February 17, 2008

Asset managers feel the pain

TORONTO (Reuters) - No quick turnaround is in sight for the shares of Canadian fund-management companies, which have been pounded in 2008 as sliding stock markets hurt assets under management and slowed mutual fund sales.

Canadians usually sock money away at this time of year for their retirement savings. But the annual RRSP season, as it's known, is off to a weak start, and skittish investors are opting to park their cash in money-market funds until there is some semblance of market stability.

Not surprisingly, the independent companies that create and sell mutual funds have been poor performers in early 2008.

"It's going to be fairly difficult for the large-cap players to dig themselves out of the hole they're in right now," said Dundee Securities analyst John Aiken. "It's not that anybody's doing anything wrong, it's just that we've had a moderating outlook."

The stocks of AGF Management and CI Financial have tumbled by 21 percent and 19 percent, respectively. That far outpaces the 4.4 percent year-to-date decline in the broad Toronto Stock Exchange composite index, and a 7 percent drop in the S&P/TSX Financials index.

At IGM Financial -- the country's largest fund company with C$119 billion ($118 billion) in assets under management -- shares are down 13 percent.

IGM is really two fund companies under one roof, Investors Group and Mackenzie Financial, and numerous analysts consider it to be the most defensive name in the sector.

IGM "should have the least downside risk relative to its closest peers," Genuity Capital analyst Gabriel Dechaine said in a note on Friday entitled: "Sometimes boring can be beautiful."

In late January, RBC Capital Markets analysts said 12-month total returns for stocks in the sector could range from a drop of 20 percent, if the TSX falls further, to an optimistic scenario in which returns hit 40 percent on average. That would require a big, double-digit rally on the Toronto market, they noted in a report.

Patient investors or those with a value bent might consider buying now.

"I think the market is already pricing in a bad year for these things," said Paul Harris, a portfolio manager at Avenue Investment Management in Toronto.

With bigger players such as CI or IGM, investors get companies with large market shares, diversified product offerings, and "a decent yield," even taking CI's announced distribution cut into account, Harris said.

"These are well-run companies, they have huge market shares, and they are not expensive at these levels," Harris said.

"I think you can wait it out and you'll do well with them."

If market volatility continues, IGM is "far and away" the best placed because its Investors Group unit distributes mutual funds exclusively through its own sales force, giving it more resiliency in sales, Dundee analyst Aiken said.

"This is where you see the absolutely stunning low levels of redemption rates," Aiken said.

Redemption rates at Investors Group are about half the industry average.

Investors Group had 4,331 financial consultants at the end of 2007, after adding more than 400 during the year.

While there are costs in recruiting and training new consultants and opening offices, "we are also seeing productivity improvements throughout the organization" as mature consultants sell more product, Murray Taylor, head of Investors Group and co-president and co-CEO of IGM, told a conference call on Friday.

On the Mackenzie side of IGM, net redemptions have plagued its Ivy brand of mutual funds. But they should perform well in the current environment due to the team's investment style, said Mackenzie president Charles Sims, who is IGM's other co-president and co-CEO.

Investors will have a chance to hear from CI Financial, which reports quarterly results on Wednesday, and from rival AGF Financial, which holds an investor forum on the same day.

($1=$1.01 Canadian)

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