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Mutual Fund News

Fund managers find their voice

Some are reluctantly stepping into spotlight in the wake of corporate governance, writes KEITH DAMSELL

MUTUAL FUNDS REPORTER

An unlikely group of party crashers upstaged chief executive officers during this spring's round of annual general meetings.

Mutual fund managers, typically a low-key group that likes to fly well below the media's radar, were suddenly the stars of the show. In the wake of corporate governance and choppy equity markets, fund executives are reluctantly stepping into the spotlight.

"Sometimes going public on an issue can be helpful," said Keith Graham, equity manager at AGF Funds Inc. in Toronto. "It can be a case of tactics, trying to accomplish a goal or to get a message across or when you are worried that a company may not be acting in the best interests of shareholders."

In recent weeks, typically bashful fund managers found their voices on a handful of shareholder issues.

Magna International Inc.

A lucrative $54-million compensation package for auto parts chairman Frank Stronach was criticized by funds in the press. In protest, Royal Bank of Canada's investment arm, along with Ethical Funds Co. and Meritas Financial Inc., signalled they would withhold their votes for the company's board of directors at the May 6 annual meeting.

Wheaton River Minerals Ltd.

Fidelity Management Ltd., owner of a 14.6-per-cent interest in the Vancouver precious metals miner, complained it was prevented from voting some of its proxies against the proposed June 8 merger with Iamgold Corp. Wheaton bowed to pressure and agreed to hold a second vote July 6.

Molson Inc.

On June 22, AIM Funds Management Inc. and AGF voted against the re-election of Dan Colson to the brewery giant's board, citing the newspaper executive's ties to troubled Hollinger International Inc.

The public airing of corporate beefs rattles the tradition of the Canadian establishment. Several industry executives said the gentlemanly art of back-room arm twisting remains the most persuasive method of winning over a chief executive officer.

"You can have some pretty stormy meetings but they are behind closed doors," said Tom Bradley, president and chief executive manager of Phillips Hager & North Investment Management Ltd. of Vancouver. "Going public can work both ways. You can get management cornered and then they won't back off, whereas if you do it behind closed doors, sometimes they are a little more amenable to fine tuning something."

Fidelity, for example, considers public pronouncements a last resort. The fund manager typically buys large minority stakes and tipping its hand to the media can undermine a fund's performance, said spokeswoman Kim Flood.

But a changing investment climate is driving mutual fund managers out of the board room and into the business press. First, the flurry of high-profile corporate scandals, from Enron Corp. to Nortel Networks Corp., has pushed corporate governance to the top of the agenda.

Investors large and small are on watch like never before and funds benefit when the public perceives they are acting in good faith. The new climate led to the creation in April last year of the Canadian Coalition for Good Governance, a Toronto-based lobby group of institutional shareholders that includes a handful of mutual fund companies.

"People are a heck of a lot more vigilant," said Blake Goldring, president and chief executive officer of AGF Management Ltd. "The bottom line is obviously doing what is the best thing for unit holders. There have been a couple of cases where we have had to -- not that we wanted to -- be a bit more vocal."

But more importantly, fund managers argue that the profile of Canada's equity market makes it necessary to be a more diligent -- and if necessary -- vocal investor. Dozens of competing Canadian equity funds have a narrow list of about 20 to 30 large-cap, blue-chip dividend-paying companies to choose from, said one fund manager. Funds have little choice but to invest in Magna and Molson and make a noisy public push for performance when deemed appropriate.

"The universe is very tight," said Geoff MacDonald, Toronto-based manager of the Trimark Canadian Endeavour Fund, an equity fund that owns a slender 25 firms. "Every now and then, because of the nature of Canada, you do get yourself involved in a situation where management or the board want to go in a different way than what you believe are in shareholders' best interests. And that's where you a) have to speak up or b) work behind the scene to express your point of view."

But the fund industry's spirit of public discourse has its limits. Several fund executives were critical of disclosure rules proposed by the Canadian Securities Administrators that would establish proxy voting guidelines and procedures. The industry argues that the rules, expected to put greater pressure on fund companies to act in the interests of investors, would add to compliance costs and expose managers to lobbying by unit holders.

"We will not take our position on a proxy public but we are very keen on making sure we get counted," said David Feather, president of Toronto's Mackenzie Financial Services Inc.

"You and I as shareholders of a company shouldn't be obligated to go out and tell everyone which way we are voting. At what point do you draw the line? Is it 10 shares? A million shares?"

While industry critics support the activist trend, there's much agreement that funds have a long way to go when it comes to speaking up on behalf of unit holders. In a recent report, small investor advocate Ken Kivenko described Fidelity's critique of Wheaton "refreshing" but was quick to add "we'd like to see similar examples of assertiveness," citing a long list of "misbehaving" firms such as Nortel, Hollinger Inc. and Atlas Cold Storage Income Trust.

"It's about time [fund companies] represent the people whose money they are steering at a high fee," said Stephen Jarislowsky of Montreal's Jarislowsky Fraser Ltd., one of corporate Canada's most vocal institutional shareholders. "[Fund managers] do nothing. I have never seen in my life that they work behind the scenes. I guess sometimes they do but then they vote for management, time and time again," he said.

It is difficult to gauge activism when it comes to returns. A random survey of three equity funds that have spoken out on recent issues outperformed the Standard and Poor's-Toronto Stock Exchange composite index.

However, "it's a tough thing to classify," said Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont. "I would certainly think activists would have good performance. Whether its better or not than non-activists, I don't know."

How they performed

Fund name............................6 mo. Return........1 yr. Return.............3 yr. Return..........5 yr. Return

AGF Cdn Real Value Balanced........4.36%..................-..........................- ....................- ....

Fidelity Canadian Opportunities........11.65%...............33.89%..................9.24%...............-...

Meritas Juntzi Social ndex...............7.08%.................21.39%..................0.90%................-

Index Name........................6 mo. Return...........1 yr return.............3 yr. Return............5 yr. Return

S&P/TSX Composite Index.............7.10%.................22.71%.................1.03%.............4.23%

S&P/TSX Total Return..................8.03%.................24.88%.................2.87%.............5.92%

What they own

Fund name..........................................Security...............................Number of shares

AGF Cdn Real Value Balanced..................Molson................................795,900 (Class A Common)

Fidelity Canadian Opportunities-A...............Wheaton River........................1,076,000 (Common)

Meritas Jantzi Social Index.......................Magna...................................5,415 (Class A common)

© 2007 The Globe and Mail. All rights reserved.

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