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Mutual Fund News

Regulation fears hurt fund firms' shares, analysts say

MUTUAL FUNDS REPORTER

Fears of a tougher regulatory regime are punishing the shares of mutual fund companies, analysts said yesterday.

"Mutual funds face increasing regulatory risk," was the headline on a report issued yesterday by BMO Nesbitt Burns Inc. Press coverage in Canada highlighting irregular fund trading "could increase the risk of greater regulatory oversight" and is "likely to weigh on the share prices of large mutual fund companies in the near term," said John Reucassel, BMO Nesbitt Burns analyst, in the report.

Financial services firms with significant mutual fund interests have declined in recent weeks from their 52-week highs.

For example, CI Fund Management Inc. closed at $15.85, down 3 cents on the Toronto Stock Exchange yesterday. The Toronto fund company has lost about 5 per cent of its value since June 1, when it reached a 52-week high of $16.60.

The class B shares of AGF Management Ltd. were up 19 cents to $18 yesterday. But the stock of the Toronto firm has lost 5 per cent in value since reaching a 52-week high of $19.87 on April 2.

Similarly, IGM Financial Inc., holding company parent of Investors Group Inc. and Mackenzie Financial Corp., and Dundee Wealth Management Inc., parent of Dynamic Mutual Funds Ltd., have fallen from 52-week highs. In Toronto yesterday, IGM was down 45 cents to $32.70, down 9 per cent since March, while Dundee Wealth was off 5 cents to $8.60, a decline of 8 per cent since January.

On Monday, The Globe and Mail reported many hedge fund managers and other market professionals have siphoned off hundreds of millions of dollars of value from Canadian mutual funds over a four-year period by engaging in a trading strategy of darting in and out of the funds to scoop up profits.

This rapid in-and-out trading in the funds totalled more than $220-billion between 2000 and 2003, a pattern highly suggestive of so-called market timing, the investigation uncovered.

The media attention comes at a "sensitive time" for the sector, Mr. Reucassel said. Negative press coverage could weaken the fragile momentum in mutual fund sales, he said.

Last week, the Investment Funds Institute of Canada reported May net sales of $533-million, the eighth consecutive month of revenue gains.

But short-term institutional investments in money market funds accounted for $278-million of new sales, more than half of last month's gains.

The Ontario Securities Commission is probing the trading practices of 15 mutual fund companies, an investigation that Mr. Reucassel believes is "unlikely" to uncover the depth of scandal found in the United States.

The OSC investigation follows last year's high-profile investigation by New York State Attorney-General Eliot Spitzer that has revealed some the biggest U.S. mutual fund families have secretly favoured short-term professional traders over small investors.

Today, the U.S. Securities and Exchange Commission is expected to approve a regulation forcing most U.S. fund companies to replace their board chairmen with outsiders who are independent. The agency has already revised disclosure rules and forced funds to adopt new ethics codes.

Increased regulation for Canadian fund companies "is a concern and has been since Eliot Spitzer first raised the issue in the U.S.," said John Aiken, analyst at National Bank Financial.

"However, at this point I believe a lot of the risk has been priced into the stocks."

Technical analysis suggests mutual fund shares will continue to fall in the near-term, said Don Vialoux, an independent analyst.

"We've been getting significant technical pressure on the sector over the last two to three weeks," Mr. Vialoux said. "My guessing is it's partly in anticipation of the Ontario Securities Commission report . . . people are starting to anticipate something that is not going to be pleasant."

One analyst who asked not to be identified said it is unlikely any measures by the OSC will have an impact on mutual funds.

Market timing has gone unchecked for years, he said, adding that it is cash flow, not the regulatory environment, that will govern the sector's fortunes.

© 2007 The Globe and Mail. All rights reserved.

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