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Bank taps into hot demand for U.S. currency exposure

Bank of Montreal is counting on Canada's weakened currency for the success of the three latest additions to its First Canadian family of funds. Launched on Oct. 2, the U.S.-dollar-denominated funds are designed for investors who are looking to hedge their currency bets through diversification. The funds include a money market, a bond and an equity index fund. The bond fund will invest in U.S.-government debt and the index will track the S&P 500 total return index.

The bank, which is marketing the funds as a family designed to cover the three major asset classes, is hoping the funds will gain the attention of Canadians who have invested in U.S.-dollar savings accounts. The firm is promoting the no-load funds as deposit substitutes, saying they have comparable liquidity and can be redeemed at any time at no cost. The funds also require small minimums of $500 (U.S.) initially and $50 dollars each month under a periodic investment plan.

Harris Investment Management of Chicago, an affiliate of Bank of Montreal, will manage the funds. Harris is part of the bank's North American Asset Management Group and already manages five U.S. equity funds as well as a global technology fund in the First Canadian family.

Canadians who do business in the U.S. and so-called "snowbirds," who winter in the U.S., are among the target markets for these funds. With the Canadian dollar dropping to all-time lows against the U.S. dollar and having been weak through most of the year, Canadian investors have been diversifying the currencies in which they have investments. They have been particularly moving towards investments in U.S. dollars.

Other sales trends of funds in recent months also auger well for the new funds. Because of the turbulence in global financial markets, many investors have turned to the safe haven of money-market funds. Despite low interest rates, this category of cash-equivalent funds has been experiencing solid growth, according to figures released by the Investment Funds Institute of Canada (IFIC). Net sales of money-market funds totalled $213 million in the first eight months of the year, according to IFIC's data.

Industry figures also point to the growing popularity of U.S. equity funds as investors move to more-established markets. Sales of U.S. equity funds rose by 23.4 percent in the year ending Aug. 31. These funds were the second-fasting growing category for Canadian fund-buyers. Also, after years of being spurned by Canadian investors, foreign bonds are starting to enjoy some resurgence in popularity. Net sales for these funds totalled $19 million in the first eight months of the year, a reversal after years of heavy redemptions.

However, despite the apparent timeliness of Bank of Montreal's launch, these types of funds are not new to the Canadian mutual-fund marketplace. There are currently 18 U.S. money market funds being sold by Canadian fund companies and seven bond funds that invest in either U.S. issues alone or a combination of U.S. and Canadian debt issues.

Meanwhile, U.S. equity index funds have grown in popularity, thanks to the prolonged North American bull market of the 1990s. Most of the 23 funds in this category track the broad S&P 500 but a few track the smaller, technology-heavy Nasdaq index. Indeed, First Canadian already offers another U.S. equity index fund that is also managed by Harris Investment Management. Nor is the option to purchase funds in U.S.-dollars new to Canadian investors. Currently, Canadian investors may choose from more than 200 funds that are sold and valued in U.S. currency.

Nevertheless, the new Bank of Montreal funds represent the first "family" of its kind in Canada. And, although some investment advisers argue that U.S.-dollar investments are not the best way to protect against currency risk, individual investors are limited in the ways in which they can diversify the currencies of their investments. As a result, U.S.-dollar denominated funds can be expected to be popular as long as the wide differences between the Canadian and U.S. dollar persist. Currently, Bank of Montreal has $9.6 billion in assets under management and ranks 12th among IFIC-member firms.