The public's skepticism about the mutual fund sector is expected to deepen in the weeks ahead following revelations that some of the sector's biggest players may face enforcement action from securities regulators.
The credibility of funds as an investment vehicle, already under pressure because of weak markets and intense competition, is likely to suffer as the scandal drags on, industry sources said. The trading practices of more than 20 firms are under investigation by the Ontario Securities Commission.
"Clearly it will have some impact on credibility [on the fund sector]. It would be difficult to think otherwise," said Bill Holland, president and chief executive officer of CI Fund Management Inc. of Toronto.
CI, along with fund rivals Investors Group Inc., AGF Funds Inc. and AIC Ltd., may face enforcement proceedings from the OSC as part of an in-depth review of trading practices from 2000 through 2003. On Tuesday, regulators found evidence of rapid, in-and-out trading in their funds, activity characteristic of market timing. The firms have 10 days to respond to the allegations.
It's expected that the next two weeks will see "some very interesting exercises in gamesmanship" as the four firms seek guidance from the OSC and cut potential deals with the regulator, one fund executive said. CI Fund Management has not ruled out a potential settlement.
To date, Mr. Holland has been the only industry executive to speak publicly on the probe. In a series of statements, each firm has confirmed receipt of an OSC letter but said little else. The absence of information has created a sense of uncertainty, said Dan Hallett, president of Dan Hallett & Associates Inc.
"We still have to wait for more information and hope that we'll get more information," Mr. Hallett said. "Advisers and investors want to know which company has done them wrong and if the firm has undertaken activities that compromise that trust. There's going to be some unhappy people around."
The information vacuum is a problem and will do little to soothe the fears of the investing public, said David Weiner, senior partner at National Public Relations Ltd. in Toronto.
"Silence usually implies to the public, rightly or wrongly, that you've got something to hide," Mr. Weiner said, adding that the trading probe has been in the works since October last year.
"It speaks to the absence in that industry of meaningful management of difficult issues . . . this was an industry that was pretty late to the table even when they had a gun to their heads," he said.
That leadership role would typically fall to the Investment Funds Institute of Canada, a trade association that is holding its annual convention next week in Toronto. While the regulatory scandal is expected to dominate discussion at the three-day forum, IFIC's official position is no comment.
"It's not appropriate for IFIC to comment . . . We don't know the allegations, we don't know how serious they are, we don't know if they are intentional problems or just inadvertence," said Tom Hockin, IFIC president and chief executive officer.
Many in the fund sector argue that IFIC is an ineffective body because of the competing interests of its members, a vast group that includes banks, fund managers and distributors, and small boutique firms.
To make matters worse, the fund sector is struggling. Last month, the sector reported a slender $49.8-million in new investment, maintaining its tentative 11-month trend of net positive sales. Meanwhile, a long list of competing products is chasing investors, especially high-net-worth clients. In 2003, investors poured $5.7-billion in to sophisticated retail structured products, compared with $607-million divested from mutual funds.
The long-term impact on the industry is hard to call. Some industry watchers believe that the OSC allegations may spark further net redemptions, especially for AIC and AGF, two firms struggling to overcome more than two years of divestment from their funds. That said, the investment community has largely shrugged off the OSC probe. Three of the four fund firms named Tuesday are publicly traded and their shares have been flat over the past two trading sessions on the Toronto Stock Exchange.
"This is an old story that needs closure," one industry analyst said. "This might be a black eye for a month and then people will move on."
© 2007 The Globe and Mail. All rights reserved.
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