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Loyalty to mutual funds linked to returns

Investors said to forgive scandal


Forget regulatory scandal -- for mutual fund investors, loyalty hinges on performance.

This Thursday, some of Canada's largest mutual-fund companies are expected to conclude multimillion-dollar settlements with the Ontario Securities Commission over market timing activities. But a quick look at fund flows suggests investors are more apt to punish fund companies based on performance than for allegedly engaging in questionable practices.

"It's not surprising," said Dan Hallett, president of Dan Hallett & Associates Inc., a mutual fund research firm. The market-timing probe has "not had a significant impact" on fund sales in a recovering market, he said.

"Most people are concerned with how it affects them individually," Mr. Hallett said. "And most people have had pretty good performance over this time and that makes them less sensitive to the issue."

On Sept. 21, the OSC found evidence four companies -- Investors Group Inc., CI Fund Management Inc., AGF Funds Inc. and AIC Ltd. -- had allowed rapid in-and-out trading characteristic of market timing in some of their funds. Late yesterday, Franklin Templeton Investments Corp. (Canada) was added to the list of firms under review. While the practice is not illegal, market timing goes against procedures many fund companies have in place to shield their shareholders from added costs and volatility.

Fund sales data from October and November suggest that returns remain the No. 1 priority for investors. During the two-month period, mutual fund assets under management at AIC slipped 2.3 per cent in value to $10.9-billion as of Nov. 30. AGF saw its managed fund assets fall about one-third of a percentage point in value to $22.7-billion. The two firms have suffered many months of net redemptions because of the performance of their marquee equity funds, the AGF International Value Fund and the downright dismal AIC Advantage and AIC Advantage II Funds.

In contrast, Investors Group and CI have reported gains in a mediocre market. In the two months since the two firms were named in the market timing investigation, Investors Group's assets under management have risen 2.4 per cent in value to $43.3-billion. The Winnipeg company is considered a blue-chip, conservative firm. CI, a Toronto company with an increasing focus on dividend and income-generating products, reported fund asset growth of 3.8 per cent for a total of $41.7-billion as of Nov. 30.

The fund flows mirror the trends set in the United States over the past year. A series of market-timing and late-trading scandals have contributed to an exodus of $40-billion (U.S.) in investing dollars from Putnam Investments for the 12 months ended Oct. 31. But only $706-million left the company's top-ranked four-star funds, according to industry tracker Morningstar Inc.

"If you had a poor performing fund and your organization has been involved in these scandals, you really got the double whammy. If your performance was good, investors tended to be a little bit forgiving," said Brian Rogers, vice-president of T. Rowe Price Associates Inc. of Baltimore, Md.

The four Canadian fund companies declined to comment, citing the fact the OSC investigation is under way. But sources at three of the four firms said there has been little or no outcry from unitholders.

© 2007 The Globe and Mail. All rights reserved.

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