Consolidate, baby, consolidate.
The more the mutual fund industry weeds out its weaker players through takeovers and mergers, the better for investors. So, yes, National Bank's deal to buy Altamira is a good thing.
According to Globefund.com, there are something like 5,000 different fund choices available to Canadian investors right now, a total that is absurdly high and destructive to investors and to fund companies.
Think of the billions of dollars sloshing around in junk funds that exist only so that the company offering them can claim to offer a full range of products. Think of fund companies wasting their resources on the overhead required to keep these stiffs going. Consolidation can cure these problems, if the fund industry does it right.
Now, what are investors to make of National Bank Financial buying Altamira?
On the surface, National Bank's undistinguished family is swallowing an Altamira lineup that has bled assets every month this year through the end of May. This isn't a huge surprise, given that the company is saddled with numerous dud funds. A good example is the flagship $1.03-billion Altamira Equity Fund, which has ranked among the bottom 25 per cent of Canadian equity funds in five of the past six years.
There's nothing in the National Bank fund menu to suggest the presence of any talent that can parachute into Altamira's weaker funds and get things straightened away. But there is something National Bank can easily do to improve things at Altamira -- get out a machete and start consolidating.
There are rules for shutting or merging funds, so we'll just do some blue-skying here on what specific measures National Bank could take.
Closing the $55.1-million Altamira e-business fund would be a nice start. This pitiful remnant of the technology stock craze has lost a compound average annual 25.4 per cent for the three years to May 31, almost double the loss of the Nasdaq Stock Market composite index.
What's worse than the e-business fund? How about a spinoff version that's eligible for registered retirement accounts. This fund is such a bad idea it's amazing Altamira hasn't already taken it out into the woods and buried it.
Other candidates for consolidation include Altamira's orphan funds, those that have been such a hit with investors that they had less than $11-million in assets as of the end of last month. Globefund.com shows six such funds, including Altamira Precision European Index, Altamira RSP Japanese Opportunity and Altamira Global Telecommunications.
Here's an idea -- roll the telecom and e-business funds into the $242-million Altamira Science & Technology Fund, which is down on its luck now but was one of the heroes of the tech runup.
Here's another idea -- Altamira has two balanced funds with slightly different mandates. National Bank could combine the two and cut overhead. Then, it could take the savings and plow them back into the Altamira funds worth keeping.
There are several such funds, by the way. Altamira Equity has great brand recognition thanks to its go-go years under Frank Mersch, and there's also an excellent collection of fixed-income funds, including Altamira Bond, Altamira Income and Altamira Short Term Canadian Income, as well as Altamira T-Bill.
Of course, the temptation will be for fund companies to pocket any money they save through consolidation.
Fund sales have been awful lately and it's hard to imagine a return to the great days of the late 1990s, even if the stock market turns around.
And yet, there's a business argument to be made for sharing the spoils of consolidation.
Even if sales growth keeps slackening in the years ahead, investors are still going to buy mutual funds. Increasingly, though, they're going to be choosier about who they deal with.
Fat-cat fund companies that spew out funds without much thought to quality are going to lose out in this kind of a market. Those that create a tight lineup of competitive funds will be in a much better position.
National Bank could accomplish this by judiciously pruning Altamira's lineup and then using the savings to beef up the management team at Altamira Equity. Another possibility would be to lower the management expense ratio on a new balanced fund created from the existing two.
Most likely, consolidation will give us an industry of huge monster companies and small boutique firms that cater to savvy investors who buy funds, not hype. Saxon and McLean Budden are examples of the small companies, while AIM Funds, Fidelity and Mackenzie are examples of the big guys.
If you're worried that a fund industry structured like this would mean a lack of choice, just remember that we're drowning in choice now. What we need more of is quality.
© 2007 The Globe and Mail. All rights reserved.
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