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Market timing shortchanged investors in 54 funds

The four companies swept up in the market timing scandal have revealed that they allowed rapid, in-and-out trading in 54 mutual funds, confirming that the controversial practice cut a wide swath through the Canadian investment community.

The trading primarily took place in the companies' international equity funds. There were roughly 500 international equity funds managed by Canadian firms in 2003, the year all market timing activity came to a halt.

As part of a settlement agreement with the Ontario Securities Commission last month, the four companies -- Investors Group Inc., CI Fund Management Inc., AGF Management Ltd. and AIC Ltd. -- have acknowledged that they routinely gave preferential treatment to a select few clients at the expense of long-term investors.

The activity had the broadest impact on investors in funds managed by CI.

About 1.4 million clients in 24 separate funds were affected, CI chief executive officer William Holland said in an interview.

At AGF, 15 funds were involved, affecting an estimated 500,000 to 750,000 clients, said spokeswoman Patricia Phillips.

Ken Kivenko, an investor advocate and author of newsletter "The Fund Observer," said he is upset that the regulator has ended its investigation into market timing when separate settlements with three bank-owned brokerage firms last month reveal that as many as 20 fund companies were involved.

"This is one of the biggest scams perpetrated on the Canadian public in recent history," he said in an interview yesterday.

In all, 15 unidentified market professionals made profits totalling $300-million over a five-year period in funds managed by the four companies. The settlement specified that not all those profits came from rapid trading commonly referred to as market timing.

All four companies have published information on their websites in an attempt to answer clients' questions about the controversy. Still, company officials insist that they have not been inundated with phone calls and letters.

Mr. Holland said CI got about 20 queries last month. Since then, the number has dropped to a trickle. By comparison, he said, he personally received 1,400 telephone calls and letters a few years ago when the firm stopped sending clients a calendar by financial guru David Chilton, author of the hugely popular The Wealthy Barber. "In the mutual fund business, what registers with investors is performance," he said. "If they have a bad year, then boy, do you hear about it."

The four companies have agreed to pay $156.5-million in restitution to investors hurt by the market timing activities as part of the settlement with the regulator. They must present a plan for distribution to the OSC by September.

At CI, employees will spend the next few months effectively re-enacting more than a billion transactions to calculate how much is owing to each investor, Mr. Holland said. His "best guess" is that the payout will average just $33. CI has agreed to pay $49.3-million in restitution.

By contrast, clients at AIC stand to receive much bigger cheques. That's because only four AIC funds were involved, yet it has agreed to pay $58.8-million in restitution, the highest of any of the companies.

AIC spokeswoman Terri Oswald would not say how many clients were affected. However, the four funds had about 150,030 accounts held by investors in 2003, according to a tally done by The Globe and Mail. Based on those figures, the payout would average about $392 for each account. Many clients typically hold more than one account.

AIC and AGF both published the names of funds affected by market timing on their websites. AGF says the average payment will be about $25 on a $5,000 account. CI and Investors Group provided a list of funds to The Globe. Investors Group had 11 funds involved in market timing. Those funds had roughly 270,000 client accounts as of November, 2002, when market timing activities came to a halt.

The list includes some of Canada's largest international equity funds in 2003 -- AGF International Value Fund, BPI Global Equity Fund, CI Global Fund, Investors European Growth Fund and Investors Global Fund.

Many of the funds were also on the list of international funds that showed telltale signs of market timing in a Globe and Mail investigation, published last June. Rapid, in-and-out trading totalled $220-billion between 2000 and 2003 in dozens of international funds managed by Canadian companies, the investigation found. It all but stopped in September, 2003, after regulators in the United States launched a crackdown on market timing and other questionable trading practices.

Market timing is not illegal. However, in accepting responsibility for other people's money, fund managers have a fiduciary duty to act in the best interests of all of their investors. Market timing is not in the best interests of long-term investors because the practice reduces a fund's returns. Market timers attempt to exploit price discrepancies in international funds, where events after overseas markets close can make their prices out of date.

All four companies say they have adopted measures to detect and prevent market timing. The closest any came to apologizing to investors was Peter Atkinson, president of CI Mutual Funds. "I would like to express our regret over any concern or inconvenience this issue has caused you," he says in a letter posted on the company's website.

Ms. Oswald of AIC said the company is attempting to answer all inquiries from its investors and has set up a special toll-free line (877-319-4900.) "Skirting the issue is not advantageous," she said. "We are listening to the concerns that are coming in and we are answering them as best we can."


AGF Funds Inc.

AGF Aggressive Global Stock Fund

AGF Asian Growth Class

AGF European Asset Allocation Fund

AGF European Equity Class

AGF Global Government Bond Fund

AGF International Stock Class

AGF International Value Fund

AGF Japan Class

AGF RSP European Equity Fund

AGF RSP International Equity Allocation Fund

AGF RSP International Value Fund

AGF Short-Term Income Class

AGF World Balanced Fund

AGF World Companies

AGF World Equity Class

AIC Ltd.

AIC Global Advantage Fund

AIC Global Diversified Fund

AIC World Advantage Fund

AIC World Equity Fund

CI Mutual Funds Inc.

BPI Global Equity Fund

BPI Global Equity RSP Fund

BPI International Equity Fund

BPI International Equity Sector Shares

CI Emerging Markets Fund

CI Emerging Markets Sector Shares

CI European Fund

CI European Sector Shares

CI Global Boomernonics Sector Shares

CI Global Financial Services Sector Shares

CI Global Fund

CI Global RSP Fund

CI Global Sector Shares

CI Global Small Companies Fund

CI Global Small Companies Sector Shares

CI Global Telecomm Sector Shares

CI Global Value Fund

CI International Balanced Fund

CI International Balanced RSP Fund

CI International Fund

CI International Value Fund

CI Japanese Shares

CI Pacific Fund

CI Pacific Sector Shares

Investors Group

Investors Japanese Growth

Investors Global

Investors European Growth

Investors Pacific International

Investors World Growth Portfolio

IG Templeton World Allocation

IG AGF International Equity (formerly IG Rothschild Select GS International Equity)

IG Templeton International Equity

IG Mackenzie Ivy European Growth (formerly IG Scudder European Growth)

IG AGF Asian Growth

Investors European Mid-Cap Growth

© 2007 The Globe and Mail. All rights reserved.

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