Hasta la vista Latin American growth funds; hello income trust and hedge funds.
In the wake of megamergers, the fund sector is consolidating -- and expanding -- like never before. While some funds are disappearing, merging assets with other plays to cut costs, uncertain market conditions have led to even more sprouting back in their place, promising ever-higher returns.
"The funds will jump on anything new that comes along and then do different versions," said Ken Kivenko, chairman of the Small Investor Protection Committee. He advises caution: Unit holders may have no say if a fund is in fact to merge, and mergers can mean higher fees, while new funds have a limited record of performance.
"How do you find the right funds? This could be even more dangerous to your [financial] health than picking the wrong stock," he said.
According to research from Globeinvestor, 239 funds merged assets last year, up from 207 in 2002. More deals are on tap. On June 21, unit holders of Investors Group will vote to merge 13 funds. CI Fund Management Inc. merged seven funds last month, and more unions are expected in the fall and 2005.
"It costs an awful lot of money to have a lot of smaller funds. By putting them together we can actually save a lot of money for investors," said Peter Anderson, CI president and chief executive officer.
While industry consolidation has driven mergers, there's some agreement that the mandate of many once-hot sector funds launched in the bull market of the 1990s may have been specious to begin with. For example, ailing e-commerce and telecommunications funds have been swallowed by tech funds with a broader scope.
"There's a lot of funds out there that were a great idea in 1999 that are not such a good idea today," said Ian Filderman, director of mutual funds at Scotia Securities Inc. The Scotia group prides itself on a family of 47 funds with little overlap in holdings or mandate, he said.
"It's fair to say we overbuilt in the nineties as most of our competitors did . . . as a sector, we overrespond to consumer demand," said David Feather, president of Mackenzie Financial Services Inc., which itself was bought in 2001 by Investors Group. Since 2002, Mackenzie has merged 54 funds.
Despite the wave of fund mergers, the total number of funds continues to climb. At the end of 2003, there were a staggering 5,422 Canadian funds, up from 5,035 in 2002. In comparison, 1,760 companies are listed on the Toronto Stock Exchange. The 387-fund increase includes a large chunk of "clones," or new classes of existing funds. Nevertheless, there are dozens of new high-yield income products, including structured funds and investment trust funds.
Diminishing returns from traditional equity and bond funds have made high-yield funds "very popular," reports Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont.
"Some of it is marketing driven," Mr. Hallett said. "From a business standpoint, it makes sense that they [fund companies] would want to at the very least retain the assets that they are managing currently, and ideally attract, on a net basis, new money."
Small fund managers are chasing new investors with increasingly exotic products that promise lofty returns. In May, Navigator Capital Management Inc. launched the Compass Long/Short Fund, a Canadian and U.S. equity hedge fund that expects to reap a 25-per-cent to 50-per-cent annual return via the volatile biotech sector. To date, the fund has attracted about $5-million in funds, said Garett Prins, Navigator's president and chief executive officer.
"We can perform in any market and people are really taking an interest," Mr. Prins said. "Up markets, down markets, sideways markets, our view of events can change on a dime."
While Mackenzie adheres to a balanced portfolio model, Mr. Feather concedes that alternative high-yield and structured products can "play a role" in some portfolios. Last year, Mackenzie launched its own diversified income trust fund, joining Franklin Templeton Investments, CM Investment Management and others in the trust fund game.
But Peter Loach, an analyst at BMO Nesbitt Burns Inc., warns that there is a higher risk factor inherent in many new products. Four income trust funds surveyed reported 12-month gains of 14 per cent to 25 per cent, but they have slid 3 to 5 per cent in the past three months.
"Whenever you buy anything other than a bond or a T-bill, you are taking on risk. When you are achieving returns that are 25 per cent higher than those, you are taking on a lot of risk," Mr. Loach said.
© 2007 The Globe and Mail. All rights reserved.
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