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Mutual Fund News

Boutique fund companies generate buzz

Smaller firms are fastest-growing segment of sector

MUTUAL FUNDS REPORTER

The foreboding skull of a longhorn steer greets visitors as they enter the offices of Mavrix Fund Management Inc. In the men's room around the corner, two glossy Sports Illustrated swimsuit calendars hang on the wall. The company's sixth-floor patio has hosted its share of noisy gatherings this summer.

Despite appearances, the unorthodox Mavrix is one of the buttoned-down financial service sector's small success stories this year. In April, the Toronto firm surprised the market when it successfully completed its $18.8-million initial public offering, even as the fund industry struggled. The firm's mutual fund assets under management climbed to about $278-million last month, up 83 per cent from $152-million a year ago.

Mavrix is one of a handful of little-known boutique fund companies that have become the fastest-growing segment of the stale sector. In the case of Mavrix, the company is benefiting not only from being in a vibrant niche market, but it is generating its own buzz by doing things differently. There aren't too many other fund firms where money managers take their message directly to planners, on a daily basis no less.

"A lot of these smaller players come off with a lot more charisma . . . they've got a personal touch that's appealing," said one financial services analyst. "The markets are trading sideways and people are looking for some sort of a differentiation. They [smaller players] are a lot more nimble."

A series of issues are making Canadians rethink where they invest their dollars. Investors are moving their money out of many older funds, as costly deferred service charges that a unit holder must pay to exit a fund get phased out. As well, since 2000, equity and bond markets have been choppy and many investors are looking for improved returns, especially baby boomers nearing retirement. And finally, industry consolidation has prompted many investment advisers to look beyond the status quo for new ideas.

Financial planners "want to continue dealing with one or two of the big companies but they want to diversify their business and deal with one or two of the smaller players. That's worked to our advantage," said Eric Frape, vice-president of product management at ClaringtonFunds Inc. of Toronto.

Clarington is a good example of a small player finding the right niche at the right time. In the mid-1990s, Clarington was a market contrarian, launching a series of conservative income-generating funds while much of Bay Street obsessed over tech stocks. The Clarington Canadian Income Fund, managed by Seamark Asset Management Ltd. of Halifax, now boasts $1.2-billion in assets under management, about one-third of Clarington's total assets.

David Schwartz, vice-president and chief operating officer of Sentry Select Capital Corp., argues smaller firms are simply exploiting the industry's chief weakness: The big fund companies are failing to address the needs of their clients.

"They've lost track of what investors really want right now. For the last three or four years, investors seem to want income at any costs and the smaller companies like ourselves are able to respond," Mr. Schwartz said. Sentry Select manages more than $3-billion in assets, including a long list of income trust products and funds.

Mavrix, like Sentry, manages the bulk of its funds internally to boost margins and lower costs. Indeed, some Mavrix managers wear multiple hats. For example, Mal Spooner, the company's irreverent chairman, president and chief executive officer, oversees the company's resource funds. On a daily basis, portfolio managers speak with financial planners around the country.

"Who does a branch [office of investment advisers] want to see? The portfolio manager face-to-face or a salesperson?" Mr. Spooner said. "We're trying to offer a higher level of service . . . we're trying to do what bigger firms have more difficulty doing."

Major fund companies are watching their smaller rivals closely. The consensus view is many boutiques are having their day in the sun courtesy of a hot investment trend. In the end, the banks, along with IGM Financial Inc. and foreign-controlled providers like AIM Funds Management Inc. will continue to dominate the sector.

"When you are riding a wave, all the ships rise to the top. When the tide changes, you come down quickly," said one product manager with a $30-billion fund company. "I don't know if they will all be there in the long term. There will be some flame-outs."

That said, one senior executive with a U.S.-owned fund company believes the boutique firms play an important role by testing new investment ideas in the market.

Smaller firms "are where you will see the innovation and the newness coming in to the industry," the fund executive said. "The big players, generally, play from a perspective of let's try and not lose, whereas the upstarts are playing to win."

Funds boutique

Some of the largest funds from little known players have a history of strong returns. As of Aug. 31, 2004

Name of fund.................Assets under management .....1-year...........3-year..............5-year

...........................................$million...................return.........total return.........total return

Clarington Canadian

Dividend Fund...........................$601.6......................9.7%...........3.8%................-............

Acuity High

Income Fund.............................$440.8.....................14.0%..........14.9%..............13.0%.....

Saxon Stock Fund.......................$257.5.....................11.6%...........9.6%...............12.2%

Sentry Select Canadian

Income Fund.............................$204.2......................25.1%.............-....................-

Maurix Dividend &

Income Fund.............................$192.9......................15.2%..........16.6%............17.0%

S&P/TSX 60 index...........................-.......................10.0%............2.7%.............2.7%

SOURCE : GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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