Gerald Coleman, former manager of Canada's second-biggest domestic equity mutual fund, says he walked away from Mackenzie Financial Corp.'s Ivy Canadian Fund partly because Mackenzie won't pay its in-house managers a chunk of the annual revenue from their funds.
"The arrangement that I personally find more rewarding potentially is the external arrangement where [compensation is] based on the assets under your care and that's something that wasn't available to me at Mackenzie," Mr. Coleman said in an interview.
As in the movie business, where shrewd operators insist on "points of the gross" or a portion of the raw revenue from a film, investment management companies hired by mutual fund companies usually get a portion of the fund assets they run.
Mackenzie uses that system for its outside managers but employees get a combination of salaries, stock options and bonuses instead.
The Toronto-based company, like many other fund sellers, levies a 2-per-cent annual management fee on its domestic equity funds.
Ivy Canadian produced a $20-million management fee for Mackenzie in the second half of 1996 -- another $4-million in expenses were charged to unitholders. And at its current $3.4-billion size, the fund is likely to produce more than $50-million in fees this year.
But unlike an external manager, Mr. Coleman was not entitled to a given percentage of that torrent of cash. "It doesn't make sense to me that an employee should be not as well off as a guy who doesn't work for the company," he said.
Phil Cunningham, president of Mackenzie Financial Services, Mackenzie's marketing arm, confirmed that outside managers and in-house stock pickers are paid using the different systems.
But he said the in-house managers have been assured that they will be "compensated like any outside manager. And that's only fair. . . . We aim to make it a level playing field."
Mr. Coleman said money was not the main reason for his move to Toronto-based C. I. Fund Management Inc.
He said he wanted to be part of a smaller organization in which he could take a bigger stake and play a larger role. "I like the idea of being a senior partner in a well-run, efficient, mid-sized Canadian mutual fund company, which I think has a promising future."
Mackenzie had mutual fund assets of $17.8-billion at the end of April, making it Canada's fourth-biggest fund manager. C. I. had assets of $6.2-billion, putting it in the No. 14 spot.
C. I.'s other big attraction, Mr. Coleman said, was the long-term contract he was offered. "The fact that I was able to strike an arrangement of this kind on a long-term basis really appealed to me. . . . It always puzzled me that Mackenzie were never interested in forming a long-term relationship."
He wouldn't give details of the contract.
C. I., which hired Mr. Coleman away from Mackenzie last week, had previously used outside managers for all of its funds, rather than employing fund managers in-house.
Outside managers who run Canadian equities for C. I. get up to one-fifth of 1 per cent of the assets they manage. That means, for instance, that John Zechner's J. Zechner & Associates Ltd. gets a maximum of about $2.2-million annually for running the $1.1-billion C. I. Canadian Growth Fund.
C. I. said Mr. Coleman, who is joining the company as president of its new C. I. Capital Management money management unit, will get the same compensation as an outside manager.
Mr. Coleman joins a procession of mutual fund managers who have become dissatisfied with a regular pay cheque and bonus, said Harry Marmer, director of investment management services at Toronto-based Frank Russell Canada Ltd.
"As long as man is human and has needs to fulfill, [managers will] desire to have some form of equity in a business in which they can earn significant profits."
Last year, for example, three managers of Elliott & Page Equity Fund and Elliott & Page Balanced Fund left to set up their own investment management firm, PCJ Investment Counsel Ltd. of Toronto. They continue to run the funds.
Mr. Coleman's move is likely to prove lucrative, another fund industry observer said. "What he's getting are all the benefits of having his own business without having the overhead of having to set up his own business."
© 2007 The Globe and Mail. All rights reserved.
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