Mary Anne Wiley savours the one coffee she allows herself each day – a large, black jolt of java in a cup the size of a soup bowl – and talks about the current buzz that’s coursing through her industry: BlackRock’s acquisition of exchange traded funds competitor Claymore Canada.
The combination of Canada’s two largest ETF providers will offer investors a comprehensive suite of products, while giving BlackRock added heft to take on its most formidable competition in the asset management sphere – the mutual fund industry, says Ms. Wiley, managing director of iShares for BlackRock Asset Management Canada Ltd.
“We acquired them [Claymore]because there is a great amount of talent and attractive products, and we want to continue to bring that to the market,” Ms. Wiley says. As of Dec. 31, BlackRock offered 48 ETFs in Canada, representing $29-billion in assets under management, and Claymore offered 34 ETFs and two closed-end funds representing $6.9-billion in assets. Combined, operating under BlackRock’s iShares brand, they will account for 85 per cent of the Canadian ETF market.
“We know there’s demand for both product lineups … Our overarching goal is to make sure that at the end of the day, when the deal closes, clients feel they now have an even more powerful product lineup and service provider with the combined entity. What that’s actually going to look like is exactly the work that we are doing now.”
It was Claymore that initiated the deal with BlackRock, after weighing the intentions of several suitors, says Som Seif, who started what became Claymore’s Canadian operations from a laptop in his living room in 2005 after leaving an investment banking job on Bay Street.
Toronto-based Claymore was a unit of U.S.-based ETF provider Claymore Group Inc. before being acquired by New York-based Guggenheim Partners LLC in 2009. It was put up for sale last fall, with BlackRock announcing its acquisition of Guggenheim’s Canadian Claymore subsidiary for an undisclosed price in January. The deal is expected to close at the end of the first quarter of 2012, subject to regulatory approval.
Mr. Seif says BlackRock was a respected rival, had a commanding presence in the Canadian market and – of the prospective acquisitors – most closely matched Claymore’s innovative culture. “To have it under one family actually makes a lot of sense.”
And, although it will ultimately be BlackRock’s call, “we don’t see any real [fund]closures or changes in mandate on either side, as there isn’t really much overlap across the funds,” says Mr. Seif, president and chief executive officer of Claymore Canada.
ETFs, which trade on stock exchanges, typically track an index or asset class. Unlike actively managed mutual funds, which strive to beat stock market benchmarks, ETFs, for the most part, are passive investment vehicles designed to replicate the returns of the indexes they track. BlackRock focuses on market-capitalization weighted indexes, while Claymore ETFs take a different approach, tracking indexes based on “fundamental” factors, such as dividends and cash flow.
“They are a perfect complement to one another. That’s why both have been successful independent businesses,” Ms. Wiley says. Claymore has different fixed-income product offerings, “they have non-cap-weighted equity and they have a really attractive commodity lineup,” she adds.
Adrian Mastracci, portfolio manager at KCM Wealth Management Inc. in Vancouver, says that, while BlackRock and Claymore take different approaches, there are enough similarities that he is “sure there is going to be some amalgamation” of funds once the deal closes.
“We are not happy to see Claymore go, of course, because we like competition. Competition is good for investors, and it’s good for advisers when we have more things to look at. So we are probably going to lose some things [as a result of the acquisition] and we are just going to have to deal with that.”
Still, Mr. Mastracci adds, it is a vibrant market and new products will emerge – both from the BlackRock-Claymore combination and their competitors in the ETF field, including establishment players such as Bank of Montreal and Royal Bank of Canada, along with Toronto-based Horizons ETF Management Inc. and new entrant Vanguard Group Inc.
ETFs provide an attractive, low-cost alternative to mutual funds and, with investors seriously embracing ETFs, there is tremendous room for growth, Mr. Mastracci says. “The mutual fund industry is a behemoth in comparison to the ETFs, but I would say the ETFs are nipping at their heels, and every year they nip a little more.”
Investor awareness “is very high now,” says Ms. Wiley, a University of Western Ontario sociology graduate who landed in the asset management field by happenstance when she was hired to fill in for a maternity leave at State Street Global Advisors. Discovering a passion for the business, Ms. Wiley went on to earn her chartered financial analyst designation and “has never looked back.”
ETF assets are now equivalent to about 5 per cent of all mutual fund assets under management in Canada, up from 3.6 per cent three years ago. With its Claymore acquisition, BlackRock is in a better position to capitalize on the growing appetite for ETFs with a broad range of products that, she says, have “democratized investing” by giving individual investors access to institutional-class investment opportunities for relatively low fees compared with the management expense ratios charged by mutual fund managers.
“The markets are not delivering double-digit returns, nor does anybody expect that’s going to happen any time soon, I would think.” As a result, investors are paying much closer attention to how much they are shelling out in management fees, she says.
The cost differential varies dramatically depending on the product, Mr. Seif adds in a separate interview, but ETF fees typically come in at between one-tenth to one-quarter the cost of traditional mutual funds.
Both Mr. Seif and Ms. Wiley believe that the biggest market inroads will be made not so much against other ETF providers, but against the mutual fund industry.
“That’s where the majority of assets lie, and that’s where we feel we have a really strong alternative for investors,” Ms. Wiley said. “So this is really an exciting combination that we have taken on here.”
For his part, Mr. Seif said there is “still a lot to be figured out, we are still in the midst of an overall process … we haven’t resolved roles in any way.
“But I would say that people at Claymore are really excited and committed to the future with BlackRock, myself included. We see a very bright future for the platform.”
Special to The Globe and Mail