h e G o v e r n o r t o The M i n i s t e r o f F i n a n c e , and S t a t e m e n t o f A c c o u n t s , Bank o f C a n a d a , O t t a w a , F e b r u a r y , 1967, p.26. 8 8 The r e s u l t t h e s e p o l i c y m e a s u r e s had on b u s i n e s s e s was t h a t c a s h f l o w a v a i l a b l e f r o m r e t a i n e d e a r n i n g s and d e p r e c i a t i o n a l l o w a n c e was o n l y s l i g h t l y l a r g e r t h a n i n 1965 and t h e e x t e r n a l f i n a n c i n g by b u s i n e s s e s i n c r e a s e d f r o m a b o u t $1 b i l l i o n i n 1965 t o $2.75 b i l l i o n i n 1966. The e f f e c t i n t e r n a l f i n a n c i n g has upon t h e i s s u a n c e o f new c o r p o r a t e s t o c k i s o b v i o u s - t h e amount o f new money r a i s e d by t h i s means t e n d e d t o d e c r e a s e . U n f o r t u n a t e l y , t h e p r o b l e m w i t h t h i s t r e n d i s t h a t i t r u n s c o m p l e t e l y c o u n t e r t o a g r o w i n g a p p e t i t e f o r e q u i t i e s by p e n s i o n f u n d s , m u t u a l f u n d s and o t h e r i n s t i t u t i o n a l i n v e s t o r s . Some i n t e r e s t i n g f i g u r e s on t h e e q u i t y s h o r t a g e i n Canada were g i v e n by R. M. M a c i n t o s h 35 and K. E. B i s s e l l , and a r e w o r t h c o n s i d e r i n g . They l i s t f o u r f a c t o r s w h i c h c a u s e d t h e s h o r t a g e o f s u p p l y o f C a n a d i a n e q u i t i e s . 1. The h i g h r a t e s o f d e p r e c i a t i o n w h i c h a r e a l l o w e d f o r c o r p o r a t e t a x p u r p o s e s . 2 . The t e n d e n c y o f c o r p o r a t e management t o r e t a i n a g e n e r o u s s h a r e o f n e t p r o f i t s , s i n c e t h i s i s t h e most c o n v e n i e n t and p e r h a p s c h e a p e s t way t o r a i s e new f u n d s . 35 R. M. M a c i n t o s h and K. E. B i s s e l l , The Bank o f Nova S c o t i a , "Some F a c t o r s i n t h e S u p p l y o f and Demand f o r C a n a d i a n E q u i t i e s " , The C a n a d i a n C h a r t e r e d A c c o u n t a n t , Volume 89, Number 5, November, 1966. p. 373 89 3. The f a c t t h a t c o r p o r a t e b o r r o w i n g f r o m o u t s i d e s o u r c e s a r e d e d u c t i b l e f o r t a x p u r p o s e s w h e r e a s c o r p o r a t e d i v i d e n d s a r e n o t . 4. The i n c r e a s i n g d e p t h o f t h e s h o r t - t e r m money m a r k e t . T h e i r a r t i c l e s u g g e s t e d t h a t u n l e s s t h e e x i s t i n g c o r p o r a t e t a x s t r u c t u r e was c h a n g e d so t h a t e q u i t y f i n a n c i n g became r e l a t i v e l y c h e a p e r , t h e r e w o u l d be l i t t l e p r o s p e c t o f s i g n i f i c a n t g r o w t h i n t h e a n n u a l new s u p p l y o f C a n a d i a n e q u i t i e s . F o r c o r p o r a t i o n s , t h e r e i s an i n c e n t i v e t o i s s u e d e b t as l o n g as t h e c o s t o f d o i n g so i s l e s s t h a n t h e r e t u r n w h i c h w i l l a c c r u e f r o m t h e e x t r a a s s e t s b e c a u s e t h e s h a r e h o l d e r b e n e f i t s f r o m t h e a d d i t i o n a l " l e v e r a g e " on t h e e q u i t y . Of c o u r s e , t h e v i e w s o f c o r p o r a t e management a b o u t a s s u m i n g an u n d u l y h e a v y d e b t b u r d e n and m a i n t a i n i n g a s o u n d f i n a n c i a l p o s i t i o n p u t s l i m i t s on t h i s p r o c e s s , as do t h e v i e w s o f b a n k s and i n s t i t u t i o n a l and o t h e r i n v e s t o r s . G i v e n t h e s e b a s i c c o n d i t i o n s , h o w e v e r , t h e f a c t t h a t i n t e r e s t c h a r g e s a r e d e d u c t i b l e as an e x p e n s e b e f o r e c o m p u t i n g t a x a b l e p r o f i t s , and d i v i d e n d s must be p a i d f r o m income a f t e r t a x e s , means t h a t p r e - t a x o p e r a t i n g e a r n i n g s must be t w i c e as h i g h t o p ay o u t t h e same amount o f d i v i d e n d s as i n i n t e r e s t , 36 c h a r g e s . 3 6 A s s u m i n g a 50% c o r p o r a t e t a x r a t e , i f $50 o f a d d i t i o n a l i n t e r e s t i s p a i d , o p e r a t i n g e a r n i n g s n e e d r i s e o n l y $50 f o r e x i s t i n g s h a r e h o l d e r s t o be u n a f f e c t e d . I f e x t r a s h a r e s p a y i n g a d i v i d e n d o f $50 a r e s o l d , o p e r a t i n g e a r n i n g s must r i s e $100; t h i s w i l l be f u l l y a b s o r b e d by e x t r a t a x l i a b i l i t i e s o f $50, and t h e d i v i d e n d s t o new s h a r e h o l d e r s o f an e q u i v a l e n t amount. 90 T h i s i s one r e a s o n why, p r e f e r r e d s h a r e s w i t h t h e i r f i x e d d i v i d e n d s have become l e s s i m p o r t a n t and now a c c o u n t f o r o n l y a b o u t o n e - t h i r d o f a l l s t o c k i s s u e s . A n o t h e r r e a s o n i s t h a t p r e f e r r e d s h a r e s have g e n e r a l l y 3 7 l o s t t h e i r a p p e a l w i t h i n v e s t o r s i n t h e m a r k e t p l a c e . The d i s c u s s i o n above p r o v i d e s t h e r e a s o n s why t h e s u p p l y o f C a n a d i a n e q u i t i e s has n o t b e e n e x t e n s i v e , b u t g i v e s v e r y l i t t l e i n d i c a t i o n o f t h e a c t u a l s u p p l y o f new C a n a d i a n e q u i t i e s . I n s t a t i s t i c a l t e r m s , n e t new i s s u e s o f C a n a d i a n c o r p o r a t e s t o c k d u r i n g t h e 1957-1966 p e r i o d amounted t o s l i g h t l y l e s s t h a n $3.3 b i l l i o n o f w h i c h $2.6 b i l l i o n r e p r e s e n t e d common s h a r e s . T hese f i g u r e s i n c l u d e a l l p u b l i c l y a n n o u n c e d i s s u e s and some p r i v a t e p l a c e m e n t i s s u e s n o t p u b l i c l y a n n o u n c e d . A y e a r l y b r e a k d o w n o f t h e a c c u m u l a t e d i n c r e a s e s i n c o r p o r a t e d e b t and e q u i t i e s can be f o u n d i n T a b l e V I I I W h i l e r e v i e w i n g t h i s p a r t i c u l a r d a t a , t h e r e a d e r s h o u l d keep i n m i n d t h a t t h e r o l l p l a y e d by e x t e r n a l f i n a n c i n g has e x p a n d e d s l i g h t l y s i n c e 1961. However, f r o m 1957 t o 1966, n e t new i s s u e s o f c o r p o r a t e s t o c k have o n l y b een r u n n i n g a r o u n d 5% o f t o t a l b u s i n e s s s p e n d i n g . I n r e l a t i o n t o t h e d i s t r i b u t i o n o f t o t a l e x t e r n a l f i n a n c i n g , c o r p o r a t e s t o c k i s s u e s o n l y r e p r e s e n t a b o u t 12% o f t h e a g g r e g a t e f i g u r e - a g a i n w i t h o u t s u b s t a n t i a l c h a n g e s o v e r t h e e n t i r e t e n y e a r p e r i o d . 3 7 " P r e f e r r e d s a r e n o t p r e f e r r e d " , The F i n a n c i a l P o s t , J u l y 13, 1968, pp. 1, 4. 9..1 TABLE V I I I NET NEW CORPORATE SECURITY ISSUES IN CANADA - 1957 - 1966 F i s c a l C o r p o r a t e O t h e r Bonds P r e f e r r e d Common T o t a l Common Y e a r and and End o f Bonds D e b e n t u r e s S t o c k S t o c k P r e f e r r e d (FIGURES IN MILLIONS OF CANADIAN DOLLARS) 1957 955 4 89 426 515 1958 661 4 -2 5 287 312 1959 98 21 72 332 404 1960 305 27 36 184 220 1961 331 28 - 6 4 ( 3 ) 309 (1) 245 1962 422 10 66 271 337 1963 582 30 4 9 ( 2 ) - 9 8 ( 2 ) -49 1964 761 11 39 2 9 3 ( 1 ) 332 1965 1,198 39 155 3 0 4 ( 1 ) 459 1966 92 1 33 190 331 521 TOTAL 6,234 207 657 2 ,639 3,296 NOTES : CD I n c l u d e s d i s t r i b u t i o n by B.C. Power C o r p . , t o i t s s h a r e h o l d e r s o f f u n d s r e c e i v e d f r o m t h e P r o v i n c e o f B.C. i n payment f o r t h e common s h a r e s o f B.C. E l e c t r i c Co. L t d . , t h e s e d i s t r i b u t i o n s amounted t o $87 m i l l i o n i n 1961, and $115 m i l l i o n i n 1964, and $2 m i l l i o n L i n 1965. (2) I n c l u d e s t h e r e t i r e m e n t o f $345 m i l l i o n common s t o c k and $55 m i l l i o n p r e f e r r e d s h a r e s o f t h e p r i v a t e l y owned h y d r o - e l e c t r i c c o m p a n i e s w h i c h were t a k e n o v e r by Quebec H y d r o . $53 m i l l i o n o f t h e p r e f e r r e d were e x c h a n g e d f o r bonds g u a r a n t e e d by t h e P r o v i n c e o f Quebec. A l s o i n c l u d e s new i s s u e o f $44 m i l l i o n s h a r e s o f S h a w i n i g a n I n d u s t r i e s L t d . (3) I n c l u d e s r e t i r e m e n t o f $104 m i l l i o n B.C. E l e c t r i c p r e f e r r e d s h a r e s e x c h a n g e d f o r bonds g u a r a n t e e d by t h e P r o v i n c e o f B.C. SOURCE: Bank o f Canada S t a t i s t i c a l Summary, S u p p l e m e n t , 1966. 92 I n a d d i t i o n t o n e t new i s s u e s , t h e r e i s a n o t h e r s o u r c e o f C a n a d i a n e q u i t i e s w h i c h must be added t o t h e s u p p l y e n t e r i n g t h e m a r k e t . S i n c e 1962, C a n a d i a n s have been n e t p u r c h a s e r s o f C a n a d i a n s t o c k f r o m n o n - r e s i d e n t s , m a i n l y f r o m t h e " N o n - R e s i d e n t Owned M u t u a l F u n d s " w h i c h have d i v e s t e d t h e m s e l v e s o f C a n a d i a n e q u i t i e s s i n c e 1959. From 1962 t o 1966, t h e t o t a l n e t p u r c h a s e s o f o u t s t a n d i n g C a n a d i a n s e c u r i t i e s f r o m a l l n o n - r e s i d e n t s has amounted t o a b o u t $794 m i l l i o n . To some e x t e n t , t h e same t y p e o f e q u i t y s u p p l y p r o b l e m e x i s t s i n t h e U n i t e d S t a t e s , and i s summed up 39 by Raymond W. G o l d s m i t h . To q u o t e h i m : - "The m a r k e t f o r common s t o c k s i n t h e p o s t w a r p e r i o d had t h e o u t s t a n d i n g f e a t u r e t h a t new common s t o c k i s s u e s were r e l a t i v e l y s m a l l c ompared t o t h e i s s u a n c e o f o t h e r c a p i t a l m a r k e t i n s t r u m e n t s , t o t h e v olume o f i n t e r n a l and e x t e r n a l f i n a n c i n g o f c o r p o r a t i o n s , t o t h e v a l u e o f common s t o c k o u t s t a n d i n g and t o t h e t o t a l a s s e t s o f most i n v e s t o r g r o u p s " . To g i v e some I n d i c a t i o n as t o what m i g h t be e x p e c t e d i n t h e f u t u r e i n t e r m s o f t h e s u p p l y o f C a n a d i a n e q u i t i e s , we c a n t u r n t o t h e f o l l o w i n g e s t i m a t e made by P r o f e s s o r Conway. D o m i n i o n B u r e a u o f S t a t i s t i c s , The C a n a d i a n B a l a n c e o f I n t e r n a t i o n a l P a y m e n t s , 1963 - 1966, and I n t e r n a t i o n a l I n v e s t m e n t P o s i t i o n , C a t a l o g u e No. 6 7-201, A n n u a l , 1966. Raymond W. G o l d s m i t h , The F l o w o f C a p i t a l Funds i n t h e P o s t w a r Economy, C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k and L o n d o n , 1965, p.18. 93 He p r e d i c t s a p r o j e c t e d l e v e l o f n e t new e q u i t y i s s u e s o f a b o u t $700 m i l l i o n a y e a r The Demand f o r C a n a d i a n E q u i t i e s . I n Canada t h e r e has b e e n a g r o w t h i n t h e demand f o r e q u i t i e s by f i n a n c i a l i n s t i t u t i o n s , e s p e c i a l l y by t h e m u t u a l f u n d s and t r u s t e e d p e n s i o n f u n d s . M a c i n t o s h and B i s s e l l , s t a t e t h a t t h e f a c t o r s t h a t have c r e a t e d 41 t h i s demand a r e : 1. R i s i n g p e r s o n a l i n c o m e s and t h e a c c u m u l a t i o n o f a s s e t s o u t o f p e r s o n a l s a v i n g s . 2. The r a p i d g r o w t h o f c o r p o r a t e p e n s i o n f u n d s r e f l e c t i n g t h e r i s e i n r e a l i n c o m e s and t h e e l a b o r a t i o n o f c o r p o r a t e f r i n g e b e n e f i t s . 3. The r a p i d g r o w t h o f m u t u a l f u n d s due t o s u c c e s s f u l s e l l i n g m e t h o d s , p r o f e s s i o n a l i n v e s t m e n t management, and a c c e p t a b l e p e r f o r m a n c e f r o m t h e p o i n t o f v i e w o f t h e s m a l l i n v e s t o r . T h i s l a t t e r f a c t o r i s r e l a t e d t o t h e g r o w i n g d i s e n c h a n t m e n t on t h e p a r t o f t h e i n d i v i d u a l w i t h t h e r e s u l t s o f h i s d i r e c t p a r t i c i p a t i o n i n t h e s t o c k m a r k e t . The t r e n d i s o b v i o u s f r o m t h e s t a t i s t i c s p r o v i d e d i n T a b l e I X , w h i c h show t h e e x t e n t t o w h i c h t h e l a r g e s t C a n a d i a n i n s t i t u t i o n a l i n v e s t o r s h ave i n v e s t e d i n C a n a d i a n c o r p o r a t e s t o c k . Conway, o p . c i t . p .35. M a c i n t o s h and B i s s e l l , pp . c i t . , p.374. 94 TABLE IX INSTITUTIONAL INVESTMENTS IN CANADIAN CORPORATE STOCK - 1960 - 1965 YEAR M u t u a l T r u s t e e d C l o s e d L i f e T r u s t M o r t g a g e Funds P e n s i o n End I n s u r a n c e Companies Loan 1. Funds 2. Funds 3. Co.s 4. 5. Co.s 6. TOTAL (FIGURES IN MILLIONS OF CANADIAN DOLLARS - BOOK VALUES) 1960 313 E 259 251 E 176 42 31 1,072 1961 385 E 342 281 E 218 53 33 1,312 1962 473 E 423 315 E 220 63 38 1,532 1963 582 519 453 257 65 52 1,823 1964 709 647 404 338 67 56 2,221 1965 918 820 429 420 75 55 2,707 1966 992 982 454 520 E 84 58 3,090 I n c r e a s e 6 7 9 723 203 344 42 27 2,018 NOTE: E - E s t i m a t e s t a k e n f r o m a t a b l e p r o v i d e d by R. M. M a c i n t o s h and K. E. B i s s e l l , C a n a d i a n C h a r t e r e d A c c o u n t a n t , November 1966, p.374. SOURCE: 1, 3, 5 and 6. - B u s i n e s s F i n a n c i a l S t a t i s t i c s - S e l e c t e d F i n a n c i a l I n s t i t u t i o n s , 1963 - 1966, D o m i n i o n B u r e a u o f S t a t i s t i c s , O t t a w a . 2. - T r u s t e e d P e n s i o n P l a n s - F i n a n c i a l S t a t i s t i c s , 1960 - 1966. D o m i n i o n B u r e a u o f S t a t i s t i c s . 3. - Bank o f Canada S t a t i s t i c a l Summary, S u p p l e m e n t , 1966. 95 From 1960 t o 1966 t h e s e s i x m a j o r i n s t i t u t i o n s a b s o r b e d $2,018 m i l l i o n w o r t h o f C a n a d i a n c o r p o r a t e s t o c k s . D u r i n g t h e same p e r i o d t h e n e t new i s s u e s s u p p l i e d t o t h e c a p i t a l m a r k e t ; ; t o t a l l e d $2 ,065 m i l l i o n . ^ T h u s , t h e s e i n s t i t u t i o n s were c a p a b l e o f d i g e s t i n g a l m o s t t h e w h o l e o f t h e n e t new s u p p l y o f C a n a d i a n common and p r e f e r r e d s t o c k s . The r e a s o n why t h e t e r m , were c a p a b l e , was u n d e r l i n e d i s t h a t t h e s e i n s t i t u t i o n s p r o b a b l y d i d n o t a b s o r b a l l o r a l a r g e p a r t o f t h e new i s s u e s p l a c e d i n t h e m a r k e t . N o r m a l l y , s u c h i n s t i t u t i o n s a r e o n l y i n t e r e s t e d i n w e l l s e a s o n e d e q u i t y i s s u e s w h i c h meet t h e minimum q u a l i t y s t a n d a r d s s e t by t h e f i n a n c i a l i n s t i t u t i o n s t h e m s e l v e s , o r s e t f o r them by t h e C a n a d i a n and B r i t i s h I n s u r a n c e C ompanies A c t and l i s t e d i n t h e " E l i g i b l e Book". The c o n c e p t t h a t m a j o r C a n a d i a n f i n a n c i a l i n s t i t u t i o n s a r e b a s i c a l l y c o n s e r v a t i v e i n v e s t o r s has a l s o been i m p l i e d by P r o f e s s o r C o n w a y . ^ 1 I t s h o u l d be p o i n t e d o u t t h a t o m i t t e d f r o m T a b l e I X , a r e t h e s e g r e g a t e d f u n d s managed by t h e l i f e i n s u r a n c e c o m p a n i e s u n d e r S e c t i o n 81 (5) 42 F i g u r e s d e r i v e d f r o m T a b l e s V I I I and IX 43 Conway , op . c i t . , p.16. 96 o f t h e C a n a d i a n and B r i t i s h I n s u r a n c e Companies A c t . E s t a b l i s h e d i n 1961, t h e s e g r e g a t e d f u n d s can be w h o l l y i n v e s t e d i n e q u i t i e s . I n 1961 t h e t o t a l a s s e t s o f t h e s e g r e g a t e d f u n d s were a p p r o x i m a t e l y $2 m i l l i o n a t m a r k e t v a l u e , and grew t o a p o s i t i o n o f $197 m i l l i o n by t h e end 44 o f 1967. A n o t h e r i m p o r t a n t g r o u p o f e q u i t y h o l d e r s o m i t t e d f r o m T a b l e I X , a r e t h e e s t a t e , t r u s t and a g e n c y a c c o u n t s managed by t r u s t c o m p a n i e s . They must be c o n s i d e r e d as a g r o w i n g f o r c e b e h i n d t h e demand f o r C a n a d i a n e q u i t i e s . I t was e s t i m a t e d i n a s u r v e y c o n d u c t e d f o r t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e t h a t t h e demand f o r e q u i t i e s g e n e r a t e d by t h e E.T. ct A. A c c o u n t s r e p r e s e n t s $300 m i l l i o n p e r ye T h i s s u r v e y a l s o i n d i c a t e d t h a t 48% o f t h e m a r k e t v a l u e o f a l l t h e s e a c c o u n t s was i n v e s t e d i n C a n a d i a n e q u i t i e s . I t d i d n o t c o v e r p e n s i o n f u n d s o r d e p o s i t s e c u r i t i e s h e l d f o r i n s u r a n c e c o m p a n i e s , w h i c h i n 1962 amounted t o a b o u t 20% o f t o t a l a s s e t s a t book v a l u e . 44 The C a n a d i a n L i f e I n s u r a n c e A s s o c i a t i o n , S u b m i s s i o n t o The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s ( T o r o n t o : The C a n a d i a n L i f e I n s u r a n c e A s s o c i a t i o n , J u n e , 1 9 6 8 ) , p.9. 97 The f o l l o w i n g t a b l e i n d i c a t e s t h e known book v a l u e o f a s s e t s i n a l l E.T. § A. A c c o u n t s t o t h e end o f 1965. TABLE X E.T. tt A. A c c o u n t s ESTIMATED INVESTMENT IN CANADIAN EQUITIES - BOOK VALUE 1961 $2,697 m i l l i o n s o f d o l l a r s 1962 2,955 1963 3,218 1964 3,606 1965 3,919 The R e s u l t o f E x c e s s Demand f o r C a n a d i a n E q u i t i e s . B a s i c a l l y , what t h e o v e r a l l a n a l y s i s o f t h e s u p p l y o f , and demand f o r e q u i t i e s i m p l i e s i s t h a t s i n c e s t o c k h o l d e r s o t h e r t h a n f i n a n c i a l i n s t i t u t i o n s u n d o u b t e d l y a c q u i r e a s u b s t a n t i a l p o r t i o n o f new i s s u e s o f c o r p o r a t e s t o c k , p a r t i c u l a r l y o f t h o s e o f f e r e d u n d e r s u b s c r i p t i o n r i g h t s ; o t h e r s t o c k h o l d e r s m u s t , f o r t h e 1960 t o 1966 p e r i o d have been n e t s e l l e r s t o f i n a n c i a l i n s t i t u t i o n s o f s e a s o n e d m a r k e t a b l e c o r p o r a t e s t o c k . F u r t h e r m o r e , i t w o u l d seem p r o b a b l e t h a t t h e c o m b i n e d n e t p u r c h a s e s o f m u t u a l f u n d s , p e n s i o n f u n d s , and o t h e r f i n a n c i a l g r o u p s w i l l c o n t i n u e t o a b s o r b a s u b s t a n t i a l p o r t i o n o f t h e new common s t o c k i s e n t e r i n g t h e C a n a d i a n e q u i t i e s m a r k e t s as w e l l as s e a r c h i n g o u t t h e h i g h e s t i n v e s t m e n t q u a l i t y s t o c k s p r e s e n t l y o u t s t a n d i n g . Some i n d i c a t i o n o f t h e e x t e n t o f t h i s demand f o r e q u i t i e s i s p r o v i d e d i n two r e a s o n a b l y r e c e n t pub 1 i c a t i o n s . 98 The f i r s t i s t h e R e p o r t o f t h e Task F o r c e on t h e S t r u c t u r e o f C a n a d i a n I n d u s t r y , w h i c h i n d i c a t e d t h a t t h e i n c r e a s e i n demand f o r s t o c k s by m u t u a l f u n d s and t h e p e n s i o n f u n d s may be n e a r l y $5 b i l l i o n o v e r t h e p e r i o d 1967 t o 1970. An a t t e m p t was a l s o made t o p r o j e c t t h e h o l d i n g s o f C a n a d i a n e q u i t i e s by m u t u a l f u n d s , p e n s i o n f u n d s and l i f e i n s u r a n c e c o m p a n i e s i n 1975. I t was s u g g e s t e d t h a t o v e r t h e n e x t e i g h t y e a r s t h e s e t h r e e m a j o r f i n a n c i a l i n s t i t u t i o n s w i l l want t o a c q u i r e more t h a n $6 b i l l i o n i n C a n a d i a n s t o c k s . Thus t h e s e i n s t i t u t i o n s , whose h o l d i n g s o f C a n a d i a n s t o c k s a t t h e end o f 1966 had an e s t i m a t e d m a r k e t v a l u e o f $3 b i l l i o n and had i n c r e a s e d by an a n n u a l a v e r a g e r a t e o f a b o u t $300 m i l l i o n s i n c e 1960, w o u l d be a c q u i r i n g an a v e r a g e o f $800 m i l l i o n o f C a n a d i a n s t o c k s e a c h y e a r . ^ 5 The s e c o n d p u b l i c a t i o n , t h e Y o r k S t u d y , p r e d i c t e d t h a t t h e same t h r e e m a j o r f i n a n c i a l i n s t i t u t i o n s c o u l d be l o o k i n g t o i n v e s t o v e r t h e n e x t few y e a r s , on a v e r a g e , a b o u t $1 b i l l i o n a y e a r i n e q u i t i e s . T h i s f i g u r e i n c l u d e s p o s s i b l e demands f o r b o t h C a n a d i a n and f o r e i g n e q u i t i e s . To t h i s f i g u r e an a d d i t i o n a l $300 m i l l i o n p e r y e a r i s added r e p r e s e n t i n g an e s t i m a t e d demand f o r e q u i t i e s by o t h e r C a n a d i a n f i n a n c i a l i n s t i t u t i o n s , by C a n a d i a n c o r p o r a t i o n s , and 46 by C a n a d i a n i n d i v i d u a l s . 45 F o r e i g n O w n e r s h i p and t h e S t r u c t u r e o f C a n a d i a n I n d u s t r y , O t t a w a : Queen's P r i n t e r , 1968, pp. 284-5. 4 6 Conway, o p . c i t . , pp. 4 0 - 4 1 . 99 C o n s i d e r i n g p o p u l a t i o n g r o w t h , and s o c i a l t r e n d s i n C a n a d a , a f u r t h e r e x p a n s i o n i n t h e number o f p e o p l e c o v e r e d by p e n s i o n p l a n s i s p r o b a b l e . From t h e v i e w p o i n t o f s t o c k i n v e s t i n g , e f f o r t s by t h e l i f e i n s u r a n c e i n d u s t r y t o e n l a r g e i t s s h a r e o f t h e p e n s i o n m a r k e t t h r o u g h v a r i a b l e a n n u i t i e s m i g h t r e p r e s e n t a s u b s t a n t i a l new i n s t i t u t i o n a l demand f o r e q u i t y s e c u r i t i e s by t h i s f i n a n c i a l i n s t i t u t i o n . E v e n t u a l l y , t h e t r e n d s d i s c u s s e d above m i g h t l e a d t o t h e same t y p e o f s i t u a t i o n t h a t has d e v e l o p e d i n t h e U n i t e d S t a t e s s i n c e 1957. I n t h e U.S., i n d i v i d u a l s h ave b e e n h e a v y s e l l e r s , e v en w h i l e t h e s t o c k m a r k e t a v e r a g e s were b e i n g s h i f t e d upward d u r i n g p e r i o d s o f o p t i m i s m ; s u g g e s t i n g t h a t s o m e t h i n g f u n d a m e n t a l had c h a n g e d i n t h e s t o c k m a r k e t . C o n s i d e r i n g t h i s t r e n d , i t no l o n g e r seems p o s s i b l e t o r e g a r d t h e b e a r i s h n e s s o f i n d i v i d u a l i n v e s t o r s on a t r a n s i t o r y m a t t e r ; i t seems c l e a r , t h e y a r e b e c o m i n g i n c r e a s i n g l y d i s e n c h a n t e d w i t h s t o c k s . M e a n w h i l e t h e U.S. p e n s i o n f u n d s and m u t u a l f u n d s have become more a t t r a c t e d t o s t o c k e v e r y y e a r . T h u s , t h e new m a r k e t i n A m e r i c a , i s made by i n d i v i d u a l s s e l l i n g s t o c k s t o p e n s i o n f u n d s and m u t u a l f u n d s . 4 ^ 47 New Y o r k S t o c k E x c h a n g e , " I n s t i t u t i o n a l S h a r e o w n e r s h 1964, p .37. 100 I n C a n a d a , a d e v e l o p m e n t s i m i l i a r t o t h i s w o u l d mean a t r a n s f e r o f s t o c k f r o m i n d i v i d u a l s t o C a n a d i a n p e n s i o n f u n d s and m u t u a l f u n d s . T h i s i s o b v i o u s f r o m t h e d a t a p r e s e n t e d i n T a b l e I X , w h i c h shows t h a t t h e n e t p u r c h a s e s o f common s t o c k by- f i n a n c i a l i n s t i t u t i o n s were c o n c e n t r a t e d i n two g r o u p s - t h e m u t u a l f u n d s and t h e t r u s t e e d p e n s i o n f u n d s a c c o u n t i n g f o r 37% and 33% r e s p e c t i v e l y . T h i s now c o m p l e t e s a r a t h e r d e t a i l e d a n a l y s i s o f t h e s u p p l y o f , a n d demand f o r C a n a d i a n e q u i t i e s , w h i c h was n e c e s s a r y f o r two r e a s o n s . F i r s t , t o show t h a t t h e g r o w t h a c h i e v e d by t h e C a n a d i a n m u t u a l f u n d i n d u s t r y has b e e n a i d e d by t h e f a c t t h a t i n Canada o v e r t h e l a s t few y e a r s t h e demand f o r C a n a d i a n e q u i t i e s has e x c e e d e d t h e s u p p l y . T h i s s i t u a t i o n has b r o u g h t a b o u t an i n t e r e s t by t h e s m a l l i n v e s t o r t o i n v e s t i n t h e s t o c k m a r k e t t h r o u g h m u t u a l f u n d s b e c a u s e o f t h e l i m i t e d amount o f d e s i r a b l e common s t o c k a v a i l a b l e f o r h i m t o i n v e s t i n ; t h e r e b y i n c r e a s i n g t h e a s s e t s o f t h e m u t u a l f u n d i n d u s t r y s i g n i f i c a n t l y . The s e c o n d r e a s o n why t h i s a n a l y s i s was n e c e s s a r y i s t h a t i t has been p r e d i c t e d t h a t t h e demand f o r C a n a d i a n e q u i t i e s w i l l c o n t i n u e t o e x c e e d t h e f o r e s e e a b l e s u p p l y . The demand by C a n a d i a n f i n a n c i a l i n s t i t u t i o n s a l o n e c o u l d e a s i l y grow t o t r i p l e t h e i r 1966 h o l d i n g s ; t h e r e b y r e d u c i n g t h e number o f s h a r e s a v a i l a b l e t o i n d i v i d u a l C a n a d i a n i n v e s t o r s and n o n - r e s i d e n t i n v e s t o r s . 101 The i m p a c t t h i s t r e n d may have on t h e C a n a d i a n i n v e s t o r i s d i s c u s s e d i n t h e f o l l o w i n g s e c t i o n . The F i n a n c i a l Community and t h e S m a l l I n v e s t o r I t has b e e n f a i r l y w e l l e s t a b l i s h e d t h a t t h e s m a l l C a n a d i a n i n v e s t o r i s f a c e d w i t h t h e p r o b l e m o f c o m p e t i n g w i t h w e a l t h y i n d i v i d u a l s and f i n a n c i a l i n s t i t u t i o n s f o r a l i m i t e d s u p p l y o f C a n a d i a n e q u i t i e s . T h i s does n o t mean t o s a y t h a t w i t h t h e a s s i s t a n c e o f a: s t o c k b r o k e r he w i l l n o t be a b l e t o s e l e c t s e c u r i t i e s f r o m t h e C a n a d i a n o r U.S. s e c u r i t i e s m a r k e t s t h a t a r e b e s t s u i t e d f o r h i s i n v e s t m e n t programme. The f a c t i s , h o w e v e r , t h a t t h e c o s t s p e r d o l l a r i n v e s t e d i n e q u i t y s e c u r i t i e s can be s u b s t a n t i a l f o r t h e s m a l l i n v e s t o r . I t i s n o t i m p o s s i b l e f o r o d d - l o t c h a r g e s on s m a l l p u r c h a s e s t o r e d u c e t h e i n v e s t o r ' s n e t y i e l d b e l o w t h e r a t e o f r e t u r n e a r n e d on t h e s e c u r i t y . And even a t t h e c u r r e n t l e v e l o f b r o k e r a g e c o m m i s s i o n s , i t may w e l l be t h a t t h e s m a l l i n v e s t o r i s n o t p a y i n g t h e f u l l c o s t o f h i s t r a n s a c t i o n s . As a r e s u l t o f t h i s , b r o k e r a g e f i r m s i n Canada and t h e U n i t e d S t a t e s have begun t o show a marked r e l u c t a n c e t o s e r v i c e s m a l 1 a c c o u n t s . C u r r e n t o p i n i o n s a b o u t t h e s m a l l i n v e s t o r e x p r e s s e d by members o f t h e f i n a n c i a l community l e n d s t r e n g t h t o t h e b e l i e f t h a t t h e s m a l l i n v e s t o r w i l l be f o r c e d i n t o u s i n g f i n a n c i a l i n s t i t u t i o n s as a means o f p a r t i c i p a t i n g i n t h e e q u i t i e s m a r k e t s . 102 One s t r o n g p r o p o n e n t o f t h e b e l i e f t h a t some day t h e s m a l l C a n a d i a n i n v e s t o r w i l l v a n i s h , i s Mr. L e s l i e R o w n t r e e , O n t a r i o M i n i s t e r o f F i n a n c i a l and C o m m e r i c a l A f f a i r s . I n an i n t e r v i e w w i t h t h e p r e s s i n e a r l y 1968, he s u g g e s t e d t h a t t h e l a c k o f c o m p r e h e n s i v e and c u r r e n t r e s e a r c h d a t a on C a n a d i a n s e c u r i t i e s was an i m p o r t a n t c a u s e o f a g r o w i n g i n v e s t m e n t i n U.S. s e c u r i t i e s by C a n a d i a n i n s t i t u t i o n s and i n d i v i d u a l s . By t h e same t o k e n , t h e l a c k o f w o r t h w h i l e r e s e a r c h d a t a may be a p a r t i a l c a u s e o f d i s e n c h a n t m e n t o f s m a l l i n v e s t o r s ; t h e r e b y c a u s i n g them t o f l e e f r o m 48 t h e m a r k e t . A n o t h e r p e r s o n who f e e l s t h a t t h e s m a l l i n v e s t o r 49 may be e a s e d o u t o f t h e m a r k e t i s Mr. A l d e n S. W h i t e . A d i s c u s s i o n w i t h t h e w r i t e r i n May,1969, Mr. W h i t e s a i d t h a t most o f t h e r e s e a r c h b e i n g c a r r i e d o u t by C a n a d i a n b r o k e r a g e f i r m s i s g e a r e d t o t h e needs o f t h e i n s t i t u t i o n a l i n v e s t o r , m a i n l y b e c a u s e t h i s g r o u p p r o v i d e s t h e b r o k e r a g e community w i t h i t s g r e a t e s t s o u r c e o f i n c o m e . He f e l t t h a t t h e r e was c e r t a i n l y no s h o r t a g e o f s m a l l i n v e s t o r s i n t h e m a r k e t a t t h a t t i m e , b u t e v e n t u a l l y c e r t a i n i n d i v i d u a l s w o u l d be g e n t l y e a s e d o u t o f d i r e c t e q u i t y i n v e s t i n g as b r o k e r a g e f i r m s c o n t i n u e t o d e v o t e more o f t h e i r t i m e and e f f o r t s t o t h e i r i n s t i t u t i o n a l a c c o u n t s . 48 "The L a c k o f A d e q u a t e S e c u r i t i e s R e s e a r c h D a t a i s B l amed f o r S w i n g t o I n v e s t m e n t i n U.S.", T o r o n t o G l o b e and M a i l , J a n u a r y 27, 1968, p2. 49 Mr. W h i t e i s t h e A s s i s t a n t R e s e a r c h Manager w i t h Wood Gundy S e c u r i t i e s L i m i t e d , T o r o n t o . 103 I n t e r m s o f t h e a c t u a l c o s t o f l o o k i n g a f t e r s m a l l c l i e n t s , J . R. K i m b e r , P r e s i d e n t o f t h e T o r o n t o S t o c k E x c h a n g e , has r e c e n t l y s a i d t h a t member f i r m s l o s e money on t r a n s a c t i o n s o f $1000 o r l e s s A t t h e p r e s e n t t i m e , members do n o t r e f u s e t h i s b u s i n e s s b u t some f i r m s make i t a p o i n t t o a d v e r t i s e t h e i r s p e c i a l i z a t i o n i n i n s t i t u t i o n a l a c t i v i t y and a b i l i t y 51 t o p r o v i d e s e r v i c e s f o r l a r g e s c a l e c l i e n t s . I n t h e U n i t e d S t a t e s , a s p e c i a l r e p o r t p r e p a r e d by t h e New Y o r k S t o c k E x c h a n g e on P r o f i t s as a P e r c e n t a g e o f S e c u r i t i e s C o m m i s s i o n R e v e n u e , r e v e a l e d t h a t b r o k e r s ' p r o f i t s a r e c l o s e l y r e l a t e d t o t h e amount o f i n s t i t u t i o n a l b u s i n e s s t h e y do. The s t u d y showed t h a t r e l a t i v e l y b i g p r o f i t s can be r e a p e d f r o m h a n d l i n g t h e b r o k e r a g e b u s i n e s s o f l a r g e f i n a n c i a l i n s t i t u t i o n s ; w h e r e a s , e x e c u t i n g so c a l l e d r e t a i l o r d e r s by s m a l l i n v e s t o r s has c a u s e d a s q u e e z e on p r o f i t s and i n 5 2 some c a s e s t h e l a c k o f p r o f i t a b i l i t y . " S m a l l d e a l s c a l l e d c o s t l y f o r b r o k e r , " T o r o n t o G l o b e and M a i l , May 14, 1969, p . B l . 51 I b i d . , p . B l . 5 2 " S t u d y shows where b r o k e r s p r o f i t m o s t " , T o r o n t o G l o b e and M a i 1, A u g u s t 1 , 1969, p.BIO. 104 T h e r e seems t o be v e r y l i t t l e d o u b t i n t h e minds o f e x e c u t i v e s w o r k i n g i n t h e C a n a d i a n f i n a n c i a l c ommunity t h a t t h e s m a l l i n v e s t o r s w i l l r e l y on t h e m u t u a l f u n d i n d u s t r y t o p r o v i d e them w i t h a more e c o n o m i c a l and b e n e f i c i a l method o f e n t e r i n g i n t o and r e m a i n i n g i n t h e e q u i t i e s m a r k e t s . I V . SUMMARY Two m a j o r t a s k s were a c c o m p l i s h e d i n t h i s C h a p t e r . F i r s t l y , we o b s e r v e d t h a t t h r e e p r e d o m i n a n t f a c t o r s h ave d i r e c t l y o r i n d i r e c t l y a i d e d t h e g r o w t h o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . T hese t h r e e f a c t o r s were s a i d t o be an i n c r e a s e i n p e r s o n a l n e t s a v i n g s , a d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by s a v e r s and a marked p r e f e r e n c e f o r s a v i n g t h r o u g h f i n a n c i a l i n s t i t u t i o n s . I n more s p e c i f i c t e r m s , i t was shown t h a t t h e r e has b e e n a h i g h and i n c r e a s i n g r a t e o f s a v i n g s i n Canada s i n c e 1957. Combined w i t h t h i s , t h e r e i s a g r o w i n g c o n c e r n by i n d i v i d u a l s o f t h e h a r m f u l e f f e c t s o f i n f l a t i o n w h i c h has s h i f t e d t h e f l o w o f s a v i n g s t o t h o s e c h a n n e l s o f s a v i n g t h a t c a n c o m p e n s a t e b e s t . I t was s u g g e s t e d t h a t e q u i t y i n v e s t i n g has h i s t o r i c a l l y p r o v i d e d r a t e s o f r e t u r n h i g h e r t h a n t h o s e o f f e r e d by b a n k s and o t h e r d e p o s i t a c c e p t i n g i n s t i t u t i o n s . 105 And t h e g r o u p s c a p a b l e o f t a k i n g a d v a n t a g e o f t h e s h i f t i n t h e a t t i t u d e o f s a v e r s t o w a r d r e a p i n g t h e b e n e f i t s o f e q u i t y i n v e s t i n g were t h e i n v e s t m e n t d e a l e r s , m u t u a l f u n d s , t r u s t e e d p e n s i o n f u n d s , c l o s e d - end i n v e s t m e n t c o m p a n i e s , and t r u s t c o m p a n i e s t h r o u g h t h e i r e s t a t e , t r u s t and a g e n c y a c c o u n t s . A s e c o n d m a j o r t a s k a c c o m p l i s h e d i n t h i s C h a p t e r was t h a t o f d e t e r m i n i n g how s a v e r s d e c i d e d where t o c h a n n e l t h e i r s a v i n g i n t h e p a s t and why some f i n a n c i a l i n s t i t u t i o n s were p r e f e r r e d o v e r o t h e r s . T h i s was a c c o m p l i s h e d by s t u d y i n g t h e C a n a d i a n i n v e s t o r and h i s d e g r e e o f f i n a n c i a l s o p h i s t i c a t i o n . I t was c o n c l u d e d t h a t C a n a d i a n s a r e a c t u a l l y f a i r l y a g g r e s s i v e i n v e s t o r s and have been m o v i n g up a s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n f o r some t i m e . Once t h i s was e s t a b l i s h e d i t became n e c e s s a r y t o d e t e r m i n e t h e r e a s o n s why i n d i r e c t i n v e s t i n g t h r o u g h f i n a n c i a l i n s t i t u t i o n s has become i n c r e a s i n g l y p o p u l a r i n r e c e n t y e a r s , e s p e c i a l l y when C a n a d i a n i n v e s t o r s a p p e a r t o be q u i t e s o p h i s t i c a t e d . An a n a l y s i s o f t h e c l a s s s t r u c t u r e o f t h e i n v e s t i n g p u b l i c , t h e s u p p l y o f , and demand f o r C a n a d i a n e q u i t i e s , and t h e a t t i t u d e o f t h e f i n a n c i a l community t o w a r d t h e s m a l l i n v e s t o r p r o v i d e d t h e a n s w e r s . 106 B r i e f l y , i t was shown t h a t t h e r e may be a l i m i t e d amount o f d e s i r a b l e common s t o c k a v a i l a b l e f o r h i m t o i n v e s t i n b e c a u s e o f c o n c e n t r a t e d h o l d i n g s o f s t o c k i n t h e hands o f t h e w e a l t h y , c o m b i n e d w i t h a g r o w i n g t e n d e n c y o f t h e demand f o r C a n a d i a n e q u i t i e s t o e x c e e d t h e new s u p p l y e n t e r i n g t h e m a r k e t . To f u r t h e r w o r s e n t h e s m a l l i n v e s t o r ' s o p p o r t u n i t y f o r p u r c h a s i n g s e c u r i t i e s b e s t s u i t e d f o r h i s i n v e s t m e n t programme he must c o n t e n d w i t h h i g h e r b r o k e r a g e c h a r g e s and a g r o w i n g t e n d e n c y f o r i n v e s t m e n t d e a l e r s t o d e v o t e more o f t h e i r t i m e t o t h e i r l a r g e c l i e n t s and i n s t i t u t i o n a l a c c o u n t s . As a r e s u l t o f t h e s e d e v e l o p m e n t s , t h e s m a l l i n v e s t o r has a l t e r e d h i s i n v e s t m e n t a p p r o a c h by p a r t i c i p a t i n g i n t h e e q u i t i e s m a r k e t s i n d i r e c t l y t h r o u g h f i n a n c i a l i n s t i t u t i o n s . The m u t u a l f u n d i n d u s t r y has b e n e f i t e d f r o m t h i s a l t e r n a t i v e i n v e s t m e n t a p p r o a c h by p r o v i d i n g t h e e x t r e m e l y a t t r a c t i v e i n v e s t m e n t p a c k a g e d e s c r i b e d i n t h e p r e v i o u s c h a p t e r . I n a d d i t i o n , C a n a d i a n m u t u a l f u n d s h a v e p l a y e d an a c t i v e r o l e i n d e v e l o p i n g an a g g r e s s i v e d i s t r i b u t i o n n e t w o r k t h r o u g h w h i c h t h e m u t u a l f u n d p a c k a g e has been m a r k e t e d . CHAPTER V GROWTH POTENTIAL FOR CANADIAN MUTUAL FUNDS The t a s k s a c c o m p l i s h e d i n t h e p r e v i o u s c h a p t e r p r o v i d e d a c o v e r a g e o f some i n f l u e n t i a l f a c t o r s b e h i n d t h e i n c r e a s i n g i n t e r e s t i n C a n a d i a n m u t u a l f u n d s as p r i n c i p a l f i n a n c i a l i n s t i t u t i o n s f o r i n v e s t i n g i n e q u i t y i n s t r u m e n t s . I n a d d i t i o n , some i n s i g h t was g i v e n as t o what l i e s a h e a d o f t h e m u t u a l f u n d i n d u s t r y and o t h e r f i n a n c i a l i n s t i t u t i o n s t h a t can meet t h e f u t u r e demands o f s a v e r s . A l t h o u g h t h e m u t u a l f u n d i n d u s t r y has g r e a t l y b e n e f i t e d f r o m t h e c h a n g i n g demands by s a v e r s , so t o o have o t h e r p r e v i o u s l y m e n t i o n e d f i n a n c i a l i n t e r m e d i a r i e s . As s a v e r s c o n t i n u e t o move t o h i g h e r l e v e l s o f i n v e s t m e n t ' s o p h i s t i c a t i o n t h e y w i l l i n v a r i a b l y s e e k o u t and i n v e s t t h e i r s a v i n g s i n f i n a n c i a l i n t e r m e d i a r i e s t h a t can s a t i s f y two i m p o r t a n t demands. The f i r s t demand i s f o r a w i d e r r a n g e o f f i n a n c i a l s e r v i c e s , w h i c h s h o u l d i n c l u d e a g r e a t e r amount o f i n v e s t m e n t c o u n s e l l i n g a l o n g w i t h a b r o a d r a n g e o f f i n a n c i a l s e r v i c e s u n d e r one r o o f . S e c o n d l y , t h e y w i l l c o n t i n u e t o demand h i g h e r r a t e s o f r e t u r n t o p r o t e c t t h e m s e l v e s f r o m t h e h a r m f u l e f f e c t s o f i n f l a t i o n . 1 0 8 The p o i n t t h a t has been r e a c h e d i n t h e f i n a n c i a l m a r k e t a t p r e s e n t i s one i n w h i c h t h e m a j o r f i n a n c i a l i n s t i t u t i o n s a r e s c r a m b l i n g i n o r d e r t o p r o v i d e a b r o a d r a n g e o f f i n a n c i a l s e r v i c e s . A s s u m i n g t h a t t h i s s c r a m b l i n g p r o c e s s c o n t i n u e s i n f u t u r e y e a r s , i t w i l l i n e v i t a b l y mean t h a t t h e s u c c e s s f u l f i n a n c i a l i n s t i t u t i o n s w i l l be f a i r l y e v e n l y m a t c h e d i n t e r m s o f t h e s e r v i c e s t h e y can p r o v i d e t o t h e i r c l i e n t s . H o wever, i s e q u a l l y a p p a r e n t t h a t t h o s e i n s t i t u t i o n s t h a t can p r o v i d e a c o m p l e t e r a n g e o f s e r v i c e s a l o n g w i t h h i g h e r r a t e s o f r e t u r n w i l l p r o v e t o be most s u c c e s s f u l i n t e r m s o f e x p a n d i n g t h e i r a s s e t s . I n s u r i n g f u t u r e g r o w t h i s n o t , h o w e v e r , l i m i t e d t o m a i n t a i n i n g a p o s i t i o n o f m e r e l y s a t i s f y i n g c h a n g i n g p r e f e r e n c e s . T h r o u g h i n n o v a t i o n , new p r e f e r e n c e s may be c r e a t e d and t h e i n n o v a t o r w i l l be r e w a r d e d a c c o r d i n g l y . I t was s u g g e s t e d i n t h e i n t r o d u c t o r y s e c t i o n o f C h a p t e r I V , t h a t p r e f e r e n c e s f o r t h e i n s t r u m e n t s and s e r v i c e s o f f e r e d by a f i n a n c i a l i n s t i t u t i o n may come a b o u t t h r o u g h i n n o v a t i o n s w h i c h c r e a t e new demands. T h e r e a r e two a s s i g n m e n t s t o be c o m p l e t e d i n t h i s c h a p t e r . The f i r s t , w i l l be t o m e n t i o n some o f t h e f a c t o r s w h i c h w i l l f a v o u r a b l y i n f l u e n c e t h e g r o w t h o f t h e m u t u a l f u n d i n d u s t r y i n t h e f u t u r e . I f a l l goes w e l l , t h e s e f a c t o r s s h o u l d c o n t r i b u t e s i g n i f i c a n t l y t o t h e f u t u r e g r o w t h o f t h e i n d u s t r y 1 0 9 b e c a u s e i t i s p r e s e n t l y w e l l p r e p a r e d t o meet t h e f u t u r e demands o f s a v e r s . The s e c o n d i s t o d i s c u s s t h e c h a n g e s t a k i n g p l a c e w i t h i n t h e m u t u a l f u n d i n d u s t r y as i t p r e p a r e s i t s e l f f o r t h e f u t u r e . I n o t h e r w o r d s , we w i l l want t o l o o k a t t h e s t e p s t h e i n d u s t r y has t a k e n and w i l l be t a k i n g t o i n s u r e i t s r a p i d g r o w t h and r e l a t i v e p o s i t i o n as a f i n a n c i a l i n t e r m e d i a r y . A l o g i c a l s t a r t i n g p o i n t i n an a n a l y s i s o f t h e f a c t o r s a s s i s t i n g f u t u r e g r o w t h i s t o i n t r o d u c e t h e o b v i o u s s o c i a l and t e c h n o l o g i c a l c h a n g e s l i k e l y t o b e n e f i t t h e m u t u a l f u n d i n d u s t r y . T h e s e s o c i a l and t e c h n o l o g i c a l c h a n g e s w i l l r e s u l t f r o m a f u r t h e r s h i f t i n t h e l e v e l o f e c o n o m i c d e v e l o p m e n t , i n t h e a t t i t u d e o f i n d i v i d u a l s a v e r s and t h e w a n t s and needs o f b o r r o w e r s . I t i s s u g g e s t e d t h a t t h e m u t u a l f u n d i n d u s t r y w i l l be i n a s t r o n g p o s i t i o n t o m a i n t a i n i t s g r o w t h r e l a t i v e t o o t h e r f i n a n c i a l i n t e r m e d i a r i e s b e c a u s e many o f t h e e x p e c t e d s o c i a l and t e c h n o l o g i c a l c h a n g e s a r e o r i e n t a t e d a l o n g t h e l i n e s o f t h e s e r v i c e s many m u t u a l f u n d s p r e s e n t l y have t o o f f e r . Once we have r e v i e w e d t h e s e c h a n g e s , i t w o u l d seem r e a s o n a b l e t o a t t e m p t t o show t h e e x t e n t t o w h i c h t h e m u t u a l f u n d i n d u s t r y i s i n n o v a t i n g i n o r d e r t o c a p i t a l i z e on t h e b u s i n e s s t h a t may u n f o l d o ut o f new demands i n t h e economy. 1 1 0 I . CANADIAN MUTUAL FUNDS AND SOCIAL AND TECHNOLOGICAL CHANGES The p a s t i s a m a t t e r o f r e c o r d . The m u t u a l f u n d s and t h e i r g r o w t h i n t h e f u t u r e i s now t h e g r e a t e s t m a t t e r o f c o n c e r n . I n a w o r l d i n w h i c h s o c i a l and t e c h n o l o g i c a l c h a n g e s a r e c o n s t a n t l y a c c e l e r a t i n g , t h e e x p e c t e d ( a l o n g w i t h t h e u n e x p e c t e d ) u s u a l l y a r r i v e s ahead o f t i m e . No one can s a y f o r s u r e what i s i n s t o r e i n t h e f u t u r e , e ven t h e f u t u r e o f a s i n g l e i n d u s t r y . Y e t , b e a r i n g t h i s i n mi n d i t r e m a i n s b o t h f r u i t f u l and f a s c i n a t i n g t o p e e r a h e a d . G i v e n a f a c t u a l body o f k n o w l e d g e i t i s p o s s i b l e t o make p r e d i c t i o n s 'of what m i g h t p o s s i b l y h a p p e n i n t h e f u t u r e ; h o w e v e r , as t i m e p a s s e s n e w l y i n t r o d u c e d k n o w l e d g e may have a t r e m e n d o u s i n f l u e n c e upon t h e e v e n t s t h a t a c t u a l l y t a k e p l a c e . As f a r as t h e C a n a d i a n m u t u a l f u n d i n d u s t r y i s c o n c e r n e d , i t i s p o s s i b l e t o o u t l i n e numerous f a c t o r s t h a t may b e n e f i t t h e f u t u r e g r o w t h o f t h e i n d u s t r y v i s - a - v i s o t h e r f i n a n c i a l i n s t i t u t i o n s . T h i s p r o c e d u r e s t i l l l e a v e s much t o be d e s i r e d i n t h a t no i n d u s t r y o p e r a t e s i n a vacuum. F o r e x a m p l e , a m a j o r e v e n t i n s t o r e f o r t h e m u t u a l f u n d i n d u s t r y i n t h e n e a r f u t u r e i s t h e r e p o r t i n g by t h e F e d e r a l - P r o v i n c i a l , C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . I l l O b v i o u s l y t h e l e g i s l a t i v e r e c o m m e n d a t i o n s t o be made by t h i s g o v e r n m e n t a l body c o u l d have t r e m e n d o u s i m p l i c a t i o n s f o r t h e f u t u r e g r o w t h and d e v e l o p m e n t o f t h e m u t u a l f u n d i n d u s t r y i n Ca n a d a . H i s t o r i c a l l y , t h e m a j o r p r o p o r t i o n o f f u n d s ' s h a r e h o l d e r s o r u n i t h o l d e r s has b e e n and s t i l l i s t h e s m a l l i n v e s t o r who l a c k s a l a r g e amount o f c a p i t a l t o a l l o c a t e t o l o n g - t e r m s a v i n g s . Most r e c e n t e c o n o m i c and s o c i a l d e v e l o p m e n t s i n Canada a r e ai m e d a t i n c r e a s i n g t h e l o w e r e a r n e r s * i ncome w h i l e k e e p i n g t h o s e i n t h e h i g h e r income g r o u p s a t t h e same l e v e l . Such a p o l i c y w i l l c o n t r i b u t e t o i n c r e a s e t h e income i n t h e hands o f t h e p e o p l e most l i k e l y t o buy m u t u a l f u n d s h a r e s . Some o f t h e s e p e o p l e have n e v e r had t h e o p p o r t u n i t y t o s a v e any money, l e t a l o n e i n v e s t i t . A p o r t i o n o f t h e i r a d d i t i o n a l income w i l l e v e n t u a l l y go i n t o l o n g - t e r m s a v i n g s , m e a n i n g t h a t t h e y c o u l d be p o t e n t i a l m u t u a l f u n d s h a r e h o l d e r s o r u n i t h o l d e r s . As f a r as i n d i v i d u a l s i n t h e m i d d l e income c l a s s e s a r e c o n c e r n e d , i t i s a l s o p o s s i b l e t h a t t h e y w i l l j o i n i n g r e a t e r f o r c e w i t h m u t u a l f u n d s . The s t o c k b r o k e r s w i l l be i n s t r u m e n t a l i n d e v e l o p i n g t h i s t r e n d . The s i t u a t i o n i s now d e v e l o p i n g w h e r e b y b r o k e r a g e f i r m s a r e d i s c o u r a g i n g d i r e c t i n v e s t m e n t by s m a l l a c c o u n t s ( u n d e r $ 1 0 , 0 0 0 ) , and d i r e c t i n g t h e s e a c c o u n t s t o w a r d e i t h e r i n h o u s e o r e x t e r n a l m u t u a l f u n d s . 112 The h i g h a d m i n i s t r a t i o n c o s t s o f o p e r a t i n g an i n v e s t m e n t a c c o u n t makes most s m a l l a c c o u n t s u n p r o f i t a b l e f o r b r o k e r a g e f i r m s . The g r o w i n g f i n a n c i a l s o p h i s t i c a t i o n i n t h e m a r k e t p l a c e w i l l c o n v i n c e a g r e a t e r number o f a v e r a g e and e ven f a i r l y s o p h i s t i c a t e d i n v e s t o r s t o t u r n t o m u t u a l f u n d s . The a d v a n t a g e o f p r o f e s s i o n a l management v i s - a - v i s d o - i t - y o u r s e l f i n v e s t i n g w i l l i n c r e a s e s h a r p l y . M u t u a l f u n d s , as w e l l as o t h e r f i n a n c i a l i n s t i t u t i o n s a r e m a k i n g more and more i n t e l l i g e n t use o f t h e c o m p u t e r as a t o o l f o r p o r t f o l i o a n a l y s i s . A l t h o u g h t h e c o m p u t e r may n e v e r t a k e t h e p l a c e o f human j u d g e m e n t i n an i n v e s t m e n t d e c i s i o n , t h e r e i s l i t t l e d o u b t t h a t i t s c a r e f u l and s o p h i s t i c a t e d use can be e n o r m o u s l y h e l p f u l t o t h e w e l l t r a i n e d i n v e s t m e n t manager. As a c o n s e q u e n c e , f i n a n c i a l r e s e a r c h methods w i l l c h a n g e . I n f o r m a t i o n w i l l be f a r more r e f i n e d and q u a n t i f i e d . I n v e s t m e n t r e s e a r c h w i l l p r o b a b l y be more m a t h e m a t i c a l l y o r i e n t a t e d . P r o b a b i l i t y t h e o r y w i l l be u s e d i n t h e p r e d i c t i o n o f e a r n i n g s , d i v i d e n d s , and g r o w t h o f c o m p a n i e s h e l d i n t h e f u n d s p o r t f o l i o s . As t h e c h a r a c t e r o f C a n a d i a n and A m e r i c a n i n d u s t r y c h a n g e s as t h e r e s u l t o f t h e t e c h n o l o g i c a l r e v o l u t i o n , f i n a n c i a l a n a l y s t s w i l l h ave t o become f a r more s c i e n t i f i c a l l y and t e c h n i c a l l y o r i e n t a t e d i n o r d e r t o a sk t h e r i g h t q u e s t i o n s o f t h e c o r p o r a t i o n s t h e y a n a l y z e . 1 1 3 I t i s q u i t e c o n c e i v a b l e t o i m a g i n e t h a t i n a d d i t i o n t o e m p l o y i n g e c o n o m i s t s , s t a t i s t i c i a n s and f i n a n c i a l r e s e a r c h e r s , m u t u a l f u n d s w i l l a l s o h i r e o p e r a t i o n s r e s e a r c h s p e c i a l i s t s , m a t h e m a t i c i a n s , b e h a v i o u r a l s c i e n t i s t s , s y s t e m s a n a l y s t s , and o t h e r s u c h s p e c i a l i s t s t o b a c k up t h e managers i n t h e i r s e a r c h f o r v a l u a b l e d a t a on p o r t f o l i o c o m p a n i e s . I n b r i e f , m u t u a l f u n d managers w i l l h ave b e t t e r and more p r e c i s e d a t a f o r m a k i n g i n v e s t m e n t d e c i s i o n s , and t h i s d a t a w i l l i n e v i t a b l y be s u p e r i o r t o t h a t a v a i l a b l e t o t h e a v e r a g e i n d i v i d u a l who i n v e s t s i n t h e s t o c k m a r k e t on h i s own; so much so t h a t t h e a d v a n t a g e s o f p r o f e s s i o n a l management w i l l be f u r t h e r d r a m a t i z e d . As a d i r e c t r e s u l t , many p r i v a t e i n v e s t o r s w i l l p r o b a b l y become c o n v i n c e d t h a t t h e r i s k - r e w a r d odds a g a i n s t them a r e t o o h i g h . A l o g i c a l s o l u t i o n f o r them w i l l be t o a l l o c a t e t h e i r s a v i n g s t o a m u t u a l f u n d w h i c h s a t i s f i e s t h e i r i n v e s t m e n t o b j e c t i v e s . Changes s u c h as t h e s e w i l l t r a n s f o r m t h e methods u s e d by m u t u a l f u n d s and t h e b u s i n e s s e n v i r o n m e n t w i t h i n w h i c h t h e y o p e r a t e . T h e r e may be g r e a t s o c i a l c h a n g e s i n t h e r e a s o n s why p e o p l e i n v e s t . I n d i v i d u a l s may buy m u t u a l f u n d s h a r e s n o t m e r e l y t o p r o v i d e t h e i r c h i l d r e n w i t h a u n i v e r s i t y e d u c a t i o n , as many C a n a d i a n s do t o d a y , b u t t o p r o v i d e t h e m s e l v e s w i t h a d d i t i o n a l e d u c a t i o n l a t e r i n l i f e . 114 T h i s change may in- p a r t stem f r o m a c o m b i n a t i o n o f t e c h n o l o g i c a l a d v a n c e m e n t and t h e demand by i n d u s t r y f o r h i g h l y e d u c a t e d p e o p l e . So t o o , p e o p l e may a l s o i n v e s t i n m u t u a l f u n d s n o t t o p r o v i d e a m a r g i n a l l i v i n g a f t e r r e t i r e m e n t y , b u t t o make p o s s i b l e a f a r more c o m f o r t a b l e s t a n d a r d o f l i v i n g and a w i d e r a n g e o f e d u c a t i o n a l and r e c r e a t i o n a l f a c i l i t i e s . D e s p i t e a l l s u c h c o n c e i v a b l e d e v e l o p m e n t s , i t i s u n l i k e l y t h a t t h e b a s i c i d e a upon w h i c h m u t u a l f u n d s a r e b a s e d w i l l c h a n g e . The p r i n c i p a l o f p o o l i n g one's c a p i t a l w i t h o t h e r s ' and p u r c h a s i n g p r o f e s s i o n a l management and d i v e r s i f i c a t i o n w i l l make e v e n more s e n s e i n t h e y e a r s a h e a d . T h i s o p t i m i s t i c b e l i e f i s g e n e r a l l y s u p p o r t e d by a summary o f t h e p r o s p e c t s f o r m u t u a l f u n d g r o w t h p r e p a r e d f o r t h e C o m m i s s i o n on Money and C r e d i t i n t h e U n i t e d S t a t e s . "The t r e n d i n i n d i v i d u a l and i n s t i t u t i o n a l f i n a n c i n g i s s t i l l t o w a r d more e q u i t y i n v e s t m e n t , " t h e C.M.C. d e c l a r e s . M o r e o v e r , t h e f u n d i n d u s t r y " i s i n a s t r o n g c o m p e t i t i v e p o s i t i o n t o o f f e r most e c o n o m i c a l l y t h e b a s i c i n v e s t m e n t a d v a n t a g e s o f d i v e r s i f i c a t i o n and p r o f e s s i o n a l management... The i n d u s t r y has d e v e l o p e d many i n v e s t m e n t s e r v i c e f e a t u r e s n o t r e a d i l y a v a i l a b l e i n o t h e r i n v e s t m e n t m e d i a . " B e f o r e p r o c e e d i n g i t s h o u l d be e m p h a s i z e d t h a t m u t u a l f u n d s a r e by no means a p p r o p r i a t e f o r e v e r y o n e . They w i l l n o t s u p p l a n t o t h e r t y p e s o f s a v i n g s and t h e y c e r t a i n l y do n o t r e p r e s e n t a p a n a c e a f o r a l l i n v e s t o r s . 115 Nor i s t h e r e i n t h e f o r e s e e a b l e f u t u r e , d e s p i t e a p o p u l a r m i s c o n c e p t i o n t o t h e c o n t r a r y , any way m u t u a l f u n d s can c o m p l e t e l y e l i m i n a t e t h e e l e m e n t o f r i s k f r o m i n v e s t i n g i n s e c u r i t i e s . I n v e s t i n g i n s t o c k s and b o n d s , e i t h e r d i r e c t l y o r i n d i r e c t l y t h r o u g h m u t u a l f u n d s , w i l l r e m a i n o n l y p a r t o f any w e l l - p l a n n e d f i n a n c i a l p r o g r a m . I t i s i n t h e a r e a o f d e v e l o p i n g t h e o t h e r a s p e c t s o f a f i n a n c i a l p r o g r a m , t h r o u g h an i n c r e a s i n g l y w i d e r a n g e o f s e r v i c e s , t h a t t h e m u t u a l f u n d i n d u s t r y i s l i k e l y t o b e n e f i t c o n s i d e r a b l y . The d i s c u s s i o n i n t h e n e x t s e c t i o n w i l l be c o n c e n t r a t e d on t h e s c r a m b l i n g p r o c e s s t a k i n g p l a c e w i t h i n t h e m u t u a l f u n d i n d u s t r y t o p r o v i d e i n v e s t o r s w i t h a b r o a d r a n g e o f f i n a n c i a l s e r v i c e s . I I . MUTUAL FUNDS AND THE INNOVATION PROCESS Changes a r e c o n s t a n t l y t a k i n g p l a c e w i t h i n t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . Some c h a n g e s r e s u l t f r o m t h e demands o f i n v e s t o r s . C e r t a i n i n v e s t o r s n eed and want a c o n s e r v a t i v e p o r t f o l i o ; o t h e r s r e q u i r e an a d v e n t u r o u s p a c k a g e o f s e c u r i t i e s . Some nee d i m m e d i a t e i n c o m e ; o t h e r s want o n l y l o n g - t e r m a p p r e c i a t i o n and s t i l l o t h e r s s e a r c h o u t s p e c u l a t i v e i n v e s t m e n t s . I n C a n a d a , t h e m u t u a l f u n d s have met s p e c i f i c demands o f i n v e s t o r s by o f f e r i n g f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s . 116 As t h e number o f f u n d s m u l t i p l i e d , t h e y have a r r a n g e d t h e m s e l v e s a l o n g what m i g h t be c a l l e d a " r i s k - r e w a r d s p e c t r u m " . A t one end o f t h e s p e c t r u m a r e t h e c o n s e r v a t i v e m u t u a l f u n d s . A t t h e o t h e r end a r e f u n d s t h a t a r e more v e n t u r e s o m e . O t h e r c h a n g e s t a k i n g p l a c e w i t h i n t h e i n d u s t r y , o r e x p e c t e d t o t a k e p l a c e i n t h e n e a r f u t u r e , r e s u l t f r o m a t t e m p t s t o p r o v i d e an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s . The a d v a n t a g e o f b e i n g i n a p o s i t i o n t o p r o v i d e an i n d i v i d u a l i n v e s t o r w i t h t h e f i n a n c i a l a s s i s t a n c e he needs i s o b v i o u s . The more s e r v i c e s an i n d i v i d u a l c a n o b t a i n u n d e r one r o o f , t h e more o f h i s s a v i n g s he w i l l l e a v e w i t h t h e o r g a n i z a t i o n p r o v i d i n g s u c h s e r v i c e s . A l t h o u g h t h e d e v e l o p m e n t s i n t h i s a r e a have been n o t a b l e as f a r as C a n a d i a n m u t u a l f u n d s a r e c o n c e r n e d , t h e g r e a t e s t d e v e l o p m e n t s i n r e c e n t y e a r s have t a k e n p l a c e i n t h e U n i t e d S t a t e s . To p u t t h i n g s i n p e r s p e c t i v e , I w i l l a t t e m p t f i r s t o f a l l t o show t h e s t e p s t h e C a n a d i a n m u t u a l f u n d i n d u s t r y has t a k e n t o p r o v i d e an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s . S e c o n d l y , I w i l l i n d i c a t e t h e c h a l l e n g e t h e C a n a d i a n m u t u a l f u n d i n d u s t r y f a c e s i n b e c o m i n g b e t t e r q u a l i f i e d i n t h e a r e a o f f i n a n c i a l c o u n s e l l i n g . T h i r d l y , I w i l l d i s c u s s t h e m e a s u r e s t h e i n d u s t r y i s a d o p t i n g t o s a t i s f y t h e demand by i n v e s t o r s f o r h i g h e r r a t e s o f r e t u r n on t h e i r c a p i t a l . 117 F i n a n c i a l C o m p l e x e s I t i s c e r t a i n t h a t t h e e x p a n d i n g m a r k e t f o r f i n a n c i a l s e r v i c e s w i l l i n t e n s i f y c o m p e t i t i o n among f i n a n c i a l i n t e r m e d i a r i e s . M u t u a l f u n d s w i l l n o t o n l y have t o compete w i t h one a n o t h e r , b u t a l s o a g a i n s t an i n c r e a s i n g number o f f i r m s e n t e r i n g t h i s a r e a f r o m w i t h o u t . L i f e i n s u r a n c e c o m p a n i e s and t r u s t c o m p a n i e s , f o r e x a m p l e , a r e w e l l aware o f t h e o p p o r t u n i t i e s o p e n i n g up i n t h e a r e a o f f i n a n c i a l p l a n n i n g . A t t h e o u t s e t , i t i s a p p a r e n t t h a t management c o m p a n i e s a d v i s i n g more t h a n one m u t u a l f u n d a r e i n a more f a v o u r a b l e p o s i t i o n t h a n t h o s e m a n a g i n g an i n d i v i d u a l f u n d as f a r as p o t e n t i a l s a l e s a r e c o n c e r n e d ; t h e r e a s o n b e i n g t h a t t h e y a r e a b l e t o o f f e r t o p o t e n t i a l i n v e s t o r s m u t u a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s . T h i s t y p e o f a r r a n g e m e n t was p r e v i o u s l y d e f i n e d as a " m u t u a l f u n d c o m p l e x " . By way o f summary, a m u t u a l f u n d c o m p l e x e n a b l e s a m u t u a l f u n d a d v i s e r t o r e a c h a b r o a d e r c r o s s - s e c t i o n o f p o t e n t i a l i n v e s t o r s and t o o f f e r e a c h i n v e s t o r an o p p o r t u n i t y t o a p p o r t i o n h i s a g g r e g a t e m u t u a l f u n d i n v e s t m e n t among s e v e r a l f u n d s w i t h d i f f e r e n t o b j e c t i v e s . Most s h a r e h o l d e r s o f a m u t u a l f u n d w i t h i n a f u n d c o m p l e x a l s o have t h e o p t i o n t o s w i t c h t o o t h e r f u n d s w i t h i n t h e c o m p l e x a t a r e d u c e d o r no s a l e s c h a r g e . The o b v i o u s a d v a n t a g e o f b e i n g a b l e t o o f f e r a l l f u n d s a l o n g t h e " r i s k - r e w a r d s p e c t r u m " i s t h a t t h e p o t e n t i a l i n v e s t o r can f i n d u n d e r one r o o f 118 a f u n d o r f u n d s c o m p l e t e l y s u i t e d t o h i s own p a r t i c u l a r i n v e s t m e n t n e e d s . I n C h a p t e r I I I , f i v e o f t h e l a r g e s t C a n a d i a n m u t u a l f u n d c o m p l e x e s were c i t e d as f o l l o w s : 1. The I n v e s t o r s Group 2. U n i t e d Funds Management L t d . 3. A.G.F. Management L t d . 4. C a p i t a l Management L t d . 5. C a n a d i a n C h a n n i n g C o r p o r a t i o n L t d . E a c h o f t h e s e f i v e management c o m p a n i e s o f f e r two o r more m u t u a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s . A c l e a r i n d i c a t i o n o f e x a c t l y what v a r i o u s management c o m p a n i e s have t o o f f e r t o t h e p u b l i c i n t e r m s o f f i n a n c i a l p l a n n i n g c a n be o b s e r v e d by r e a d i n g t h e f o l l o w i n g comments e x t r a c t e d f r o m a s t a n d a r d n e w s l e t t e r c i r c u l a t e d by C a n a d i a n C h a n n i n g C o r p o r a t i o n L t d . "As w i t h most M u t u a l F u n d s , t h e p r i n c i p a l o b j e c t i v e s o f t h e t h r e e C a n a d i a n C h a n n i n g Funds i n c l u d e t h e m a i n t e n a n c e o f s t a b l e i n c o m e , t h e g r o w t h o f c a p i t a l i n v e s t e d and t h e s a f e t y o f i n v e s t m e n t s f r o m s e r i o u s d e c l i n e i n v a l u e . However, t h e s e o b j e c t i v e s a r e t o some e x t e n t m u t u a l l y e x c l u s i v e , t h a t i s , i n o r d e r t o g i v e p r i o r i t y t o one o f t h e o b j e c t i v e s , t h e e m p h a s i s on one o r b o t h o f t h e o t h e r o b j e c t i v e s must g e n e r a l l y be d e c r e a s e d . E a c h o f t h e t h r e e C h a n n i n g Funds p l a c e d i f f e r i n g d e g r e e s o f e m p h a s i s on e a c h o f t h e s e o b j e c t i v e s . T h u s , c e r t a i n c l a s s e s o f i n v e s t o r s w i t h p a r t i c u l a r o b j e c t i v e s w i l l p r e f e r one t y p e o f f u n d t o t h e o t h e r s f o r an a d d i t i o n a l c ommitment. W i t h t h e f o r m a t i o n o f t h e new V e n t u r e F u n d , e v e r y p o t e n t i a l i n v e s t o r can now f i n d a C a n a d i a n C h a n n i n g managed f u n d o r f u n d s c o m p l e t e l y s u i t e d t o h i s own p a r t i c u l a r s i t u a t i o n . " 119 "The Commonwealth Fund i s a " b a l a n c e d " t y p e o f M u t u a l F u n d , w h i c h , b e c a u s e o f t h e c h a r a c t e r o f i t s d i v e r s i f i e d i n v e s t m e n t s a c t i n g i n c o n c e r t , p r o v i d e s a h i g h d e g r e e o f s e c u r i t y and a s t a b l e r a t e o f c u r r e n t income t o i t s s h a r e h o l d e r s . A t t h e same t i m e u n l i k e t h e s i t u a t i o n w i t h f i x e d d o l l a r r e t u r n , i n v e s t m e n t s s u c h as Canada S a v i n g s B onds, s h a r e h o l d e r s p a r t i c i p a t e i n t h e g r o w t h o f t h e economy t h r o u g h t h e c a p i t a l a p p r e c i a t i o n o f t h e f u n d ' s i n v e s t m e n t p o r t f o l i o , a l t h o u g h t h i s g r o w t h p o t e n t i a l i s n o t n e c e s s a r i l y as g r e a t as i n t h e l e s s c o n s e r v a t i v e f u n d s . The Commonwealth Fund i s , t h e r e f o r e , d e s i g n e d f o r i n v e s t o r s who d e s i r e e q u i t y i n v e s t m e n t and income t o combat i n f l a t i o n a r y p r e s s u r e s , b u t who w i s h t o be a s s u r e d t h a t t h e i r i n v e s t e d c a p i t a l w i l l n o t be s e r i o u s l y d e p l e t e d even on a t e m p o r a r y b a s i s . " "The L e v e r a g e Fund i s commonly r e f e r r e d t o as a " g r o w t h " f u n d , t h a t i s , i t s p r i m a r y o b j e c t i v e i s l o n g t e r m c a p i t a l g r o w t h . T h i s f u n d s h o u l d , t h e r e f o r e , be o f i n t e r e s t t o p e r s o n s who a r e w i l l i n g t o a c c e p t a h i g h e r d e g r e e o f v o l a t i l i t y i n t h e i r i n v e s t m e n t i n o r d e r t o a c h i e v e a h i g h e r g r o w t h p o t e n t i a l , b u t a t t h e same t i m e , a r e n o t i n t e r e s t e d i n a h i g h l y s p e c u l a t i v e i n v e s t m e n t . " "The V e n t u r e Fund i s d e s i g n e d w i t h a b o l d e r and more a g g r e s s i v e i n v e s t m e n t p o l i c y t h a n e i t h e r o f t h e o t h e r two f u n d s . I t s aim w i l l be t o a t t a i n above a v e r a g e a p p r e c i a t i o n o f c a p i t a l w i t h i n r e a s o n a b l e l i m i t s by e m p h a s i z i n g i n v e s t m e n t s i n t h e h i g h e r g r o w t h segments o f t h e economy and i n c o m p a n i e s w i t h new i d e a s and t e c h n o l o g y , i n c l u d i n g s m a l l e r c o m p a n i e s . The p o t e n t i a l f o r c a p i t a l g r o w t h w i l l be t h e s o l e b a s i s f o r s e l e c t i o n o f p o r t f o l i o s e c u r i t i e s and i n t h e v a r i a t i o n s i n t h e l i q u i d i t y o f t h e Fund. The V e n t u r e Fund i s c o n s e q u e n t l y aimed a t t h e i n v e s t o r who i s w i l l i n g t o , and c a n a f f o r d t o , t a k e g r e a t e r r i s k i n o r d e r t o s e e k h i g h e r a p p r e c i a t i o n o f h i s i n v e s t e d c a p i t a l . " The C a n a d i a n C h a n n i n g e x a m p l e was c h o s e n f o r no s p e c i a l r e a s o n o t h e r t h a n t h e f a c t t h a t t h e i r s a l e s l i t e r a t u r e e x p r e s s e d t h e o b j e c t i v e s o f t h e i r f u n d s i n c l e a r t e r m s . 120 A r e v i e w o f t h e l i t e r a t u r e o f t h e o t h e r m u t u a l f u n d o r g a n i z a t i o n s w o u l d r e v e a l a s i m i l a r t y p e o f p r e s e n t a t i o n . Q u i t e a p a r t f r o m t h e f a c t t h a t s e v e r a l l a r g e r m u t u a l f u n d c o m p l e x e s a r e a b l e t o o f f e r a number o f d i f f e r e n t t y p e s o f f u n d s g e a r e d t o a b r o a d r a n g e o f d e s i r e s o f i n v e s t o r s , t h e y have a l s o b e e n s u c c e s s f u l i n m o v i n g i n t o o t h e r a r e a s . These o t h e r a r e a s w o u l d i n c l u d e many o f t h e s e r v i c e s p r e s e n t l y b e i n g o f f e r e d by t h e t r u s t c o m p a n i e s and i n s u r a n c e c o m p a n i e s i n t h e o v e r a l l p r o c e s s o f f i n a n c i a l p l a n n i n g . T h i s movement i s g e n e r a l l y t e r m e d as t h e p r o c e s s o f " f i n a n c i a l s c r a m b l i n g " . When a m u t u a l f u n d c o m p l e x becomes a s s o c i a t e d w i t h o t h e r f i n a n c i a l i n s t i t u t i o n s as a r e s u l t o f s u c h s c r a m b l i n g we o b s e r v e t h e d e v e l o p m e n t o f a " f i n a n c i a l c o m p l e x . " The d e v e l o p m e n t o f f i n a n c i a l c o m p l e x e s has b e e n e v i d e n t i n Canada f o r sometime and i s w e l l i l l u s t r a t e d by r e f e r e n c e t o The I n v e s t o r s Group and i t s a s s o c i a t i o n w i t h o t h e r f i n a n c i a l i n t e r m e d i a r i e s . T h i s g r o u p i s t h e s u c c e s s o r o f I n v e s t o r s S y n d i c a t e o f C a n a d a , L i m i t e d , w h i c h was i n c o r p o r a t e d i n M a n i t o b a i n 1940 t o h a n d l e t h e C a n a d i a n b u s i n e s s o f t h e U.S. p a r e n t company, I n v e s t o r s D i v e r s i f i e d S e r v i c e s , I n c . o f M i n n i a p o l i s , M i n n e s o t a . The b u s i n e s s a t t h a t t i m e c o n s i s t e d o n l y o f t h e s a l e o f i n v e s t m e n t c o n t r a c t s . 121 I n 1950, I n v e s t o r s S y n d i c a t e o f C a n a d a , L i m i t e d o r g a n i z e d a m u t u a l f u n d c a l l e d I n v e s t o r s M u t u a l o f Canada L t d . , f o r w h i c h I n v e s t o r s S y n d i c a t e o f C a n a d a , L i m i t e d a c t e d as t h e management and d i s t r i b u t i o n company. A t t h e end o f 1968, t h e t o t a l n e t a s s e t s o f I n v e s t o r s M u t u a l o f Canada L t d . , were $ 5 8 4 , 8 1 8 , 6 1 6 . I n 1956, I n v e s t o r s D i v e r s i f i e d S e r v i c e s , I n c . d i v e s t e d i t s e l f o f i t s C a n a d i a n s u b s i d i a r y t h r o u g h t h e i s s u a n c e o f a s t o c k d i v i d e n d i n s h a r e s o f I n v e s t o r s S y n d i c a t e o f C a n a d a , L i m i t e d . The l a t t e r company was r e o r g a n i z e d i n 1964 and c a l l e d The I n v e s t o r s G r o u p . C o n t r o l o f t h i s g r o u p i s h e l d i n C a n a d a , and i t i s o p e r a t e d s e p a r a t e l y f r o m I n v e s t o r s D i v e r s i f i e d S e r v i c e s , I n c . . The I n v e s t o r s Group i s a p u b l i c management company, and i s l i s t e d on C a n a d i a n s t o c k e x c h a n g e s . A f t e r t h e r e o r g a n i z a t i o n o f I n v e s t o r s S y n d i c a t e o f C a n a d a , L i m i t e d as The I n v e s t o r s G r o u p , a new company was e s t a b l i s h e d u n d e r t h e name I n v e s t o r s S y n d i c a t e L i m i t e d . The l a t t e r s e l l s i n v e s t m e n t c o n t r a c t s and a l s o a c t s as t h e d i s t r i b u t i o n company f o r I n v e s t o r s M u t u a l o f Canada L t d . , I n v e s t o r s G r o w t h Fund o f Canada L t d . , and I n v e s t o r s I n t e r n a t i o n a l M u t u a l Fund L t d . . The I n v e s t o r s Group i s t h e management company o f a l l t h r e e m u t u a l f u n d s . The l a t t e r two m u t u a l f u n d s were c r e a t e d i n 1957 and 1961 r e s p e c t i v e l y t o p r o v i d e a b r o a d e r r a n g e o f i n v e s t m e n t o b j e c t i v e s f o r p o t e n t i a l s h a r e h o l d e r s ; t h e i r a g g r e g a t e t o t a l n e t a s s e t s a t December 31, 1968 were $441,281,474. 122 The t h r e e m u t u a l f u n d s t o g e t h e r make up t h e l a r g e s t m u t u a l f u n d c o m p l e x i n C a nada. S a l e s m e n o f I n v e s t o r s S y n d i c a t e L i m i t e d s e l l i t s i n v e s t m e n t c o n t r a c t s and s h a r e s o f t h e t h r e e m u t u a l f u n d s . I n a d d i t i o n , t h e y can o f f e r t h e i r c l i e n t s c o n s i d e r a b l e i n f o r m a t i o n as t o o t h e r s e r v i c e s p r o v i d e d by The I n v e s t o r s Group and i t s s u b s i d i a r y c o m p a n i e s . The I n v e s t o r s Group has s e v e r a l o t h e r f i n a n c i a l i n t e r e s t s . I t a l s o owns The W e s t e r n S a v i n g s and Loan A s s o c i a t i o n , an o r g a n i z a t i o n which,, i s s u e s i n v e s t m e n t c o n t r a c t s and a c t s as t h e d i s t r i b u t i o n company f o r P r o v i d e n t M u t u a l Fund L t d . and P r o v i d e n t S t o c k Fund L t d . o f w h i c h The I n v e s t o r s Group i s t h e management company. These two m u t u a l f u n d s had a g g r e g a t e t o t a l n e t a s s e t s a t t h e end o f 1968 o f $ 4 2 , 9 9 6 , 5 7 4 . The a g g r e g a t e t o t a l n e t a s s e t s a t December 3 1 , 1968 o f m u t u a l f u n d s managed by The I n v e s t o r s Group was $ 1 , 0 6 9 , 0 9 6 , 0 6 4 . The I n v e s t o r s Group a l s o c a r r i e s on t r u s t company o p e r a t i o n s t h r o u g h I n v e s t o r s Group T r u s t Co. L t d . , and has s u b s i d i a r i e s e n g a ged i n r e a l e s t a t e d e v e l o p m e n t and o t h e r a c t i v i t i e s . I n a d d i t i o n , The I n v e s t o r s Group has l a r g e i n t e r e s t s i n a number o f C a n a d i a n p u b l i c c o m p a n i e s . The I n v e s t o r s Group and i t s a s s o c i a t e d c o m p a n i e s can be o b s e r v e d i n d i a g r a m a t i c a l f o r m i n F i g u r e 6 . 24% O w n e r s h i p M o n t r e a l T r u s t Company L t d . The W e s t e r n S a v i n g s ct Loan A s s o c i a t i o n " F a c e amount c e r t i f i c a t e s " I n v e s t o r s Group T r u s t Co. L t d . " I n d i v i d u a l § Group P e n s i o n Funds " A f f i l i a t e d M u t u a l Funds i P r o v i d e n t M u t u a l Fund L t d . " B a l a n c e d F u n d " P o o l e d P e n s i o n Fund 1) F i x e d I n c . Fund 2 ) E q u . F P r o v i d e n t S t o c k Fund L t d . "Gro w t h F u n d " The I n v e s t o r s Group I WHOLLY OWNED SUBSIDIARIES 1 i 50% O w n e r s h i p I R.C. B a x t e r P r o p e r t i e s L t d " R e a l E s t a t e D e v e l o p m e n t Company" i As s o c i a t e d i l The I m p e r i a l L i f e A s s u r a n c e Company o f Canada Has a 26% i n t e r e s t i n The I n v e s t o r s Group I n v e s t o r s Brampt on S y n d i c a t e L i m i t e d S h o p p i n g C e n t r e " I n v e s t m e n t L t d . C e r t i f i c a t e s " A f f i l i a t e d M u t u a l Funds Wes t f u n d R o w c l i f f e L t d . I n v e s t m e n t s " I n v e s t s L i m i t e d i n a t t r a c - t i v e s m a l - l e r compa- i e s " N o r t h w e s t M o r t g a g e C o m p a n y L i m i t e " M o r t g a g e l e n d i n g " I n v e s t o r s M u t u a l o f Canada L t d . I n v e s t o r s Growth Fund o f Canada L t d I n v e s t o r s I n t e r n a - t i o n a l M u t u a l Fund L t d . FIGURE 6 THE INVESTORS GROUP SUBSIDIARY AND A F F I L I A T E D COMPANIES to 124 The d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l c o m p l e x e s i s f u r t h e r i l l u s t r a t e d by t h e f a c t t h a t The I n v e s t o r s Group has i t s e l f b e en a b s o r b e d by a l a r g e f i n a n c i a l c o m p l e x t h a t c o v e r s a b r o a d r a n g e o f Canada's e c o n o m i c and f i n a n c i a l c o m m u n i t y . B a s e d on a c l o s e d - e n d i n v e s t m e n t company, Power C o r p o r a t i o n o f C a n a d a , L i m i t e d , t h i s c o m p l e x c o n t r o l s o r i s a s s o c i a t e d w i t h o t h e r m u t u a l f u n d s , l i f e i n s u r a n c e c o m p a n i e s , and a m a j o r t r u s t company. The G r e a t - W e s t L i f e A s s u r a n c e Company, o f w h i c h The I n v e s t o r s Group r e c e n t l y a c q u i r e d c o n t r o l and w h i c h has a s u b s t a n t i a l i n t e r e s t i n The I n v e s t o r s G r o u p , i s a c t i v e i n t h e d e v e l o p m e n t o f v a r i a b l e i n s u r a n c e c o n t r a c t s . M o n t r e a l T r u s t Company, i n w h i c h b o t h Power C o r p o r a t i o n o f C a n a d a , L i m i t e d and The I n v e s t o r s Group have s u b s t a n t i a l i n t e r e s t s , o f f e r s i n v e s t m e n t f u n d s f o r p u b l i c p a r t i c i p a t i o n and had a g g r e g a t e t o t a l n e t a s s e t s o f $30,724,241 a t t h e end o f 1968. The R o y a l Bank o f C a n a d a , h a v i n g i n t e r e s t s i n b o t h M o n t r e a l T r u s t Company and The I n v e s t o r s G r o u p , i s a s s o c i a t e d w i t h RoyFund L t d . , a m u t u a l f u n d f i r s t s o l d t o t h e p u b l i c i n 1967, w i t h t o t a l n e t a s s e t s a t t h e end o f 1968 o f $ 9 , 8 1 1 , 0 6 4 . These a r e o n l y a few o f t h e o r g a n i z a t i o n s a s s o c i a t e d w i t h t h e f i n a n c i a l c o m p l e x w h i c h o f f e r m u t u a l f u n d s h a r e s o r u n i t s o r c o m p e t i t i v e i n s t r u m e n t s , and a l m o s t e v e r y o t h e r t y p e o f f i n a n c i a l s e r v i c e i s p r o v i d e d by a t l e a s t one company w i t h i n t h e c o m p l e x . 125 O t h e r f i n a n c i a l g r o u p s have a l s o b een a c t i v e i n t h e movement t o w a r d f u l l y i n t e g r a t e d s e r v i c e s . A n o t h e r i n t e r e s t i n g e x a m p l e i s The C o l l e c t i v e G r o u p . T h i s g r o u p p r o f e s s e s t o r e p r e s e n t a c o m p l e t e o n e - s t o p f i n a n c i a l c e n t e r . L i s t e d among t h e s e r v i c e s t h e y p r o v i d e a r e s a v i n g s and c h e q u i n g a c c o u n t s , s a v i n g s c e r t i f i c a t e s , m u t u a l f u n d s , p e n s i o n p l a n s , l i f e , a u t o and f i r e i n s u r a n c e , t r u s t s e r v i c e s , r e a l t o r s , m o r t g a g e l o a n s , and p r o p e r t y management. These s e r v i c e s a r e p r o v i d e d by a number o f d i f f e r e n t s u b s i d i a r y c o m p a n i e s w h i c h a r e named i n t h e o r g a n i z a t i o n a l s t r u c t u r e i l l u s t r a t e d i n F i g u r e 7 . The two g r o u p s j u s t d e s c r i b e d by no means r e p r e s e n t t h e o n l y f i n a n c i a l c o m p l e x e s p r o v i d i n g a c o m p l e t e r a n g e o f f i n a n c i a l s e r v i c e s . They do, h o w e v e r , g i v e a c l e a r i n d i c a t i o n o f t h e movement t a k i n g p l a c e w i t h i n t h e i n d u s t r y t o c a p t u r e b u s i n e s s t h a t w o u l d n o r m a l l y f l o w t o c o m p e t i t o r s . I t w o u l d a p p e a r t h a t t h e f i n a n c i a l c o m p l e x e s a r e l i k e l y t o a t t a i n t r e m e n d o u s a s s e t g r o w t h o v e r t h e n e x t few y e a r s . F i n a n c i a l C o u n s e l l i n g I t i s now w o r t h c o n s i d e r i n g some o f t h e d e v e l o p m e n t s e x p e c t e d t o t a k e p l a c e w i t h i n t h e i n d u s t r y as t h e b a t t l e f o r t h e i n v e s t o r ' s d o l l a r becomes more f i e r c e . One o b v i o u s d e v e l o p m e n t w i l l be t h e i m p r o v e m e n t i n t h e e d u c a t i o n o f m u t u a l f u n d s a l e s m e n . 126 FIGURE 7 THE COLLECTIVE GROUP SUBSIDIARY AND A F F I L I A T E D COMPANIES JO. n c i p a l I n v e s - s C o r p o r a t i o n C orp . ) The C o l l e c t i v e Group P r i n c i p a l C e r t i f i - c a t e s S e r i e s I n c . (US C o r p . ) C o l l e c t i v e S e c u r i t i e s L t d 1 F i r s t I n v e s t o r s C o r p o r a t i o n L t d C o l l e c t i v e M u t u a l Fund L t d . A s s o c i a t e d I n v e s t o r s o f Canada L t d . T A t h a b as c a H o l d i n g s L t d T A t h a b as c a C o r p . L t d M o r t g a g e T P r i n c i p a l L i f e A s s u r a n c e Co. 1 i i e r t a M o r t - I m p e r i a l R e a l M e r c e r § W i l l i a m s e E x c h a n g e E s t a t e L t d . A g e n c y L t d . W e s t e r n I n d u s t r i a l P l a n n i n g A s s o c i a t e s L t d . RCE: F i l e s o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s 127 S a l e s m e n w i l l h ave t o do much more t h a n j u s t s e l l s e c u r i t i e s as t h e move t o w a r d p e r s o n a l f i n a n c i a l p l a n n i n g i s e x t e n d e d . A l o n g w i t h o f f e r i n g an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s , t h e y w i l l h ave t o s e r v e as f i n a n c i a l c o u n s e l l o r s t o t h e i r c l i e n t s , a d v i s i n g them on m u t u a l f u n d m a t t e r s , on i n s u r a n c e and o t h e r a s p e c t s o f f i n a n c i a l p l a n n i n g . Many p e o p l e b e l i e v e , f o r i n s t a n c e , t h a t as a r e s u l t o f f i n a n c i a l s c r a m b l i n g by m u t u a l f u n d s , i t w i l l n o t be l o n g b e f o r e d u a l - 1 i c e n s i n g o f i n s u r a n c e and m u t u a l f u n d s a l e s m e n w i l l be a l l o w e d . I t i s now a l l o w e d i n most s t a t e s o f t h e U n i t e d S t a t e s b u t n o t o f f i c i a l l y as y e t i n Canada. T h i s i n i t s e l f w i l l be one o f t h e recommended c h a n g e s t o be s u g g e s t e d by The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s . I n o r d e r t o become a q u a l i f i e d f i n a n c i a l c o u n s e l l o r t h e s a l e s m a n w i l l h ave t o become more s y s t e m a t i c and f i n a n c i a l l y s o p h i s t i c a t e d . He w i l l h ave t o be w e l l e d u c a t e d , n o t o n l y i n t h e f u n d a m e n t a l s o f t h e m u t u a l f u n d b u s i n e s s and t h e r e g u l a t i o n s g o v e r n i n g t h e i n d u s t r y , b u t a l s o i n t h e c o m p l e x i t i e s o f p e r s o n a l f i n a n c i a l p l a n n i n g . He w i l l a l s o have t o be w e l l t r a i n e d i n t h e newer s e l l i n g and m a r k e t i n g t e c h n i q u e s , f o r t h e n e x t few y e a r s w i l l p r o b a b l y be a m a r k e t i n g e r a . 128 P r e s e n t m u t u a l f u n d s a l e s t r a i n i n g t e c h n i q u e s l e a v e much t o be d e s i r e d , and have been c r i t i c i z e d o f t e n a l t h o u g h i m p r o v e m e n t s a r e b e i n g i n t r o d u c e d and w i l l c o n t i n u e t o be i n t r o d u c e d by t h e more p r o g r e s s i v e o r g a n i z a t i o n s . I n a d d i t i o n , The M u t u a l Fund C o m m i t t e e w i l l be r e c o m m e n d i n g more s t r i c t l y c o n t r o l l e d t r a i n i n g p r o c e d u r e s f o r a l l m u t u a l f u n d s a l e s m e n , w h i c h , i f i m p l e m e n t e d , s h o u l d n o t o n l y p r o t e c t t h e i n v e s t i n g p u b l i c f r o m a b u s i v e s a l e s t e c h n i q u e s b u t a l s o f o r c e t h e i n d u s t r i e s ' s a l e s r e p r e s e n t a t i v e t o become b e t t e r q u a l i f i e d as f i n a n c i a l a d v i s e r s . V e n t u r e Funds - P e r f o r m a n c e A s p e c t A t r e n d t h a t has d e v e l o p e d i n Canada i n r e c e n t y e a r s i s t h e d e s i r e o f i n v e s t o r s f o r h i g h e r r a t e s o f r e t u r n on t h e i r i n v e s t m e n t s . T h i s t r e n d h a s , t o a c e r t a i n e x t e n t , i n d u c e d s a l e s m e n t o s e l l p e r f o r m a n c e r a t h e r t h a n t h e m u t u a l f u n d c o n c e p t . W i t h an i n c r e a s i n g e m p h a s i s b e i n g p l a c e d upon r a t e s o f r e t u r n , i t can be e x p e c t e d t h a t i n v e s t o r s w i l l be l o o k i n g more and more a t t h e s u p e r i o r p e r f o r m e r s . The p o o r p e r f o r m e r s may f i n d new c a p i t a l h a r d t o o b t a i n . B e c a u s e o f t h e i m p a c t t h e demand by i n v e s t o r s f o r p e r f o r m a n c e w i l l h ave on t h e f u t u r e g r o w t h o f t h e m u t u a l f u n d i n d u s t r y , i t i s w o r t h w h i l e r e v i e w i n g one i m p o r t a n t a s p e c t o f p e r f o r m a n c e - t h e p e r f o r m a n c e f u n d s . 12g The p e r f o r m a n c e f u n d s came i n t o t h e i r own i n 1966. C o n v i n c e d t h a t t h e "go-go p e r f o r m e r s " were n o t a f l a s h i n t h e d a r k and t h a t t h e y were i n f a c t s i p h o n i n g o f f c o n s i d e r a b l e b u s i n e s s , some o f t h e m a j o r m u t u a l f u n d o r g a n i z a t i o n s i n t r o d u c e d t h e i r own p e r f o r m a n c e f u n d s . S i n c e t h e i r i n t r o d u c t i o n , a number o f t h e s e m u t u a l f u n d s w i t h i n v e s t m e n t o b j e c t i v e s t h a t c o n t e m p l a t e t h e a c c e p t a n c e o f r i s k i n o r d e r t o i n c r e a s e t h e r a t e o f r e t u r n ( o f t e n r e f e r r e d t o as " v e n t u r e " f u n d s ) h a v e h a d v e r y c o n s i d e r a b l e s u c c e s s . B a s i c a l l y , t h e v e n t u r e f u n d s s e e k o u t s t o c k s t h a t appear:; t o have a much g r e a t e r o p p o r t u n i t y f o r c a p i t a l a p p r e c i a t i o n o v e r t h e s h o r t - t e r m . They a l s o t e n d t o f o l l o w a f l e x i b l e management p o l i c y by f r e q u e n t l y s h i f t i n g t o bonds o r t o s t o c k s t o t a k e a d v a n t a g e o f s p e c i a l c o n d i t i o n s i n t h e s e c u r i t i e s m a r k e t s . I n c o n t r a s t , b a l a n c e d f u n d s t r y t o h o l d enough s e n i o r s e c u r i t i e s ( b o n d , d e b e n t u r e s , p r e f e r r e d s t o c k s ) t o o f f s e t s h a r p f l u c t u a t i o n s i n common s t o c k p r i c e s . The managers o f b a l a n c e d and o t h e r c o n s e r v a t i v e l y managed f u n d s a l s o t e n d t o e m p h a s i z e l o n g - t e r m g r o w t h r a t h e r t h a n t r a d i n g f r e q u e n t l y f o r s h o r t - t e r m c a p i t a l g a i n s . The v e n t u r e f u n d s , as m e n t i o n e d a b o v e , have f r e q u e n t l y g o o d , and s o m e t i m e s e x c e l l e n t , r a t e s o f r e t u r n ; i n t h i s t h e y have been a s s i s t e d by r i s i n g s t o c k p r i c e s , b u t i n some c a s e s t h e i r p e r f o r m a n c e has b e e n c o n s i d e r a b l y 130 h i g h e r t h a n t h o s e w h i c h w o u l d have b e e n a t t a i n e d t h r o u g h i n v e s t i n g i n t h e e q u i t i e s t h a t f o r m r e c o g n i z e d m a r k e t i n d i c e s o r a v e r a g e s . I t i s d i f f i c u l t t o s p e c i f y w i t h p r e c i s i o n w h i c h C a n a d i a n m u t u a l f u n d s s h o u l d be c l a s s i f i e d as v e n t u r e f u n d s , b u t f o r t h e p u r p o s e o f t h i s d i s c u s s i o n one m i g h t a c c e p t as i n d i c a t i v e o f t h e s u c c e s s o f t h e s e o r g a n i z a t i o n s t h e s t a t i s t i c s c o n t a i n e d i n a b r i e f s u b m i t t e d t o The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s by t h e C a n a d i a n M u t u a l Funds A s s o c i a t i o n and b a s e d on a c l a s s i f i c a t i o n p r e p a r e d by t h e i r c o n s u l t a n t s . The b r i e f s t a t e d t h a t f o r t h e p e r i o d J a n u a r y 1, 1968 t o J u n e 30, 1968, n e t s a l e s o f t h e f i v e v e n t u r e f u n d s t h e n i n c l u d e d i n C.M.F.A. mem b e r s h i p t o t a l l e d $51.8 m i l l i o n , w h i l e n e t s a l e s o f a l l o t h e r member m u t u a l f u n d s were o n l y 5 3 $4.1 m i l l i o n . T h ese f i g u r e s c l e a r l y show t h e e x t e n t t o w h i c h v e n t u r e f u n d s have b e e n a c c e p t e d by t h e C a n a d i a n p u b l i c . The f i v e f u n d s i n c l u d e d i n t h e C.M.F.A. membership a r e named i n T a b l e X I . The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s was s u b s e q u e n t l y a d v i s e d t h a t c o r r e s p o n d i n g f i g u r e s f o r t h e e n t i r e y e a r 1968 were $105.2 and $102.3 m i l l i o n r e s p e c t i v e l y . H o wever, d u r i n g t h e s e c o n d h a l f o f 1968, AGF S p e c i a l Fund L i m i t e d was o r g a n i z e d and r a i s e d $60 m i l l i o n on t h e b a s i s d e s c r i b e d i n t h e r e p o r t . I t w o u l d be a p p r o p r i a t e t o t r e a t t h i s as a v e n t u r e f u n d , w h i c h w o u l d change t h e l a t t e r f i g u r e s t o $165.2 and $42.3 m i l l i o n r e s p e c t i v e l y . 13a TABLE XI SPECULATIVE CANADIAN MUTUAL FUNDS OFFERED TO THE PUBLIC NAME OF FUND MANAGER DATE ORGANIZED 1 . A l l - C a n a d i a n V e n t u r e Fund L t d . 2. C a n a d i a n C h a n n i n g V e n t u r e Fund L t d . 3. Spec Fund 4 . U n i t e d V e n t u r e Fund L t d . 5. T a u r u s Fund L i m i t e d C a p i t a l Management L t d . C a n a d i a n C h a n n i n g C o r p o r a t i o n L t d . Les P l a c e m e n t s C o l l e c t i f s I n c . U n i t e d Funds . Management L t d . P l a n n e d I n v e s t m e n t Management L t d . J a n 16/67 A p r i l 2/68 A p r i l 25/67 Dec. 31/66 A p r i l 18/66 SOURCE: R e c e n t P r o s p e c t u s e s A l t h o u g h t h e a g g r e g a t e t o t a l a s s e t s o f a l l t h e v e n t u r e f u n d s r e p r e s e n t s o n l y a s m a l l p o r t i o n o f t o t a l m u t u a l f u n d a s s e t s , i t i s q u i t e p o s s i b l e t h a t t h e s e f u n d s w i l l grow r a p i d l y i n t h e y e a r s a h e a d . As C a n a d i a n s move t o h i g h e r z o n e s o f f i n a n c i a l s o p h i s t i c a t i o n t h i s t y p e o f i n v e s t m e n t a l t e r n a t i v e may become e x t r e m e l y p o p u l a r . The a l m o s t o v e r n i g h t d e v e l o p m e n t o f v e n t u r e f u n d s by t h e i r r e s p e c t i v e managers c l e a r l y i n d i c a t e s an a n t i c i p a t i o n o f a g g r e s s i v e i n v e s t o r s u t i l i z i n g t h e s e r v i c e s o f a m u t u a l f u n d f o r t h e f i r s t t i m e . V e n t u r e f u n d s have a v e r y i m p o r t a n t r o l e t o p l a y 1 3 ? by p r o v i d i n g a v a l u a b l e s e r v i c e t o i n v e s t o r s f o r whom t h e y a r e a p p r o p r i a t e . A l t h o u g h t h e c o n c e p t o f p e r f o r m a n c e i s r e l a t i v e l y new and i s c a t c h i n g o n , i t i s s t i l l t o o e a r l y t o p r e d i c t what w i l l h a p p e n . i n t h i s a r e a i n t h e f u t u r e . I t i s w o r t h s t r e s s i n g , h o w e v e r , t h a t management c o m p a n i e s a b l e t o o f f e r a v e n t u r e f u n d h a v e a new i n n o v a t i o n a v a i l a b l e t h a t may enhance t h e i r f u t u r e g r o w t h p o s i t i o n . From t h e i n v e s t o r ' s v i e w p o i n t , i t i s v e r y d i f f i c u l t t o draw any s t r o n g c o n c l u s i o n s on t h e t o p i c o f p e r f o r m a n c e . P e r f o r m a n c e i s a s u b j e c t i v e c o n c e p t , s i n c e t o t h e i n v e s t o r t h e b e s t p e r f o r m i n g m u t u a l f u n d i s t h e one t h a t most n e a r l y s a t i s f i e s h i s p e r s o n a l i n v e s t m e n t o b j e c t i v e s . The i m p o r t a n c e o f r a t e o f r e t u r n t o a s s e s s m e n t o f p e r f o r m a n c e made by o r f o r any i n v e s t o r i s o b v i o u s . But f o r many i n v e s t o r s a c o m p e t i n g c o n s i d e r a t i o n i s p r e s e n t - t h e d e s i r e t o l i m i t t h e d e g r e e o f r i s k a c c e p t e d i n t h e p u r s u i t o f a h i g h r a t e o f r e t u r n . A c o n s i d e r a b l e amount o f a c a d e m i c work i s b e i n g c a r r i e d o ut a t t h e p r e s e n t t i m e on t h e s u b j e c t o f m u t u a l f u n d p e r f o r m a n c e , b u t l i t t l e o f t h i s r e s e a r c h i s y e t o f p r a c t i c a l use t o t h e a v e r a g e i n v e s t o r . U n t i l s u c h t i m e as r e s e a r c h c a n be p u t t o p r a c t i c a l u s e , t h e i n v e s t o r w i l l h ave t o w e i g h t h e e x p e c t e d b e n e f i t s a g a i n s t t h e r i s k s i n v o l v e d i n a l l o c a t i n g h i s money t o a s p e c i f i c i n v e s t m e n t v e h i c l e . 133 I t i s i m p o s s i b l e t o s t a t e t h a t a l l m u t u a l f u n d s w i l l be a b l e t o meet t h e demands by i n v e s t o r s f o r h i g h e r r e t u r n s b e c a u s e o f - t h e n a t u r e o f t h e i r o p e r a t i o n s . I t i s p o s s i b l e , t o s a y , h o w e v e r , t h a t t h e d e v e l o p m e n t s t a k i n g p l a c e w i t h i n t h e i n d u s t r y , c o m b i n e d w i t h t h e c h a n g i n g f i n a n c i a l e n v i r o n m e n t , w i l l p u t m u t u a l f u n d s i n a f a v o u r a b l e p e r f o r m a n c e p o s i t i o n . I I I . SUMMARY I t has become i n e v i t a b l e t h a t t h e r e m a r k a b l e s u c c e s s o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y , c o u p l e d w i t h i n c r e a s i n g p u b l i c demand f o r e q u i t y i n v e s t m e n t s , s h o u l d a t t r a c t o t h e r f i n a n c i a l i n s t i t u t i o n s i n t o t h e m a r k e t s e r v i c e d by m u t u a l f u n d s . As i n v e s t o r s become more s o p h i s t i c a t e d t h e y w i l l s e e k o u t f i n a n c i a l i n s t i t u t i o n s t h a t a r e b e s t a b l e t o meet t h e i r f i n a n c i a l demands. The f i r s t demand w i l l be f o r a w i d e r r a n g e o f f i n a n c i a l s e r v i c e s u n d e r one r o o f . T h i s w o u l d i n c l u d e i n v e s t m e n t c o u n s e l l i n g and a b r o a d r a n g e o f f i n a n c i a l s e r v i c e s . The s e c o n d demand i s f o r h i g h e r r a t e s o f r e t u r n on i n v e s t e d c a p i t a l . The m u t u a l f u n d i n d u s t r y , as w e l l as a few o t h e r f i n a n c i a l i n t e r m e d i a r i e s , have been s u c c e s s f u l i n m e e t i n g t h e s e demands i n t h e p a s t and a r e c o n t i n u i n g t o p r o v i d e new s e r v i c e s i n a n t i c i p a t i o n o f t h e f u t u r e demands o f s a v e r s . I t was s u g g e s t e d t h a t new demands w i l l d e v e l o p t h r o u g h s o c i a l and t e c h n o l o g i c a l ' c h a n g e s i n o u r s o c i e t y . 134 I t was a l s o s u g g e s t e d t h a t t h e m u t u a l f u n d i n d u s t r y - w i l l be i n a s t r o n g p o s i t i o n t o m a i n t a i n i t s g r o w t h r e l a t i v e t o o t h e r f i n a n c i a l i n t e r m e d i a r i e s b e c a u s e many o f t h e e x p e c t e d s o c i a l and t e c h n o l o g i c a l c h a n g e s a r e o r i e n t a t e d a l o n g t h e l i n e s o f t h e s e r v i c e s p r e s e n t l y p r o v i d e d by some o f t h e more p r o g r e s s i v e m u t u a l f u n d s . On a s o c i a l b a s i s t h e income l e v e l o f t h e l o w e r income g r o u p w i l l r i s e . F o r t h e f i r s t t i m e p e o p l e i n t h i s g r o u p may have an o p p o r t u n i t y t o s a v e and w i l l l i k e l y t u r n t o t h e m u t u a l f u n d f o r m o f i n v e s t m e n t as s m a l l s c a l e d i r e c t i n v e s t m e n t c o n t i n u e s t o be d i s c o u r a g e d . From t h e t e c h n o l o g i c a l s i d e , t h e g r o w i n g s o p h i s t i c a t i o n i n t h e f i n a n c i a l m a r k e t s w i l l c o n v i n c e a g r e a t e r number o f a v e r a g e and even f a i r l y s o p h i s t i c a t e d i n v e s t o r s t o t u r n t o m u t u a l f u n d s . M u t u a l f u n d s a r e f a v o u r e d b e c a u s e t h e y o f f e r p r o f e s s i o n a l management b a c k e d up by h i g h l y c o m p e t e n t f i n a n c i a l a n a l y s t s f o l l o w i n g modern r e s e a r c h t e c h n i q u e s . A l t h o u g h many o f t h e s e f a c t o r s w i l l c o n t i n u e t o f a v o u r t h e f u t u r e g r o w t h o f t h e C a n a d i a n m u t u a l f u n d i n d u s t r y , i t was a l s o s t r e s s e d t h a t i t i s e s s e n t i a l f o r t h e i n d u s t r y t o i n n o v a t e i n o r d e r t o a v o i d b e i n g o u t d o n e by o t h e r f i n a n c i a l i n s t i t u t i o n s who a r e a l s o s c r a m b l i n g t o c a p t u r e new b u s i n e s s . The m u t u a l f u n d i n d u s t r y i s m e e t i n g t h i s f u t u r e c h a l l e n g e on t h r e e m a j o r f r o n t s : t h e d e v e l o p m e n t o f f i n a n c i a l c o m p l e x e s , t h e movement t o w a r d i m p r o v e d 13.5 f i n a n c i a l c o u n s e l l i n g , and by o f f e r i n g a new t y p e o f m u t u a l f u n d g e a r e d t o w a r d g e n e r a t i n g h i g h e r i n v e s t m e n t r e t u r n s . We saw t h a t t h r o u g h a s s o c i a t i o n w i t h o t h e r f i n a n c i a l i n s t i t u t i o n s , c e r t a i n m u t u a l f u n d s h a v e become p a r t o f f i n a n c i a l c o m p l e x e s . T h r o u g h t h e f i n a n c i a l c o m p l e x a m u t u a l f u n d i s c a p a b l e o f p r o v i d i n g s a v e r s w i t h a b r o a d r a n g e o f f i n a n c i a l s e r v i c e s e i t h e r d i r e c t l y o r i n d i r e c t l y . I n t e r m s o f f i n a n c i a l c o u n s e l l i n g , t h e m u t u a l f u n d i n d u s t r y i s a t t e m p t i n g t o t r a i n i t s r e p r e s e n t i v e s t o s e r v e as f i n a n c i a l c o u n s e l l o r s t o t h e i r c u s t o m e r s by a d v i s i n g them on a l l a s p e c t s o f f i n a n c i a l p l a n n i n g . I n t h e a r e a o f p e r f o r m a n c e we o b s e r v e d t h e r e c e n t i n t r o d u c t i o n o f v e n t u r e f u n d s . B a s i c a l l y , t h e y a r e f u n d s w i t h i n v e s t m e n t o b j e c t i v e s t h a t c o n t e m p l a t e t h e a c c e p t a n c e o f r i s k i n o r d e r t o i n c r e a s e t h e r a t e o f r e t u r n t o t h e i n v e s t o r . I t was s u g g e s t e d t h a t as C a n a d i a n s c o n t i n u e t o move t o h i g h e r zones o f f i n a n c i a l s o p h i s t i c a t i o n t h i s t y p e o f i n v e s t m e n t v e h i c l e w i l l t e n d t o become i n c r e a s i n g l y more a t t r a c t i v e . A c c o r d i n g l y , t h o s e o r g a n i z a t i o n s t h a t can o f f e r a v e n t u r e f u n d w i l l b e n e f i t i n t e r m s o f g r o w t h . CHAPTER VI SUMMARY AND CONCLUSIONS The p u r p o s e o f t h i s p a p e r has now be e n a c c o m p l i s h e d . The C a n a d i a n m u t u a l f u n d i n d u s t r y has been e x a m i n e d as a f i n a n c i a l i n t e r m e d i a r y o p e r a t i n g i n t h e C a n a d i a n c a p i t a l m a r k e t . T h r o u g h t h i s e x a m i n a t i o n i t was p o s s i b l e t o i s o l a t e t h e r e a s o n s f o r i t s t r e m e n d o u s g r o w t h s i n c e 1957 and t o o b s e r v e some o f t h e f a c t o r s w h i c h s h o u l d a s s i s t t h e i n d u s t r y t o m a i n t a i n i t s r e l a t i v e g r o w t h p o s i t i o n i n t h e f u t u r e . I . METHODOLOGY REVIEWED The f i r s t u n d e r t a k i n g n e c e s s a r y t o a c c o m p l i s h t h e p u r p o s e o u t l i n e d above was t o g i v e t h e r e a d e r a b a s i c u n d e r s t a n d i n g o f t h e i m p o r t a n c e o f t h e c a p i t a l m a r k e t and t h e r o l e o f f i n a n c i a l i n t e r m e d i a r i e s . T h i s was u s e f u l t o p r o v i d e n e c e s s a r y b a c k g r o u n d i n f o r m a t i o n f o r a d e p a r t u r e i n t o an a n a l y s i s o f t h e g r o w t h and d e v e l o p m e n t o f Canada's f a s t e s t g r o w i n g f i n a n c i a l i n s t i t u t i o n - C a n a d i a n m u t u a l f u n d s . A c c o r d i n g l y , t h e r e a d e r was g i v e n i n f o r m a t i o n on t h e o r g a n i z a t i o n , g r o w t h and c h a r a c t e r i s t i c s o f t h e i n d u s t r y . 137 T h i s i n f o r m a t i o n p r o v i d e d i n s i g h t i n t o t h e r e a s o n s f o r t h e r a p i d g r o w t h a c h i e v e d by t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . Two o f t h e r e a s o n s d i s c u s s e d were t h e a t t r a c t i v e n e s s o f t h e m u t u a l f u n d p r o d u c t and t h e b r o a d d i s t r i b u t i o n n e t w o r k t h r o u g h w h i c h t h e p r o d u c t i s d i s t r i b u t e d t o t h e p u b l i c . I t was e m p h a s i z e d , o h o w e v e r , t h a t p r o d u c t s a l e s d epend upon p u b l i c a c c e p t a n c e . An e x a m i n a t i o n o f t h e r e a s o n s b e h i n d p u b l i c a c c e p t a n c e o f t h e m u t u a l f u n d p r o d u c t became t h e s e c o n d m a j o r u n d e r t a k i n g . The f i n a l u n d e r t a k i n g was t o exa m i n e t h e f u t u r e o u t l o o k f o r t h e C a n a d i a n m u t u a l f u n d i n d u s t r y t o s e e i f i t w o u l d c o n t i n u e t o m a i n t a i n i t s r e l a t i v e g r o w t h p o s i t i o n . The n e x t s e c t i o n w i l l h i g h l i g h t some o f t h e more i m p o r t a n t f i n d i n g s and c o n c l u s i o n s o f t h i s s t u d y . I I . SUMMARY AND CONCLUSIONS BY CHAPTERS The m a i n t e x t o f t h e t h e s i s b e gan i n C h a p t e r I I , w h i c h p r o v i d e d t h e r e a d e r w i t h a d i s c u s s i o n o f t h e t e r m " c a p i t a l m a r k e t " and t h e r o l e , g r o w t h and d e v e l o p m e n t o f C a n a d i a n f i n a n c i a l i n t e r m e d i a r i e s . E c o n o m i c g r o w t h , i t was s u g g e s t e d , i s a c c o m p a n i e d by t h e f o r m a t i o n o f a c a p i t a l m a r k e t and f i n a n c i a l i n t e r m e d i a r i e s t o s t r e a m l i n e t h i s m a r k e t . I t has b e e n t h e e x i s t e n c e o f t h e c a p i t a l m a r k e t and f i n a n c i a l i n t e r m e d i a r i e s t h a t h a v e made p o s s i b l e t h e p r o c e s s o f c a p i t a l f o r m a t i o n . 138 The c a p i t a l m a r k e t was d e f i n e d as a m a r k e t where i n t e r m e d i a t e and l o n g - t e r m f u n d s a r e g a t h e r e d and made a v a i l a b l e t o b u s i n e s s e s , g o v e r n m e n t s and i n d i v i d u a l s , and where i n s t r u m e n t s t h a t a r e a l r e a d y o u t s t a n d i n g a r e t r a n s f e r r e d . F i n a n c i a l i n s t i t u t i o n s a c t as m i d d l e m e n b e t w e e n b o r r o w e r s and s a v e r s . I n t h e i r r o l e as m i d d l e m e n t h e f i n a n c i a l i n s t i t u t i o n s c h a n n e l f u n d s f r o m s a v e r s t o b o r r o w e r s by p r o v i d i n g f i n a n c i a l a s s e t s s a v e r s want and t h e f u n d s b o r r o w e r s r e q u i r e . T h i s t r a n s f o r m a t i o n p r o c e s s i s a c c o m p l i s h e d by a f i n a n c i a l i n t e r m e d i a r y i s s u i n g i t s own i n s t r u m e n t s ; , s u c h as d e p o s i t s , s h a r e s , o r c e r t i f i c a t e s f o r l e n d e r s t o b u y , and i n t u r n u s e t h e f u n d s r e c e i v e d t o p u r c h a s e o t h e r i n s t r u m e n t s s u c h as c o r p o r a t e s t o c k , c o r p o r a t e b o n d s , m o r t g a g e s and so f o r t h i s s u e d by b o r r o w e r s . The numerous f i n a n c i a l i n t e r m e d i a r i e s a r e e s s e n t i a l l y a c r e a t i o n o f t h e n i n e t e e n t h c e n t u r y ; h o w e v e r , o f t h e n i n e t e e n f i n a n c i a l i n t e r m e d i a r e s o p e r a t i n g i n C a n a d a , o n l y s e v e n o r i g i n a t e d i n t h e n i n e t e e n t h c e n t u r y and t w e l v e a p p e a r e d i n t h e t w e n t i e t h c e n t u r y . Of t h e n i n e t e e n f i n a n c i a l i n t e r m e d i a r i e s , o n l y n i n e a r e c o n s i d e r e d m a j o r and were t h e o n l y i n t e r m e d i a r i e s a n a l y z e d i n t e r m s o f a s s e t g r o w t h . T h e r e has b een an i m p r e s s i v e r a t e o f g r o w t h f o r t h e m a j o r f i n a n c i a l i n s t i t u t i o n s i n Canada f r o m 1957 t o 1968. 139 A g g r e g a t e g r o w t h i n a s s e t s compared w i t h t h e g r o w t h i n t h e economy shows t h a t a s s e t s were 83% o f G.N.P. a t t h e end o f 1957 and 109% f o r t h e c o r r e s p o n d i n g p e r i o d i n 1968. W h i l e a l l n i n e m a j o r f i n a n c i a l i n s t i t u t i o n s i n c r e a s e d i n s i z e d u r i n g t h e e l e v e n y e a r p e r i o d , g r o w t h r a t e s were f o r t h e most p a r t u n e v e n . The most o u t s t a n d i n g g r o w t h was a c h i e v e d by t h e C a n a d i a n m u t u a l f u n d s i n d u s t r y . I n t e r m s o f r e - d i s t r i b u t i o n o f a g g r e g a t e a s s e t s o f t h e n i n e m a j o r f i n a n c i a l i n s t i t u t i o n s , t h e C a n a d i a n m u t u a l f u n d i n d u s t r y r a n k e d s e c o n d . A g l i m p s e a t t h e s t a t i s t i c s p r e s e n t e d i n C h a p t e r I I , w i l l c o n f i r m t h e g r o w t h l e a d e r s h i p o f t h i s i n d u s t r y f o r t h e p e r i o d 1957 t o 1968. The s u c c e s s o f t h e m u t u a l f u n d i n d u s t r y i n t e r m s o f g r o w t h l a u n c h e d a d e p a r t u r e f r o m t h e d i s c u s s i o n o f f i n a n c i a l i n t e r m e d i a r i e s on a g l o b a l b a s i s , t o a s p e c i f i c a n a l y s i s i n C h a p t e r I I I , o f C a n a d i a n m u t u a l f u n d s as f i n a n c i a l i n t e r m e d i a r i e s . I t was shown t h a t a m u t u a l f u n d d i f f e r s f r o m o t h e r i n s t i t u t i o n s i n t h a t i t s e l l s i t s own s h a r e s o r u n i t s t o t h e p u b l i c and i n v e s t s t h e p r o c e e d s ; t h e r e f o r e , t h e a c t i v i t y o f i n v e s t i n g i n s e c u r i t i e s i s i t s m a i n f u n c t i o n . I t was s t a t e d t h a t t h e j u s t i f i c a t i o n f o r an i n v e s t m e n t company i n t h e c a p i t a l m a r k e t i s t h a t i t e n a b l e s i n v e s t o r s , t h r o u g h a p o o l i n g o f s a v i n g s , t o o b t a i n a p r o f e s s i o n a l l y managed d i v e r s i f i e d p o r t f o l i o o f s e c u r i t i e s . 140 M u t u a l f u n d s were d i s t i n g u i s h e d f r o m o t h e r i n v e s t m e n t c o m p a n i e s by t h e f a c t t h a t t h e i n s t r u m e n t s t h e y i s s u e e n t i t l e t h e h o l d e r t o r e c e i v e , on demand, o r w i t h i n a s p e c i f i e d p e r i o d o f t i m e a f t e r demand, an amount computed by r e f e r e n c e t o t h e v a l u e o f a p r o p o r t i o n a t e i n t e r e s t i n t h e a s s e t s o f t h e i s s u i n g o r g a n i z a t i o n . S h a r e s o f m u t u a l f u n d s a r e d i s t r i b u t e d t o t h e p u b l i c a t n e t a s s e t v a l u e p l u s , i n most c a s e s , an a c q u i s i t i o n c hange o f 8% t o 9% o f t h e o f f e r i n g p r i c e . C l o s e d - e n d f u n d s r e p r e s e n t a n o t h e r t y p e o f i n v e s t m e n t company. They were b r i e f l y d i s c u s s e d i n C h a p t e r I I I , f o r t h e p u r p o s e o f d i s t i n g u i s h i n g them f r o m m u t u a l f u n d s w h i c h a r e o f t e n r e f e r r e d t o as open- end i n v e s t m e n t c o m p a n i e s . We saw t h a t C a n a d i a n m u t u a l f u n d s may be i n c o r p o r a t e d o r u n i n c o r p o r a t e d when o r g a n i z e d . From an o p e r a t i o n a l p o i n t - o f - v i e w t h e l e g a l f o r m m a t t e r s l i t t l e . T h i s i s t r u e b e c a u s e o f t h e n e c e s s i t y t o p r o v i d e a means wh e r e b y t h e o r g a n i z e r s r e c e i v e t h e i r r e w a r d s i n t h a t p r o f i t s and l o s s e s on t h e p o r t f o l i o a r e p a s s e d t h r o u g h t o p u b l i c p a r t i c i p a n t s . T h i s i s n o t t h e c a s e w i t h o t h e r f i n a n c i a l i n s t i t u t i o n s where t h e p r o m o t e r s o b t a i n t h e i r o r g a n i z a t i o n a l r e w a r d p r i n c i p a l l y t h r o u g h o w n e r s h i p o f e q u i t y s e c u r i t i e s i s s u e d by t h e f i n a n c i a l i n t e r m e d i a r i e s . 141 I n t h e m u t u a l f u n d c o n t e x t i t i s t r a d i t i o n a l f o r t h e o r g a n i z e r s t o o b t a i n t h e i r r e w a r d s f r o m management and a d m i n i s t r a t i o n f e e s and p r o f i t s on t h e d i s t r i b u t i o n o f s h a r e s o r u n i t s . I n v e s t m e n t management and d i s t r i b u t i o n i s c a r r i e d on by o u t s i d e o r g a n i z a t i o n s i n w h i c h t h e o r g a n i z e r s h o l d t h e e q u i t y p a r t i c i p a t i o n . T h e s e o r g a n i z a t i o n s a r e n o r m a l l y r e f e r r e d t o as t h e "management company" and " d i s t r i b u t i o n company" r e s p e c t i v e l y . One a d v a n t a g e o f t h e e x t e r n a l i z a t i o n o f management and d i s t r i b u t i o n i s t h a t i t i s p o s s i b l e f o r t h e s e two o r g a n i z a t i o n s t o manage and d i s t r i b u t e s e v e r a l m u t u a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s o r g a n i z e d t o a p p e a l t o a w i d e v a r i e t y o f i n v e s t o r s . We a l s o saw t h a t m u t u a l f u n d s may be o r g a n i z e d t o o p e r a t e i n c o n j u n c t i o n w i t h o t h e r e n t e r p r i s e s s u c h as b r o k e r a g e f i r m s , b a n k s and t r u s t c o m p a n i e s . I n t h e s e c a s e s a m u t u a l f u n d may be c r e a t e d by one o f t h e s e f i n a n c i a l i n s t i t u t i o n s t o o f f e r an a d d i t i o n a l s e r v i c e t o t h e i r c l i e n t s . I n t e r m s o f g r o w t h , t h e m u t u a l f u n d i n d u s t r y embarked upon i t s p e r i o d o f r a p i d g r o w t h i n t h e m i d - 1 9 5 0 ' s . By 1950 t h e t o t a l n e t a s s e t s o f C a n a d i a n m u t u a l f u n d s q u a l i f i e d f o r s a l e i n Canada a g g r e g a t e d a p p r o x i m a t e l y $46 m i l l i o n . The f o l l o w i n g t a b l e shows t h e n e t a s s e t s h e l d by c a t e g o r y o f m u t u a l f u n d s i n 1961 and 1967. 142 TABLE X I I NET ASSETS HELD BY CATEGORY OF MUTUAL FUNDS 1961 AND 1967 CATEGORY OF MUTUAL FUNDS TOTAL NET ASSETS ($ MILLIONS) Dec. 31,1961 Dec. 31.1967 C a n a d i a n M u t u a l Funds T r u s t Company I n v e s t m e n t Funds U n i t e d S t a t e s B a s e d M u t u a l Funds 787 8 n o t known 2,508 158 104 ( h o l d i n g s i n Canada) TOTAL 795 2 ,770 In t e r m s o f t h e number o f o r g a n i z a t i o n s q u a l i f i e d as m u t u a l f u n d s a t t h e end o f 1967 t h e r e were 118, and t h e number i n c r e a s e d t o 136 by t h e end o f 1968. T u r n i n g t o t h e s e r v i c e s p r o v i d e d by m u t u a l f u n d s t o t h e i r s h a r e h o l d e r s o r u n i t h o l d e r s we o b s e r v e d an i m p r e s s i v e l i s t . Such s e r v i c e s o r b e n e f i t s i n c l u d e d p r o f e s s i o n a l management, d i v e r s i f i e d p o r t f o l i o s , l i q u i d i t y and m a r k e t a b i l i t y , a c c u m u l a t i o n p l a n s , a d m i n i s t r a t i v e f e a t u r e s , d o l l a r - c o s t a v e r a g i n g , v a r i e t y o f m u t u a l f u n d s and r i g h t s o f w i t h d r a w a l . I t was c o n c l u d e d t h a t t h i s l i s t p r o v i d e d an a t t r a c t i v e i n v e s t m e n t p a c k a g e a v a i l a b l e t o a p o t e n t i a l i n v e s t o r . From a m a r k e t i n g p o i n t - o f - v i e w , i t was shown t h a t t h e m u t u a l f u n d p r o d u c t i s d i s t r i b u t e d t h r o u g h t h r e e p r i n c i p a l c h a n n e l s : d i r e c t s a l e s f o r c e s , b r o k e r s and i n d e p e n d e n t s a l e s f o r c e s . 143 The f o r m e r has b e e n t h e most i m p o r t a n t c h a n n e l o f d i s t r i b u t i o n a c c o u n t i n g f o r 66% o f t o t a l s a l e s o f m u t u a l f u n d s h a r e s o r u n i t s i n 1967. S a l e s t h r o u g h b r o k e r s r e p r e s e n t e d 30% i n t h e same p e r i o d , f o l l o w e d by 4% t h r o u g h i n d e p e n d e n t s a l e s f o r c e s and o t h e r m i n o r c h a n n e l s . The c o n c l u s i o n r e a c h e d i n C h a p t e r I I I , was t h a t t h e a t t r a c t i v e n e s s o f t h e m u t u a l f u n d p r o d u c t and t h e a b i l i t y o f m u t u a l f u n d s t o s e l l t h e i r p r o d u c t , have g r e a t l y a s s i s t e d t h e i n d u s t r y t o grow a t a r a p i d p a c e . A t t h e same t i m e i t was s u g g e s t e d t h a t t h e s e two f a c t o r s d e p e n d e d upon p u b l i c a c c e p t a n c e and demand f o r t h e m u t u a l f u n d p r o d u c t . I n C h a p t e r I V , we t u r n e d o u r a t t e n t i o n t o t h e f a c t o r s w h i c h a l t e r e d t h e p r e f e r e n c e s f o r t h e i n s t r u m e n t s and s e r v i c e s o f f e r e d by m u t u a l f u n d s o v e r t h o s e o f f e r e d by o t h e r f i n a n c i a l i n t e r m e d i a r i e s . The t h r e e f a c t o r s c i t e d as s h i f t i n g m u t u a l f u n d s i n t o a f a v o u r a b l e p o s i t i o n i n t e r m s o f p u b l i c a c c e p t a n c e were t h e g r o w t h i n p e r s o n a l n e t s a v i n g s , a d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n by s a v e r s and a marked p u b l i c p r e f e r e n c e t o s a v e t h r o u g h f i n a n c i a l i n t e r m e d i a r i e s . I t was s u g g e s t e d t h a t a l t h o u g h a l l f i n a n c i a l i n t e r m e d i a r i e s have b e n e f i t e d f r o m t h e r i s e i n p e r s o n a l n e t s a v i n g s , t h e r e were some who b e n e f i t e d more t h a n o t h e r s . 144 The r e a s o n g i v e n f o r t h i s was t h a t s a v e r s a r e b e c o m i n g more i n f l a t i o n c o n s c i o u s and a r e a l l o c a t i n g t h e i r f u n d s t o t h o s e i n s t i t u t i o n s p r o v i d i n g r a t e s o f r e t u r n a d e q u a t e t o p r o t e c t t h e l o n g - t e r m p u r c h a s i n g power o f t h e i r i n v e s t e d d o l l a r s . The t r a d i t i o n a l a p p r o a c h t o t h i s p r o b l e m has been t o i n v e s t i n e q u i t i e s o f c o r p o r a t i o n s . R e s u l t s o f t h e L o r i e and F i s h e r s t u d y were s u m m a r i z e d t o show t h e f a v o u r a b l e r a t e s o f r e t u r n o b t a i n e d t h r o u g h e q u i t y i n v e s t i n g . B e c a u s e o f t h e r i s k i n s e c u r i t y o w n e r s h i p many i n v e s t o r s have s o u g h t out p r o f e s s i o n a l management o f t h e i r s a v i n g s t h r o u g h b r o k e r a g e f i r m s , t r u s t c o m p a n i e s and m u t u a l f u n d s . F i n a n c i a l i n s t i t u t i o n s h a v i n g a s u b s t a n t i a l p o r t i o n o f t h e i r a s s e t s i n e q u i t i e s have a l s o b e n e f i t e d f r o m t h e upward movement o f s t o c k p r i c e s . Among t h o s e i n c l u d e d were t h e e s t a t e , t r u s t and a g e n c y a c c o u n t s o f t r u s t c o m p a n i e s , m u t u a l f u n d s , c l o s e d - end i n v e s t m e n t c o m p a n i e s and t h e t r u s t e e d p e n s i o n f u n d s . The s e c o n d f a c t o r m e n t i o n e d as h a v i n g some b e a r i n g upon p u b l i c a c c e p t a n c e o f t h e m u t u a l f u n d p r o d u c t was t h e d e v e l o p m e n t o f f i n a n c i a l s o p h i s t i c a t i o n on t h e p a r t o f s a v e r s . As s a v e r s have become more s o p h i s t i c a t e d t h e y have demanded i n v e s t m e n t s where r i s k s a r e l a r g e b u t where p o t e n t i a l r e w a r d s a r e g r e a t . 145 I n a d d i t i o n , t h e y have demanded a b r o a d e r r a n g e o f f i n a n c i a l s e r v i c e s . F i n a n c i a l i n s t i t u t i o n s t h a t have a l t e r e d t h e i r p a c k a g e o f f e r i n g t o i n c l u d e a g r e a t e r amount o f i n v e s t m e n t c o u n s e l l i n g h ave b e n e f i t e d i n t e r m s o f g r o w t h . I t was p r o v e n by t h e r e s u l t s o f t h e s t u d y c o n d u c t e d by P r o f e s s o r Conway t h a t C a n a d i a n s a r e i n f a c t v e r y a g g r e s s i v e i n v e s t o r s and h ave p r o b a b l y b e e n m o v i n g up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n f o r s ome t ime. A movement up t h e s c a l e o f f i n a n c i a l s o p h i s t i c a t i o n assumes t h a t t h e f u r t h e r t o w a r d t h e t o p one moves, t h e g r e a t e r t h e p o r t i o n o f e q u i t i e s t o be f o u n d i n h i s i n v e s t m e n t p o r t f o l i o . The scheme a l s o assumes t h a t n o r m a l l y , i n d i v i d u a l s p r o g r e s s f r o m i n d i r e c t t o d i r e c t i n v e s t m e n t , and t o f u l l e r p a r t i c i p a t i o n i n e q u i t y o w n e r s h i p . We saw t h a t t h i s d e v e l o p m e n t has been c u r t a i l e d i n Canada b e c a u s e c e r t a i n f i n a n c i a l m a r k e t p r o b l e m s have s t e e r e d many i n v e s t o r s t o w a r d i n d i r e c t i n v e s t i n g t h r o u g h f i n a n c i a l i n s t i t u t i o n s . T h r e e p r o b l e m s i n t h e f i n a n c i a l m a r k e t were s u g g e s t e d as c a u s i n g t h i s c u r t a i l m e n t : t h e c l a s s s t r u c t u r e , t h e s u p p l y o f , and demand f o r C a n a d i a n e q u i t i e s , and t h e a t t i t u d e o f t h e f i n a n c i a l community t o w a r d t h e s m a l l i n v e s t o r . I n b r i e f , t h e s e t h r e e p r o b l e m s b o i l down t o t h e s i m p l e f a c t t h a t t h e r e i s a l i m i t e d s u p p l y o f d e s i r a b l e common s t o c k a v a i l a b l e i n r e l a t i o n t o t h e demand f o r t h e s e s t o c k s . 146 I n a d d i t i o n , b r o k e r a g e h o u s e s i n Canada and t h e U n i t e d S t a t e s have begun t o show a marked r e l u c t a n c e t o s e r v i c e s m a l l a c c o u n t s . As a d i r e c t r e s u l t o f t h e s e d e v e l o p m e n t s , t h e s m a l l i n v e s t o r has a l t e r e d h i s i n v e s t m e n t a p p r o a c h by p a r t i c i p a t i n g i n t h e e q u i t i e s m a r k e t s on an i n d i r e c t b a s i s by i n v e s t i n g i n e q u i t y b a s e d i n s t r u m e n t s o f f e r e d by f i n a n c i a l i n s t i t u t i o n s . The m u t u a l f u n d s r e p r e s e n t one s u c h i n s t i t u t i o n a l g r o u p w h i c h has b e n e f i t e d f r o m t h i s a l t e r n a t i v e i n v e s t m e n t a p p r o a c h by p r o v i d i n g an a t t r a c t i v e i n v e s t m e n t p r o d u c t , b a c k e d up by a n a t i o n w i d e d i s t r i b u t i o n n e t w o r k t h r o u g h w h i c h t h e p r o d u c t was b r o u g h t t o t h e a t t e n t i o n o f t h e p u b l i c . I n C h a p t e r V, an a s s u m p t i o n was made t h a t s a v e r s w i l l c o n t i n u e t o se e k o u t f i n a n c i a l i n s t i t u t i o n s t h a t can s a t i s f y t h e i r demands f o r h i g h e r r a t e s o f r e t u r n on t h e i r s a v i n g s and a w i d e r r a n g e o f f i n a n c i a l s e r v i c e s . I t was s u g g e s t e d t h a t f i n a n c i a l i n t e r m e d i a r i e s t h a t can meet t h e s e demands w i l l c o n t i n u e t o e x p a n d a t a r a p i d p a c e . By t h e same t o k e n , i t was a l s o i m p l i e d t h a t i n s t i t u t i o n s t h a t d e v e l o p new i n s t r u m e n t s and s e r v i c e s w h i c h become a c c e p t e d by t h e p u b l i c may grow more r a p i d l y t h a n o t h e r s . I t was shown t h a t many C a n a d i a n m u t u a l f u n d s a r e p r e s e n t l y w e l l p r e p a r e d i n t e r m s o f m e e t i n g t h e f u t u r e demands o f s a v e r s r e s u l t i n g f r o m s h i f t s i n t h e l e v e l o f e c o n o m i c d e v e l o p m e n t , i n t h e a t t i t u d e o f s a v e r s and t h e wants and needs o f b o r r o w e r s . 1 4 7 T h i s i s so b e c a u s e many o f t h e s o c i a l and t e c h n o l o g i c a l c h a n g e s e x p e c t e d t o t a k e p l a c e i n t h e f u t u r e a r e o r i e n t a t e d a l o n g t h e l i n e s o f t h e i n s t r u m e n t s and s e r v i c e s c e r t a i n m u t u a l f u n d s have t o o f f e r a t p r e s e n t . A few o f t h e s o c i a l c h a n g e s m e n t i o n e d w h i c h a r e e x p e c t e d t o f a v o u r t h i s i n d u s t r y a r e t h e f o r t h c o m i n g l e g i s l a t i v e r e c o m m e n d a t i o n s o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , i n c r e a s e s i n t h e wage l e v e l o f t h e l o w e r income g r o u p s m a k i n g p o s s i b l e t h e o p p o r t u n i t y f o r s a v i n g , and t h e l a c k o f i n t e r e s t by b r o k e r a g e f i r m s i n s m a l l i n v e s t m e n t a c c o u n t s . I n t e r m s o f t e c h n o l o g i c a l c h a n g e s , t h e use o f t h e c o m p u t e r as a t o o l f o r i n v e s t m e n t a n a l y s i s , more r e f i n e d and q u a n t i f i e d r e s e a r c h methods and h i g h l y q u a l i f i e d i n v e s t m e n t p e r s o n n e l w i l l p l a c e c e r t a i n f i n a n c i a l i n s t i t u t i o n s i n a s t r o n g c o m p e t i t i v e p o s i t i o n i n t h e b a t t l e f o r p u b l i c s a v i n g s . The m u t u a l f u n d i n d u s t r y has a l r e a d y made g r e a t s t r i d e s i n t h e s e t e c h n o l o g i c a l a r e a s . R i g h t now, many m u t u a l f u n d managers have b e t t e r and more p r e c i s e d a t a on w h i c h t o f o r m u l a t e i n v e s t m e n t d e c i s i o n s , and t h i s d a t a i s i n most c a s e s s u p e r i o r t o t h a t a v a i l a b l e t o t h e a v e r a g e i n d i v i d u a l who i n v e s t s i n t h e m a r k e t on h i s own; so much so t h a t t h e a d v a n t a g e o f p r o f e s s i o n a l management i s b e c o m i n g i n c r e a s i n g l y o b v i o u s . 148 As a r e s u l t , many i n d i v i d u a l i n v e s t o r s w i l l be c o n v i n c e d t h a t t h e odds a g a i n s t them a r e t o o h i g h and w i l l t u r n t o t h e m u t u a l f u n d i n d u s t r y f o r p r o f e s s i o n a l i n v e s t m e n t management. I t was s u g g e s t e d above t h a t f i n a n c i a l i n s t i t u t i o n s t h a t d e v e l o p new i n s t r u m e n t s and s e r v i c e s a c c e p t e d by t h e p u b l i c w i l l grow more r a p i d l y t h a n o t h e r s . These i n s t i t u t i o n s w i l l be t h e i n n o v a t o r s who c r e a t e new demands by s a v e r s . They a r e t h e f i n a n c i a l i n s t i t u t i o n s p r e s e n t l y t a k i n g s t e p s t o i n s u r e t h e i r r a p i d g r o w t h and r e l a t i v e p o s i t i o n as c o m p e t i t i o n becomes more i n t e n s i f i e d . H ere a g a i n , t h e m u t u a l f u n d i n d u s t r y has t a k e n a l e a d i n g r o l e . The d e v e l o p m e n t o f " f i n a n c i a l c o m p l e x e s " has e n a b l e d t h e i n d u s t r y t o p r o v i d e an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s . W i t h i n t h e f i n a n c i a l c o m p l e x we o b s e r v e d " m u t u a l f u n d c o m p l e x e s " w h i c h e n a b l e a m u t u a l f u n d a d v i s e r t o r e a c h a b r o a d e r s e c t i o n o f p o t e n t i a l i n v e s t o r s and t o o f f e r them t h e o p p o r t u n i t y t o a p p o r t i o n t h e i r m u t u a l f u n d i n v e s t m e n t s among s e v e r a l f u n d s w i t h d i f f e r e n t i n v e s t m e n t o b j e c t i v e s . Q u i t e a p a r t f r o m t h i s f e a t u r e , t h e i n d u s t r y has a l s o b e e n s u c c e s s f u l i n m o v i n g d i r e c t l y and i n d i r e c t l y i n t o o t h e r a r e a s . O t h e r s u c h a r e a s i n c l u d e d many o f t h e s e r v i c e s p r e s e n t l y b e i n g o f f e r e d by t r u s t c o m p a n i e s and i n s u r a n c e c o m p a n i e s . T h i s movement was b r o a d l y t e r m e d as t h e p r o c e s s o f " f i n a n c i a l s c r a m b l i n g " . I n t h e p r o c e s s o f f i n a n c i a l s c r a m b l i n g a m u t u a l f u n d c o m p l e x 149 becomes a s s o c i a t e d w i t h o t h e r f i n a n c i a l i n s t i t u t i o n s t h u s f o r m i n g t h e f i n a n c i a l c o m p l e x . Two e x a m p l e s o f f i n a n c i a l c o m p l e x e s were d e s c r i b e d i n C h a p t e r V, t o show t h e r e a d e r t h e number o f a d d i t i o n a l f i n a n c i a l s e r v i c e s a v a i l a b l e t o an i n v e s t o r who becomes i n v o l v e d w i t h any one s e c t o r o f t h e f i n a n c i a l c o m p l e x . New d e v e l o p m e n t s a r e a l s o t a k i n g p l a c e w i t h i n t h e C a n a d i a n m u t u a l f u n d i n d u s t r y by way o f t r a i n i n g i t s r e p r e s e n t a t i v e s t o become q u a l i f i e d f i n a n c i a l c o u n s e l l o r s . The t a l e n t o f f i n a n c i a l p l a n n i n g w i l l become a n e c e s s a r y r e q u i r e m e n t i f t h e m u t u a l f u n d i n d u s t r y i n t e n s i f i e s i t s e f f o r t s t o p r o v i d e an i n t e g r a t e d l i n e o f f i n a n c i a l s e r v i c e s . I n an a t t e m p t t o meet a n t i c i p a t e d i n v e s t o r demand f o r h i g h e r r a t e s o f r e t u r n t h e i n d u s t r y has i n t r o d u c e d m u t u a l f u n d s w i t h i n v e s t m e n t o b j e c t i v e s t h a t c o n t e m p l a t e t h e a c c e p t a n c e o f r i s k i n o r d e r t o i n c r e a s e r a t e s o f r e t u r n . T hese o r g a n i z a t i o n s a r e known as " v e n t u r e f u n d s " and have been w e l l a c c e p t e d by t h e p u b l i c s i n c e t h e i r i n t r o d u c t i o n i n 1966. What has now been s a i d sums up t h e i m p o r t a n t f i n d i n g s and c o n c l u s i o n s o f t h i s p a p e r on t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . I t i s an e x t r e m e l y f a s c i n a t i n g i n d u s t r y and has f u l f i l l e d a v e r y w o r t h w h i l e f u n c t i o n i n t h e C a n a d i a n economy. A l l i n a l l , t h e n e x t few y e a r s s h o u l d p r o v e t o be a v e r y i n t e r e s t i n g p h a s e i n t h e g r o w t h and d e v e l o p m e n t o f C a n a d i a n m u t u a l f u n d s . 1 5 0 I I I . OPPORTUNITIES FOR OTHER STUDIES A s t u d y s u c h as t h e one u n d e r t a k e n i n t h i s p a p e r a l w a y s opens new d o o r s f o r a d d i t i o n a l s t u d y on t h e same t o p i c , o r f o r nese.arxh i n t o a r e a s l i g h t l y p a s s e d o v e r . On t h e f o r m e r , an i m m e d i a t e i d e a t h a t comes t o t h e w r i t e r ' s mind i s t h e g r o w t h i m p l i c a t i o n s t h e r e c o m m e n d a t i o n s o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s w i l l h ave f o r t h e C a n a d i a n m u t u a l f u n d i n d u s t r y . I f c e r t a i n r e c o m m e n d a t i o n s a r e i m p l e m e n t e d , w i l l t h e m u t u a l f u n d i n d u s t r y h ave a c o m p e t i t i v e a d v a n t a g e o v e r o t h e r f i n a n c i a l i n t e r m e d i a r i e s ? What r e c o m m e n d a t i o n s , i f i m p l e m e n t e d , may s l o w down t h e g r o w t h o f m u t u a l f u n d i n d u s t r y ? W i t h i n t h e i n d u s t r y , w h i c h m u t u a l f u n d g r o u p s w i l l b e n e f i t most f r o m l e g i s l a t i v e r e c o m m e n d a t i o n s ; w h i c h g r o u p s w i l l s u f f e r ? What c h a n g e s m i g h t t a k e p l a c e w i t h i n t h e i n d u s t r y as r e c o m m e n d a t i o n s a r e i m p l e m e n t e d ? Two a r e a s o f new r e s e a r c h may become o b v i o u s as c h a n g e s a r e i n t r o d u c e d by g o v e r n m e n t t h r o u g h t a x and a n t i - c o m b i n e s l e g i s l a t i o n . What l i e s i n s t o r e f o r t h e m u t u a l f u n d i n d u s t r y as new t a x l a w s a r e i n t r o d u c e d ? How w i l l t h e a n t i - c o m b i n e s d e p a r t m e n t r e a c t i n f u t u r e y e a r s t o w a r d t h e p r o l i f e r a t i o n o f f i n a n c i a l c o m p l e x e s ? I t i s t h e b e l i e f o f t h e w r i t e r t h a t many w o r t h w h i l e s t u d i e s w i l l d e v e l o p o u t o f g o v e r n m e n t p o l i c y d e c i s i o n s p r e s e n t l y on t h e l e g i s l a t i v e d r a w i n g b o a r d s . BIBLIOGRAPHY 152 BIBLIOGRAPHICAL ENTRIES A. BOOKS B u l l o c k , Hugh, The S t o r y o f I n v e s t m e n t C o m p a n i e s , C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k , 1960. Conway, G.R., The S u p p l y o f , and Demand f o r , C a n a d i a n E q u i t i e s , A C o n s p e c t u s o f t h e s t u d y c o m m i s s i o n e d f r o m t h e F a c u l t y o f A d m i n i s t r a t i v e S t u d i e s , Y o r k U n i v e r s i t y , T o r o n t o , by The T o r o n t o S t o c k E x c h a n g e , The S t a t i s t i c a l S e c t i o n , The T o r o n t o S t o c k E x c h a n g e , T o r o n t o , S e p t e m b e r , 1968. D o u g a l l , H e r b e r t E., C a p i t a l M a r k e t s and I n s t i t u t i o n s , P r e n t i c e - H a l 1 I n c . , E n g l e w o o d C l i f f s , New J e r s e y , 1965. G o l d s m i t h , Raymond W., F i n a n c i a l I n t e r m e d i a r i e s i n t h e A m e r i c a n Economy S i n c e 1900, A S t u d y by t h e N a t i o n a l B u r e a u o f E c o n o m i c R e s e a r c h , New Y o r k , P r i n c e t o n U n i v e r s i t y P r e s s , P r i n c e t o n , 1958. G o l d s m i t h , Raymond W., The F l o w o f C a p i t a l Funds i n t h e P o s t - W a r Economy, A S t u d y by t h e N a t i o n a l B u r e a u o f E c o n o m i c R e s e a r c h , New Y o r k , C o l u m b i a U n i v e r s i t y P r e s s , New Y o r k and L o n d o n , 1965. H a y e s , D o u g l a s A., I n v e s t m e n t s : A n a l y s i s and Managements, The M a c m i l l a n Company, New Y o r k , 1966. K e n d a l l , Leon T., R e a d i n g s i n F i n a n c i a l I n s t i t u t i o n s , H o u g h t o n M i f f i n Company, B o s t o n , 1965. K etchum, M a r s h a l l D., and Leon T. K e n d a l l , R e a d i n g s i n F i n a n c i a l I n s t i t u t i o n s , H o u g h t o n M i f f i n Company, New Y o r k , 1965. O l a n d , R o b i s o n § O t h e r s , F i n a n c i a l I n s t i t u t i o n s , R i c h a r d D. I r w i n , 1960. P o r t e r , J o h n , The V e r t i c a l M o s a i c - A n A n a l y s i s o f S o c i a l C l a s s and Power i n C a n a d a , U n i v e r s i t y o f T o r o n t o P r e s s , 1965. P o t t e r , C.C., F i n a n c e and B u s i n e s s A d m i n i s t r a t i o n i n C a n a d a , P r e n t i c e - H a l l o f Canada L t d . , 1966. Q u i r i n , G. D. and W. R. W a t e r s , A S t u d y o f t h e C a n a d i a n M u t u a l Fund I n d u s t r y , The C a n a d i a n M u t u a l Funds A s s o c i a t i o n , T o r o n t o , J u n e , 1969. R o b b i n s , S i d n e y , The S e c u r i t i e s M a r k e t s , O p e r a t i o n s and I s s u e s , C o l l i e r - M a c m i l l a n C a n a d a , L t d . , T o r o n t o , 1966. 153 The E x c h a n g e Community i n 1975, An E c o n o m i c S t u d y by The New Y o r k S t o c k E x c h a n g e , New Y o r k , N.Y., December, 1965. W i l l i a m s o n , P e t e r J . , S u p p l e m e n t t o S e c u r i t i e s R e g u l a t i o n i n C a n a d a , The Queen's P r i n t e r , O t t a w a , 1966. Wha r t o n S c h o o l o f F i n a n c e and Commerce, A S t u d y o f M u t u a l F u n d s , S e c u r i t i e s and E x c h a n g e C o m m i s s i o n , U n i o n C a l e n d a r No. 9 5 5 . , U.S. Government P r i n t i n g O f f i c e , W a s h i n g t o n 25, D.C.: R e p o r t o f t h e C o m m i t t e e on I n t e r s t a t e and F o r e i g n Commerce, 1962. B. PUBLICATIONS OF THE GOVERNMENTS, LEARNED S O C I E T I E S , AND OTHER ORGANIZATIONS Bank o f Canada A n n u a l R e p o r t o f t h e G o v e r n o r t o t h e M i n i s t e r o f F i n a n c e and S t a t e m e n t o f A c c o u n t s f o r t h e Y e a r 1966, Bank o f C a n a d a , O t t a w a , F e b r u a r y , 1967. Bank o f C a n a d a , S t a t i s t i c a l Summary - 1966 S u p p l e m e n t , Bank o f C a n a d a , O t t a w a , 1966. D o m i n i o n B u r e a u o f S t a t i s t i c s , B u s i n e s s F i n a n c i a l S t a t i s t i c s - S e l e c t e d F i n a n c i a l I n s t i t u t i o n s , The Queen's P r i n t e r , O t t a w a , C a t a l o g u e No. 61 - 0 0 6 , 1963 - 1966. D o m i n i o n B u r e a u o f S t a t i s t i c s , F i n a n c i a l I n s t i t u t i o n s - F i n a n c i a l S t a t i s t i c s , The Queen's P r i n t e r , O t t a w a , C a t a l o g u e No. 61 - 0 0 6 , F o u r t h Q u a r t e r , 1968. D o m i n i o n B u r e a u o f S t a t i s t i c s , Q u a r t e r l y E s t i m a t e s o f t h e C a n a d i a n B a l a n c e o f I n t e r n a t i o n a l P a y m e n t s , The Queen's P r i n t e r , C a t a l o g u e No. 6 7 - 0 0 1 , F o u r t h Q u a r t e r , 1968. D o m i n i o n B u r e a u o f S t a t i s t i c s , T r u s t e e d P e n s i o n P l a n s F i n a n c i a l S t a t i s t i c s , The Queen's P r i n t e r , C a t a l o g u e No. 7 4 - 2 0 1 , A n n u a l , 1967. F i n a n c i a l I n t e r m e d i a r i e s a R e f e r e n c e S u r v e y , E c o n o m i c A n a l y s i s B r a n c h , O f f i c e o f t h e C h i e f E c o n o m i s t , D e p a r t m e n t o f E c o n o m i c s and D e v e l o p m e n t , T o r o n t o , O n t a r i o . S e p t e m b e r , 1967. F i n a n c i a l P o s t , 1969 S u r v e y o f I n v e s t m e n t F u n d s , T o r o n t o : M a c l e a n - H u n t e r P u b l i s h i n g Company, 1969. F o r e i g n O w n e r s h i p and t h e S t r u c t u r e o f C a n a d i a n I n d u s t r y , Queen's P r i n t e r , O t t a w a , 1968. 154 I n s t i t u t i o n a l S h a r e o w n e r s h i p , A R e p o r t on F i n a n c i a l I n s t i t u t i o n s and t h e S t o c k M a r k e t , J u n e , 1964. I n v e s t m e n t C o m p a n i e s , M u t u a l Funds and O t h e r T y p e s , 1963 E d i t i o n , A r t h u r W i e s e n b e r g e r and Company. J o h n s o n , Hugh A., J o h n s o n ' s I n v e s t m e n t Company C h a r t s , N i n e t e e n t h A n n u a l E d i t i o n , B u f f a l o , New Y o r k , 1967. Money and C r e d i t , T h e i r I n f l u e n c e on J o b s , P r i c e s , and G r o w t h , The R e p o r t o f t h e R o y a l C o m m i s s i o n Money and C r e d i t , P r e n t i c e H a l l , I n c . , E n g l e w o o d C l i f f s , N . J . , 1961. M u t u a l Fund F a c t Book, I n v e s t m e n t Company I n s t i t u t e , New Y o r k , N.Y., 1967. R e p o r t o f t h e R o y a l C o m m i s s i o n on B a n k i n g and F i n a n c e , 1964, Queen's P r i n t e r and C o n t r o l l e r o f S t a t i o n e r y , O t t a w a , C anada. S e c u r i t i e s and E x c h a n g e C o m m i s s i o n , P u b l i c P o l i c y I m p l i c a t i o n s o f I n v e s t m e n t Company G r o w t h , U n i o n C a l e n d e r No. 1046., U.S. Government P r i n t i n g O f f i c e , W a s h i n g t o n 25, D.C.: R e p o r t o f t h e C o m m i t t e e on I n t e r s t a t e and F o r e i g n Commerce, 1966. The C a n a d i a n L i f e I n s u r a n c e A s s o c i a t i o n , S u b m i s s i o n t o The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , The C a n a d i a n L i f e I n s u r a n c e A s s o c i a t i o n , T o r o n t o , J u n e , 1968. The Money M a n a g e r s - P r o f e s s i o n a l I n v e s t m e n t t h r o u g h M u t u a l F u n d s , I n v e s t m e n t Company I n s t i t u t e , McGraw - H i l l Book Company, New Y o r k , 1967. The R e p o r t o f The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , u n p u b 1 i s h e d , T o r o n t o , November, 19 69. C. PERIODICALS F i s h e r , L a w r e n c e and James H. L o r i e , " R a t e o f R e t u r n on I n v e s t m e n t s i n Common S t o c k t h e Y e a r - b y - Y e a r R e c o r d 1926 - 1 9 6 5 , " The J o u r n a l o f B u s i n e s s , J u l y , 1968, M a c i n t o s h , R.M., and K. E. B i s s e l l , "Some F a c t o r s i n t h e S u p p l y o f and Demand f o r C a n a d i a n E q u i t i e s , " The C a n a d i a n C h a r t e r e d A c c o u n t a n t , Volume 89, No.5, November, 1966. 155 Nauheim, F e r d , " L i f e I n s u r a n c e and M u t u a l Funds ... Some P r e d i c t i o n s , " I n v e s t m e n t D e a l e r s ' D i g e s t , A p r i l , 1 9 6 8 , pp . 4-7. S e l i g m a n , D a n i e l and T.A. W i s e , "New F o r c e s i n t h e S t o c k M a r k e t , " F o r t u n e , Volume L X I X , F e b r u a r y , 1964, pp. 9 2 - 9 5 , 194-206. S h a r p , W i l l i a m F., " M u t u a l Fund P e r f o r m a n c e , " The J o u r n a l o f B u s i n e s s , Volume X X X I X , The U n i v e r s i t y o f C h i c a g o P r e s s , J a n u a r y , 1966. p p . 1 1 9 - 1 3 8 . T r e y n o r , J a c k , " R a t i n g Management o f I n v e s t m e n t F u n d s , " H a r v a r d B u s i n e s s R e v i e w , Volume 4 3, J a n u a r y - F e b r u a r y , 1965, pp. 63- 7 9 . D. UNPUBLISHED MATERIALS H i t c h e n s , B a r r y G., "An I n v e s t i g a t i o n i n t o The G r o w t h and P e r f o r m a n c e o f t h e C a n a d i a n M u t u a l Fund I n d u s t r y , " G r a d u a t i n g E s s a y i n Commerce, The U n i v e r s i t y o f B r i t i s h C o l u m b i a , V a n c o u v e r , M a r c h , 1967. L e s s a r d , P i e r r e H., " C a n a d i a n M u t u a l F u n d s : A R e v i e w o f t h e I n d u s t r y and D e t e r m i n a t i o n o f a Me t h o d t o E v a l u a t e t h e i r P e r f o r m a n c e , " D i s s e r t a t i o n , H a r v a r d B u s i n e s s S c h o o l , A p r i l , 1966. L u s z t i g , P e t e r A. R o b e r t W. W h i t e and L e s l i e G. J . Wong, " M u t u a l Funds and T h e i r C o n t r o l o f P o r t f o l i o C o m p a n i e s , " P a p e r p r e p a r e d f o r The C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s , A u g u s t , 1968. P r i c e , P.W., "An E x a m i n a t i o n o f t h e C h a n g i n g R o l e o f F i n a n c i a l I n t e r m e d i a r i e s i n t h e Modern Economy," G r a d u a t i n g E s s a y i n Commerce, The U n i v e r s i t y o f B r i t i s h C o l u m b i a , V a n c o u v e r , A p r i l , 1967. W i l l i a m s o n , P e t e r J . , " M u t u a l Funds i n C a n a d a , " A r e s t r i c t e d p a p e r p r e p a r e d f o r t h e F e d e r a l - P r o v i n c i a l C o n f e r e n c e o f O f f i c i a l s on S e c u r i t y R e g u l a t i o n , 1966. E. NEWSPAPERS L u t s k y , I r v i n , " L a c k o f a d e q u a t e s e c u r i t i e s r e s e a r c h d a t a i s b l a m e d f o r s w i n g t o i n v e s t m e n t i n U.S.," The T o r o n t o G l o b e and M a i l , J a n u a r y 27 , 1969 , p. B2 . 156 L u t s k y , I r v i n , " S m a l l d e a l s c a l l e d c o s t l y f o r b r o k e r s , " The T o r o n t o G l o b e and M a i l , May 14, 1969, p . B l . L y o n s , J o h n F., "From Orphan t o C i n d e r e l l a - V a r i a b l e A n n u i t y P o l i c i e s a r e b e c o m i n g D a r l i n g o f t h e L i f e I n s u r a n c e I n d u s t r y , " The W a l l S t r e e t J o u r n a l , J u l y 26, 1967, p.26. R a b i n o w i t z , A r n o l d , " P r e f e r r e d s a r e n o t p r e f e r r e d , " The F i n a n c i a l P o s t , J u l y 13 , 1968, p p . 1 , 4 . R i d d e l l , B e a t r i c e , " A g e n t s f i n a l l y s e l l i n s u r a n c e , f u n d s , " The F i n a n c i a l P o s t , J u n e 14, 1969, p . l . R o b e r t s o n , F r a s e r , " C a n a d i a n Myth E x p l o d e d on E q u i t i e s I n v e s t m e n t , " The T o r o n t o G l o b e and M a i l , J a n u a r y 27, 1968, p.B2. The F i n a n c i a l P o s t , " P r e d i c t s s m a l l i n v e s t o r may some day v a n i s h , " J u n e 1, 1967, p.5. The T o r o n t o G l o b e and M a i l , " S t u d y shows where b r o k e r s p r o f i t m o s t , " A u g u s t 1, 1969, p.BIO. 157 > APPENDIX 158 APPENDIX A THE CANADIAN COMMITTEE ON MUTUAL FUNDS AND INVESTMENT CONTRACTS The E s t a b l i s h m e n t o f t h e C o m m i t t e e D u r i n g t h e F e d e r a l - P r o v i n c i a l C o n f e r e n c e s on S e c u r i t i e s R e g u l a t i o n h e l d i n 1966, c o n s i d e r a t i o n was g i v e n t o t h e r e g u l a t i o n o f m u t u a l f u n d s and o f i n v e s t m e n t c o n t r a c t s . I t was d e c i d e d t h a t t h e a v a i l a b l e i n f o r m a t i o n on t h e o p e r a t i o n o f m u t u a l f u n d s and o f i n v e s t m e n t c o n t r a c t c o m p a n i e s i n Canada was n o t s u f f i c i e n t l y d e t a i l e d , and t h a t a c o m m i t t e e s h o u l d be a p p o i n t e d t o c o n s i d e r t h i s and r e l a t e d m a t t e r s and t o make r e c o m m e n d a t i o n s as t o l e g i s l a t i o n I n a c c o r d a n c e w i t h t h i s d e c i s i o n , t h e C a n a d i a n C o m m i t t e e on M u t u a l Funds and I n v e s t m e n t C o n t r a c t s was e s t a b l i s h e d i n M a r c h , 1967. The members o f t h e C o m m i t t e e , a t t h e p r e s e n t t i m e , a r e : G. E. G r u n d y , S u p e r i n t e n d e n t o f I n s u r a n c e P r o v i n c e o f O n t a r i o . L o u i s , de B. G r a v e l , Q.C. D i r e c t o r , C ompanies B r a n c h , P r o v i n c e o f Quebec. K. P. L a w t o n , Q.C. A d m i n i s t r a t o r u n d e r t h e New B r u n s w i c k S e c u r i t i e s A c t Marc L a l o n d e , Q.C. P r i n c i p a l S e c r e t a r y t o t h e P r i m e M i n i s t e r G. H. R o s e , Q.C. C h a i r m a n o f t h e A l b e r t a S e c u r i t i e s C o m m i s s i o n F. C. T a p l e y , R e g i s t r a r u n d e r t h e M a n i t o b a S e c u r i t i e s A c t W . S. I r w i n , S u p e r i n t e n d e n t o f B r o k e r s , B r i t i s h C o l u m b i a S e c u r i t i e s . C o m m i s s i o n . The O v e r a l l F u n c t i o n o f t h e C o m m i t t e e The C o m m i t t e e i s p r e s e n t l y i n t h e p r o c e s s o f c o n d u c t i n g an e x t e n s i v e s t u d y o f m u t u a l f u n d s and i n v e s t m e n t c o n t r a c t s i n C a n a d a . The p u r p o s e o f t h e s t u d y i s t o o b t a i n c o m p l e t e i n f o r m a t i o n c o n c e r n i n g t h e op e n - e n d m u t u a l f u n d s ( i n c l u d i n g f u n d s s p o n s o r e d by t r u s t c o m p a n i e s ) and i n v e s t m e n t c o n t r a c t s upon t h e b a s i s o f w h i c h d e t e r m i n a t i o n may be made as t o w h e t h e r l e g i s l a t i o n i n a d d i t i o n t o t h e e x i s t i n g l e g i s l a t i o n i s r e q u i r e d f o r t h e p r o t e c t i o n o f t h e p u b l i c i n t e r e s t . A p a r t f r o m t h e s t r u c t u r e o f m u t u a l f u n d s and i n v e s t m e n t c o n t r a c t i s s u e r s , t h e s c o p e o f t h e s t u d y has been e x t e n d e d t o s u c h m a t t e r s as t h e r e l a t i o n s h i p o f t h e i s s u e r s w i t h management and s e l l i n g c o m p a n i e s and i n v e s t m e n t d e a l e r s , p r o b l e m s a r i s i n g i n t h e s a l e t o t h e p u b l i c o f m u t u a l f u n d s h a r e s and i n v e s t m e n t c o n t r a c t s , and v a r i a b l e c o n t r a c t s i s s u e d by l i f e i n s u r a n c e c o m p a n i e s . 1 5 9 A t t h e o u t s e t o f i t s w o r k , t h e C o m m i t t e e d i s t r i b u t e d t o m u t u a l f u n d s , i n v e s t m e n t c o n t r a c t c o m p a n i e s , t r u s t c o m p a n i e s , l i f e i n s u r a n c e o r g a n i z a t i o n s , b r o k e r s , s t o c k e x c h a n g e s and v a r i o u s o t h e r a s s o c i a t i o n s and o r g a n i z a t i o n s , a l i s t o f t o p i c s t o be c o n s i d e r e d by i t . Those who were i n t e r e s t e d were a s k e d t o s u b m i t b r i e f s . I n a d d i t i o n , t h e C o m m i t t e e ' s s t a f f and c o n s u l t a n t s have c i r c u l a t e d d e t a i l e d q u e s t i o n n a i r e s and have had many m e e t i n g s w i t h r e p r e s e n t a t i v e s o f m u t u a l f u n d s and i n v e s t m e n t c o n t r a c t i n d u s t r i e s . B e c a u s e o f t h e q u a l i t y o f i n f o r m a t i o n c o l l e c t e d by t h e s t a f f , and t h e h i g h q u a l i t y o f f o r m a l and i n f o r m a l s u b m i s s i o n s r e c e i v e d by i t , i t has b e e n d e c i d e d by t h e C o m m i t t e e n o t t o h o l d p u b l i c h e a r i n g s . The S t a f f o f t h e C o m m i t t e e The C o m m i t t e e has e s t a b l i s h e d a c e n t r a l o f f i c e a t T o r o n t o , where i t has a s t a f f o f a p p r o x i m a t e l y 20 p e r s o n s h e a d e d by M e s s r s . J.C. B a i l l i e and C. B r u n e a u . Mr. B a i l l i e i s a s s o c i a t e d w i t h t h e law f i r m o f T o r y , T o r y , D e s L a u r i e r s and B i n n i n g t o n i n T o r o n t o and l e c t u r e s i n s e c u r i t i e s r e g u l a t i o n a t Osgoode H a l l Law S c h o o l . He p r e v i o u s l y w o r k e d on s p e c i a l s t u d i e s f o r t h e O n t a r i o S e c u r i t i e s C o m m i s s i o n , t h e R o y a l C o m m i s s i o n on W i n d f a l l , and t h e F e d e r a l T a s k F o r c e on S e c u r i t y R e g u l a t i o n and C o r p o r a t e D i s c l o s u r e . Mr. B r u n e a u , a l s o a l a w y e r , has h e l d t h e p o s i t i o n o f S p e c i a l A s s i s t a n t t o t h e M i n i s t e r o f J u s t i c e , O t t a w a , and w o r k e d on s t u d i e s r e l a t i n g t o f e d e r a l r e g u l a t i o n o f s e c u r i t i e s and w i t h t h e c o m m i t t e e s e t up t o s t u d y c o r p o r a t e and l a b o u r d i s c l o s u r e , w h i c h e v e n t u a l l y l e d t o t h e •enactment o f t h e C o r p o r a t i o n s and L a b o u r U n i o n s R e t u r n A c t . He has a l s o b een a s s o c i a t e d w i t h a f i r m o f i n v e s t m e n t d e a l e r s , and b e f o r e j o i n i n g t h e C o m m i t t e e he was t h e A s s i s t a n t S e c r e t a r y p f S t e i n b e r g ' s L i m i t e d i n M o n t r e a l . I n a d d i t i o n t o M e s s r s . B a i l l i e and B r u n e a u t h e p r o f e s s i o n a l s t a f f o f t h e C o m m i t t e e a l s o i n c l u d e s an e c o n o m i s t , Mr. H.J. C l e l a n d , f o r m e r l y t h e D i r e c t o r o f S u r v e i l l a n c e w i t h t h e T o r o n t o S t o c k E x c h a n g e and a r e s e a r c h c o - o r d i n a t o r , Mr. P a u l H.C. D y s o n , a b u s i n e s s g r a d u a t e s t u d e n t f r o m t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a . The R e p o r t o f t h e C o m m i t t e e S i n c e t h e c r e a t i o n o f t h e C o m m i t t e e , i t ' s s t a f f has b e en a c t i v e l y e ngaged i n t h e c o l l e c t i o n o f i n f o r m a t i o n c o n c e r n i n g t h e s e i n d u s t r i e s , and i t i s h oped t h a t t h e R e p o r t w i l l be c o m p l e t e d i n l a t e 1969. F o l l o w i n g t h e c o m p l e t i o n o f t h e s t u d y , t h e R e p o r t w i l l be s u b m i t t e d t o t h e P r i m e M i n i s t e r s and P r e m i e r s o f t h e e l e v e n j u r i s d i c t i o n s c o n c e r n e d w h i c h w i l l i n c l u d e r e c o m m e n d a t i o n s as t o w h e t h e r a d d i t i o n a l l e g i s l a t i o n i s r e q u i r e d f o r t h e p r o t e c t i o n o f t h e i n v e s t o r .

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Redmond 1 1
Ashburn 1 0

{[{ mDataHeader[type] }]} {[{ month[type] }]} {[{ tData[type] }]}

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