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Regulator ignored market timing at other firms: AIC

Fund founder questions why OSC opted to make an example of handful of companies

MUTUAL FUNDS REPORTER

BURLINGTON, ONT. -- Michael Lee-Chin, the jovial founder of AIC Ltd., said the Ontario Securities Commission ignored evidence of market timing across the mutual fund industry, opting instead to make an example of a handful of firms -- including his own -- in its probe of the controversial practice.

"As a [mutual fund] unit holder of other companies, why am I a second-class citizen? Why shouldn't I be getting restitution?" said Mr. Lee-Chin in a rare interview at the company's headquarters in Burlington, Ont. "You open a can of worms, finish it."

In December, four mutual fund companies agreed to pay $156.5-million in penalties to settle the probe. AIC, Canada's eighth-largest fund company, paid the largest penalty, $58.8-million, for allowing three investors to make rapid, in-and-out trades in the company's funds. The trio made $127-million in profit and drove up costs for other AIC investors, regulators said.

The four companies -- AIC, Investors Group Inc., CI Fund Management Inc. and AGF Management Ltd. -- have all adopted procedures to prevent market timing. A fifth company, Franklin Templeton Investments Corp., will be the last firm to face market timing allegations. The OSC said the message has been sent and there is no point in dedicating further resources to the probe.

But detailed settlement agreements released by the OSC and the industry indicate as many as 20 fund companies permitted market timing. While the practice is not illegal, market timing goes against procedures many fund companies have in place to shield their unit holders from added costs and volatility.

"If the universe was greater than five [fund companies] . . . why are those unit holders lesser beings? Because the companies aren't making any restitution to them," said Mr. Lee-Chin, the billionaire president, chief executive officer and controlling shareholder of AIC.

Agreeing to settle with the OSC was "a difficult decision," he said. "The industry . . . had some culpability, whether it was 1 per cent culpability or more, the fact is we had some culpability."

Despite the market timing scandal receiving a barrage of media attention, Mr. Lee-Chin said AIC unit holders are "desensitized" to the issue and the company received few complaints. Instead, performance issues continue to be the single biggest reason why investors leave the company, he said.

The company has been plagued with unit holder redemptions for the past three years, with assets under management falling from a peak of $15.4-billion to about $10.9-billion today.

It's a remarkable change in fortunes. In the late 1990s, AIC's mantra of "Buy, hold and prosper" made the company a mutual fund star. A heavy weighting in the hot wealth management sector made the AIC Advantage and AIC Advantage II Funds core holdings for many Canadians. In 1998, the two funds were worth a combined total of $7.4-billion; today, poor returns have shrunk their value to about $2.9-billion.

There will be no shift in the company's value investing style, however. Mr. Lee-Chin argues there is a "mismatch" between unit holders' short-term concerns and long-term rewards. He expects an aging population saving for retirement will mean 10- to 12-per-cent annual rates of return for wealth management firms, including AIC holdings like AGF, IGM Financial Inc. and Amvescap PLC.

AIC continues to cut costs and has not ruled our trimming its management expense ratio, the annual fee unit holders pay a fund company. In January, Fidelity Investments Canada Ltd. unit holders will see the MER they pay each year drop by 20 to 30 basis points. (A basis point is 1/100th of a percentage point.)

"We are continuously looking at becoming more efficient, which will translate into the lowering of the MERs," Mr. Lee-Chin said.

© 2007 The Globe and Mail. All rights reserved.

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