Ethical Funds Inc., which targets socially responsible companies for its investments, is considering replacing scandal-plagued U.S.-based Alliance Capital Management Holding LP as manager of one of its foreign stock funds.
New York-based Alliance Capital, the largest U.S. publicly traded money manager, has suspended two top managers for alleged conflicts of interest in fund trading, and has recorded a third-quarter $190-million (U.S.) charge for restitution and litigation costs related to a probe on market timing.
"When you are positioning yourself as being socially responsible investors, and an event like this comes out, it becomes very sensitive," said Don Rolfe, chief executive officer of Vancouver-based Ethical Funds. "We want to make sure that we are seen as doing the right thing at all times."
Mr. Rolfe said Ethical Funds is monitoring the situation daily, and has found an alternate manager to replace Alliance Capital on its Ethical North American Equity Fund, if its board of directors ultimately decides to let this manager go. "We are obviously concerned about their reputation."
So far, he has received assurance from Alliance that the mutual fund trading probe by U.S. regulatory authorities is "isolated," and is not directly related to the management of money for Ethical Funds.
The scandal rocking the U.S. fund industry, as a result of an investigation by New York Attorney-General Elliot Spitzer, has caused headaches for Canadian fund companies that use U.S.-based managers for their funds, and has also meant a beefing up of their hiring procedures.
Mr. Rolfe said Ethical Funds hired two management search firms this time -- instead of one -- to short-list candidates that might replace Alliance Capital, and make sure "we haven't missed anything."
Besides Alliance Capital, the welter of U.S. companies being investigated on allegations of rapid and late trading of mutual funds include such names as Putnam Investments, Janus Capital Group Inc., Fred Alger Management Inc., Pilgrim Baxter & Associates and Strong Capital Management Inc.
Alliance Capital also runs funds for BMO Mutual Funds Inc. and Mackenzie Financial Corp., a unit of Winnipeg-based Investors Group Inc.
Scott Barlow, a fund analyst at CIBC Wood Gundy Inc., said Canadian fund companies are concerned by the American scandal affecting their U.S. managers, adding that Bank of Montreal, particularly, has had "some bad luck" because it has relationships with a number of firms. More than half of the assets in Canadian foreign stock funds are run by U.S.-based managers.
BMO Mutual Funds, which last month fired Boston-based Putnam Investments on its BMO International Equity Fund, said it has decided to delay a previous decision to hire Alliance Capital to replace J.P. Morgan Fleming Asset Management on its BMO Emerging Markets and BMO Japanese funds. Alliance Capital was to have started running those funds this week.
"We believe that it is in the best interests of unitholders not to [hire Alliance Capital] at this time," said Bank of Montreal spokeswoman JoAnne Hayes. "There are too many uncertainties."
But the bank plans to let Alliance Capital continue to manage the BMO European Fund for now because, so far, it hasn't been affected by the allegations of improprieties, Ms. Hayes said.
She said the bank dropped Putnam Investments from its BMO International Equity fund because it was run by a team headed by Omid Kamshad, a chief investment officer who has been charged with securities fraud. Putnam has put a new interim team on that fund until the bank finds a replacement.
Ms. Hayes said the bank has become more careful in its hiring for a manager to replace Putnam, and has expanded its questions to include "asking them about inappropriate trading activities."
Alliance Capital also runs five funds for Mackenzie Financial, including Mackenzie Universal Growth Trends, Mackenzie Universal Health Sciences and Sentinel Tactical Global Bond Fund.
David Feather, president of Mackenzie's fund arm, said in an e-mail response that his company is "always reviewing" the practices of its outside investment advisers, and has decided to let Alliance Capital continue running five funds. "We have attained assurances from Alliance that the people who are alleged to have been involved in these issues are not involved with our funds."
Toronto-based Sceptre Investment Counsel Ltd., which sells pooled funds managed by Putnam to institutional investors, acknowledged that it has experienced some redemptions as a result of the negative publicity about alleged improper trading by Putnam managers.
"There has been mixed reaction among clients," Sceptre's chief executive officer Richard Knowles said. "We have some strong supporters of Putnam who have retained them, and we have others -- who for other reasons -- have dropped them."
Marlene Klassen, a spokeswoman for Winnipeg-based Great-West Lifeco Inc., said the insurer has put the six funds managed by Putnam "under review," and is now involved in a search for a global fund manager because it feels that is in the "best interest of unitholders."
Putnam runs about $700-million in assets for Great-West and subsidiary London Life Insurance Co. Up to 20 global investment managers -- including Putnam -- are expected to be interviewed for the job of running about $700-million in assets, Ms. Klassen said.
© 2007 The Globe and Mail. All rights reserved.
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