Summary:
Join Goshka Folda, host of MI Talk and Global Head of Research at ISS Market Intelligence, and Will Stevenson, Senior Research Associate at ISS MI as they delve into the 2023 edition of the Household Balance Sheet. In this episode, they explore the “Big Squeeze,” dissect the decline in household savings rate and uncover flows within different cohorts.
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Transcript:
Goshka: Welcome to MI Talk, the podcast series brought to you by ISS Market Intelligence. And thank you for tuning in. The focus of our discussion on MI talk, is the global Retail Financial Services marketplace and its many subsectors. Asset management, wealth management, life insurance, banking, fintech and so on. For more than three decades, the ISS market intelligence team and its previous companies, has been a passionate student of this business.
Our specialty here is to explore the proverbial second day story and really peek under the industry headlines and try to understand the bigger meaning or discern the bigger meaning of certain trends and developments in the industry. We do so with the help of industry experts and thought leaders. We do create new episodes monthly and sometimes, even two episodes in a month.
So if you enjoyed this episode of MI talk, please remember to subscribe to our podcast on your preferred podcast platform. My name is Goshka Folda, I’m your host and, the global head of research at ISS Market Intelligence. So we’re in January, can you believe it is already 2024? And it is a leap year no less so we get one extra day to prepare great research and have more discussions about the business, which we, of course, love.
And let us leap into this year with a hot topic of the household wealth and the fund industry flows, lots of debate about cash on the sidelines and what’s going on. Where is the money going? Very hot topic, really, around the world. And the asset management business in North America it’s particularly hot, we hear this from our U.S. clients and Canadian clients all the time.
So it’s quite exciting to talk about it. So today we’re going to start this, thought process, with our Canadian data and kind of contemplate where the Canadian households are in terms of their financial standing and what is in store for the deposit and fund businesses. For those of you joining us from outside of Canada, the first, 60 days of the year are, an important, period for making investment and savings decisions because they coincide with the tax deadlines and special credits that we do get if we invest in our retirement plans.
So that’s why, we thought it would be a good idea to start with Canada. And, this is also where we have kind of, a really broad base of really excellent data that we can, delve into and to help me think through this topic, is our own, data and methodology and forecasting guru.
I am delighted to be joined by senior research associate as ISS Market Intelligence, Will Stevenson. Well, it’s, a repeat guest on this podcast. So I have probably, already wax poetic about his, tremendous capabilities and expertise. In the previous podcast but, I did want to mention that, a lot of the work that, that Will is going to talk about stems out of our household balance sheet report research.
And, as you might know, those of you who are familiar with that property, this was our first report when we started the business in Canada in 1992. The first edition was published in 93. And of course, the most recent, edition, was published exactly 30 years later in 2023, towards the end of the year. So, Will was or is the chief architect of this most recent edition of the household balance sheet report is no mean feat for someone as young, as well.
Because not only did, Will lead the forecasting process for, kind of thinking about the business 5 to 10 years hence, along with Carlos Cardone. But, Will also took it upon himself to manage a team of researchers on three continents to create, and deliver a compelling, wise and thoughtful and for outlook for the future of Canada’s household wealth in the decade ahead. And you do know or if you don’t know, let me tell you this, having run research for a long while, herding researchers, and, managing research teams, it’s like herding the black cats so, and herding me, no less is quite a different story. And Will did it really great. Well done, Will and welcome to the podcast.
Will: Thanks, Goshka. Thanks for having me on.
Goshka: So let’s dig into, where the Canadian households are, right now and the household balance sheet report, when you and I discussed kind of the main themes, one of the big ideas that you spoke about is this kind of big squeeze, which is evident, you know, the financial squeeze on the Canadian households is both evident in the short term, but also possibly, might have some kind of lasting effect on Canadian household, finances in the longer term.
So now that we are into 2024, the net savings of Canadian households appear to be, you know, those deployed into financial assets are trending towards zero. This begs the question, where were will the fund industry or the asset managers, find flows, into their products?
Will: Yeah. Thanks Goshka. So it just after a couple of years of 2021 and 2022, where flows and financial assets were around 300 billion, 200 billion, you know, the headline savings rate from Statistics Canada as well as from some other publications, was jumping into double digits, early on in 2020 and 2021 and a lot of that money found its way on to asset management product shelves, in 2021 and 2022.
2022 less so, especially near to the end of the year. That’s largely done, it’s as much as there is money on the sidelines and gics in some of these money market mutual funds, ETFs, that could find its way into, into the market exposure. One of the sort of prevailing myths or consistent myths over the past couple of years is that there’s a lot of money sitting and checking accounts and savings accounts, from the retail investor just just waiting to to find its way onto the shelf.
That’s largely not true. We have, a lot of data on those accounts. Here at ISS and the average balances for Canadians, are largely where they were in 2019. So those kinds of products driving flows is certainly not going to happen. And with the, with the savings start turning towards zero. New money, new savings, is going to make its way on to asset management shelves either.
So where does that leave asset managers or, or fund sponsors in terms of driving flows? They’re really gonna have to pull it from somewhere else. There are some news about 100 billion in GICs that’s across both retail on the, in the branches and banks, you know, direct banks, those events, GICs which cost a little bit in 2023, as well as those on advisor channels, about 100 billion combined, is set to expire in the first quarter of this year.
So where does that leave asset managers? They’re going to have to compete against that. The yields on those have come down below the that magical 5% band that was driving a lot of, lot of consumers and or savers into, into those GIC products. But when an asset manager is putting a product in front of a client, they’re going to have to at least say they’re going to do better than that.
It’s a little bit easier with rates on those coming down and fixed income rates, remaining stubbornly high for some of those products, especially on the high yield side. But it’s really about doing better than what did you GIC and promise someone, all of that money is going to have to come from those products.
Goshka: Yeah. Well, that’s such a great point. And actually were, looking at this same topic in the US, and I know I’ll be circling back to you for your inputs on that, but but, you know, that that magic number that you and I talked about, you know, going way back into the 90s, you know, the 7% is as you close in on that, any term deposit was 7%.
It’s I don’t want to say it’s game over, but it is a tough slog. And I think what you’re saying is that asset managers, product developers have to really make the case for those maturing assets to really come on board is not kind of, you know, an easy, easy winning situation like we saw, when those, when there was explosion in savings, as you pointed out, in the $300 billion range.
So now is do you think that, there is also some, some differentiation between the demographic cohorts of investors and clients that will have impact on kind of, you know, where the flows can be found and can they be found?
Will: Yeah. For sure. So so the 100 billion that’s set to rebook. I’ll put another number from that 300 billion, which is kind of net change GICs of course the past couple of years that 300 billion has been added guys. So who’s added that is the main question. If it’s baby boomers, you know, 55 to 75, that age category is GICs always has been and still is. And a lot of that money, a little over a third of that money based on what we’re saying, was, was done by that cohort as well.
So, so the recent retiree or soon to be retiree added a lot of that money. Now that was that was good news for those client segments because they were saving so much throughout the pandemic. But those clients are also much less likely to abandon a GIC many of them are using them for monthly income, they could be pulled by monthly income funds if, if that promises some price appreciation along with a significant yield.
But a lot of them are looking at safety. There are some, especially some of the recent retirees are looking at inflation, eating into their earnings. And that’s where the price appreciation can be a benefit for them. But those are recent retirees who saw their money go up. “Oh, this is my time, to retire.”
They don’t want to necessarily go back to work, but they are seeing inflation moving into some other earning power. So their concerned about the safety of this retirement plan and will tend to go towards safety, over and above. Another third is what I would call kind of the still an accumulation, but soon to be done generation X.
They picked up likely over a third as well of that 300 billion. And that’s, that was a, that was largely advisor driven. You saw a lot of that on Advisor shelves saying, you know, this is five and a half, 6% what it was at the time, the year. This is a real return GIC to which is not the case for many, many years.
You know, plug a bunch of your savings into this for the short term and revisit, in the near future. Now, a lot of that may find its way to accumulation products that this generation, is also the most exposed to debt. So any sort of debt strain, debt consolidation, A. this generation isn’t going to be putting new savings into the system because they’re going to be, constrained by that.
But also some of them may be looking at consolidating some of their debt, in the short term as well as, you mentioned earlier in the long term, so that kind of money finding its way long term on asset management shelves is not as guaranteed as, say, some of the high net worth baby boomers who are looking for monthly income not as exposed to that could easily recycle this into other products.
At the bottom end, I would say millennials and Gen Z some hopped into these products a little bit. I would say less than quarter. This, and this is based on face to face data that we get from from some of our banks and, you know, some of our tax filer data that we get. This was opportunistic, many of them very, very short term GICs on digital banks in many cases, a lot of the physical banks owed a lot of GICs from primarily this client segment.
This is kind of the most eligible to move. And the most eligible loop to move into kind of riskier accumulation products, particularly generation Z, very low debt. So maybe picked up some of these GICs for some of the first investing, the lucky ones did the ones who did just stick all their money into individual tech stocks like this on sort of 2021, 2022.
But many of them are going to be looking for accumulation and also looking for accumulation, product, in particular. So those who got the GICs, they’re going to look for a stronger accumulation product for the long term. Those that were looking into, you know, riskier assets through the course of 2021, 2022, may not have done well over the past couple of years.
So some of them looking for accumulation through advice, accumulation with a product, that’s that’s going to be a key segment for advisors as well as for asset managers to target, in the short term as well as the term.
Goshka: So it’s, very important to segment your potential, targets in terms of, you know, both for financial institutions, branches and for advisors and to understand the dynamics.
And clearly, as you pointed out, each cohort has, has a different set of parameters that they are looking at. And, you know, from kind of the older ones, safety and protection. But I think that also it’s a bit of a challenge for the younger generations of the Gen Z and millennials because especially Gen Z, because some of those early experiences with accumulation or investment products maybe, have not been ideal.
And I know you talk about that quite a lot in the household balance sheet report.
Will: Yeah. So the first, the first step is through investing for for many investors is is very important to in fact set the stage, for the rest of their investing life. There’s really two influences that would, that would do, that really press on younger investors.
The first is their first experiences. So if it’s a down in the A down for a very long time, they can stay on safety. The other is their parents experience. So in Canada that pushes a lot of young people towards real estate, but only so much as they can afford it. Many of these younger investors are still priced out for the time being, from the real estate market, but they are looking to accumulate to that point.
And this is going to be very important for advisors as well, given the recent launch of the first home savings account, which is not we do know it’s not available for every advisor. It’s not available on every dealer yet. It’s still working its way through the system quite slowly. After being launched in April of last year, that’s going to be key for advisor engagement of these younger clients.
A lot of these younger clients are going to be looking to save and invest for the purpose of real estate, primarily, over and above investing for safe retirement because they have one goal first and and the second goal, second. You know, I can speak to even my parents experience, one of my parents had a horrible first experience with a real estate in sort of the 91 era.
The other one didn’t. And so, one of them really pushed for real estate. And the other one did not early on in their investing life. And, they eventually went with real estate. And that has been the right decision. But you never know what the right decision in the past, will be the right decision in the future.
Goshka: Yes. Such, such great, great points. And, you know, finger writing in Canada, 90, 1991, I guess I was a bit scarred by the whole situation with real estate. So that did not, there was not an option, that I considered really powerfully at the time because of the conditions of the market conditions, as you pointed out, for one of your parents.
So, listen, let’s wrap up with, your fund sales predictions for, the first quarter. You know, a little bit about what you think, what this means for asset class directionality. So we well know, you know, fund sponsors, fund manufacturers can fight a lot of things, but very difficult to find a fight.The trend of asset class directionality in the marketplace.
And, and any thoughts if there could be any surprising developments in the marketplace that would maybe, result in that slightly different outlook. Tell us, what do you think?
Will: So for the for the short term, and I’ll just talk about 2023 for, for a second, which, 2023, was a down year for investment funds in general, but it was really active mutual funds, a lot of that recycling into GICs, some of the recycling, even into annuities.
But in the end of it, it was in cycling towards yield. It was positive year for ETFs, however, a lot of it again in the yield ETFs so that given given investments are chasing the high yields of 2023, we expect that to largely continue. So in terms of surprise events, one of them was one potential one was this morning which still end up happening, which was the inflation release in Canada.
I’ll play towards investor’s home biases here for a second, and say that, you know, 3.4% present this morning, even though CORE was pretty moderate. That gives the central bank a lot more leeway to lead interest rates higher. So that pushes more and more money towards some of these, these higher yielding income products.
So on the mutual fund side, with some of those guys expiring, we expect it to be a similar, next mutual fund season as it was last year. So netting towards zero a little bit above zero. With that money coming primarily in six, with that money coming primarily from vehicles and gases from baby boomers who are recent retirees, a lot of them are going to be looking towards that monthly income.
I saw those monthly income products, with distributions, they take out every month and even into, into an investor’s account. We think are going to be, going to be very, very well set, sold, in addition to any kind of high yield products. The soft landing kind of narrative is still very presence.
So when that is present, looking for spreads in high yield products, this is going to be easy, easier to sell, than in kind of a hard landing scenario. However, some investors might be getting a little bit nervous with these rates staying as high as they are, that the landing may not be as soft as, as they thought.
On the ETF side, one of the things that I talked about earlier on the kind of millennials, generation Z or earlier, investor experience, ETFs in 2023 were really towards the fixed income. I expect a little bit more into kind of real accumulation equity side. And particularly active equity side, a lot of these younger investors, they love the word alternative.
They love, you know, private, anything like that, whether or not they understand what those products mean. But what those are is really active, you know, you know, private equity, private credit, that’s active equity, and active credit sits within a particular structure, but that’s active. And a lot of those activities have been lost over the past year.
So for younger investors, if they’re looking for picking, or tactical allocations, because that’s where they’re coming from, is doing their own tax bill allocations, an active ETF, even if it’s year equity is is looking to be a good sell in the first quarter of this year, I will say, just from the midterm on, on the interest rate side, when we did the household balance sheet, we did predict any interest rate cuts before 2025.
In the first period, we kept it for higher for longer than what was being called, looking to push towards that direction in 2025. However, that, you know, the 125 basis points of expected course that some, some were predicting start as early as Q1 of this year. If you look back in 2023, that’s starting in kind of Q4 to Q1 instead of 2025.
That leaves a lot more time, for these types of yield products to be picked up, picked up by clients. It also starts to push into a lot more markets for intronulls, which pushes this net savings towards zero a lot longer, or even some debt consolidation in the mid term. It does is that does reduce the overall level of fund sales into the mid, mid and long term the further this gets pushed ahead.
However, for those that are not Texans frame that kind of the older and the very younger. That’s that’s where we expect a lot of those fund sales to, to come from.
Goshka: Yeah. And then a great, landing. But you’ve landed a good punch on our expectation of, interest rate cuts because I think we were a bit low on fish on that one.
Everybody was predicting a much quicker, dialed down. And, and I think we were arguing that is going to take some good time. And I think that’s exactly where we’re going to land. Well, I think a good call on that. And, I would say it’s also, you know, I’ll claim that fame, but, it’s all thanks to you and, and the thoughtful modeling that you do.
This is great stuff. Well, thank you very much. You have given us, a lot to think about. I think it’s going to be, you know, navigating these financially tougher conditions. It’s a challenge for Canadian households, but also really, it translates into some challenges, but possibly also opportunities for asset managers and for the large and well populated Canadian investment fund, business.
I think we’ll see, who will be able to translate those conditions, into tailwinds, for there business and who will be challenged, your point about active ETFs and yield, you know, this is and, and alternatives also, focusing a lot on private credit and the yield products. Clearly, I think you are spot on with that and the active ETFs, which is published a big report in the US and really the flows have been, accelerating again, we were early on in predicting that that would happen, it took a few years. But I think we’re getting there. So thank you very, very much Will. This was, great stuff and that is a wrap for us in January.
I encourage our listeners to come back to join us in the coming months, as we have a number of quite, exciting episodes on the on the burner or, on the stove, if you will. We have a very special guest. Major leader of, distribution organization and an asset manager in the US and a guest host our own Ashley Wood from our US Team and we will really delve deeper into what it takes to succeed in today’s sales game. You know, building on Will’s point, about that kind of, stand off, if you will, between deposits, term deposits and and, accumulation or wealth and investment strategies. And we’ll figure it out, how that is playing out and the world’s largest asset management market, which is the US.
As always, I encourage everyone to ping us, with your ideas about specific topics that you might want, for us to tackle in the future. And on behalf of ISS market intelligence, let me, thank you for listening to this episode and of course, I would like to, wish you a wonderful 2024. And let’s leap into the future with that. I’m signing off. Thank you.
About the series:
MI Talk, a podcast series brought to you by ISS Market Intelligence (MI), delivers global coverage of developments in the asset management, wealth management, insurance, and distribution industries. Each episode features ISS MI’s experts in conversation about topical issues, trends, and developments that are shaping the market intelligence landscape, specifically, and global financial services industry more broadly. Financial services professionals focused on funds, annuities, insurance, mortgages, and related areas will find MI Talk particularly helpful in staying abreast of what’s of import across the industry.