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Portus probe has hedge funds uneasy

Some fear the investigation will slow the sector's growth over all, KEITH DAMSELL writes

The hedge fund industry is on tenterhooks this month, trying to assess the impact of the securities probe at Portus Alternative Asset Management Inc.

"It's very unfortunate this is happening," said Miklos Nagy, chairman of Canadian Hedge Watch Inc. "Some investors may lump this together with the whole hedge fund industry . . . and think there is something wrong with it. It is not. This is an isolated incident."

Portus management has frozen an estimated $800-million in assets and suspended withdrawals as securities regulators investigate the Toronto firm. At issue is the marketing of the company's so-called principal-protected funds. Portus insists the notes are protected by a bank, but no financial institution is disclosed in the company's offering memorandums.

Hedge funds are typically marketed to well-heeled, risk-tolerant investors and are not regulated by securities officials. Lower-cost guaranteed notes tied to a hedge fund's performance have become a popular option for small investors.

There's industry agreement that the Portus mess has more to do with disclosure and compliance than the principles of hedge fund investing. Nevertheless, there is some concern the scandal may act as a speed bump to further growth throughout the sector.

Stephen Kangas, managing director of hedge fund BluMont Capital Corp., predicts dealers selling hedge funds and products will soon face an increased regulatory regime.

"I don't think this is going to be an indictment against principal-protected notes. But who is protecting the notes? That should be front and centre," Mr. Kangas said.

Losers list includes winners

There's no other way to describe it -- January was a weird month in mutual fund land.

The Investment Funds Institute of Canada expects to report January net sales of between $1.3-billion and $1.7-billion. The figure falls short of $1.8-billion in new funds invested in January a year ago, but nevertheless represents the third consecutive month of net sales for the recovering sector.

Eight fund companies lost business in January, typically one of the strongest sales months of the year. To no one's surprise, the list of losers included laggards AGF Management Ltd., AIC Ltd., Fidelity Investments Canada Ltd., and lastly, on-again, off-again performer Altamira Management Ltd.

Here's where things get a little strange. The four remaining companies suffering net redemptions included some of the sector's most successful firms:

AIM Funds Management Inc., down $48-million. "It's difficult to pinpoint the reason why . . . it's just one of those things," said Dwayne Dreger, vice-president of communications for AIM Funds. He expects more investors will be making registered retirement savings plan contributions later in the season.

Franklin Templeton Investments Corp., off $20-million. "Investors are regrouping," said Franklin Templeton president and chief executive officer Donald Reed. More investors are redeeming in January, temporarily parking dollars in money market funds and then making fund-buying decisions in March and April, he said.

Mackenzie Financial Corp., down $90-million. More than half of net redemptions stem from business clients leaving the Mackenzie Sentinel Canadian Managed Yield Capital Class Fund, said David Feather, the company's president. The fund is designed for those seeking tax relief.

TD Asset Management Inc., $45-million in net redemptions. A handful of large institutional clients yanked $417-million from the bank's money market funds, making January's sales appear "a little bouncy," said Steve Geist, president of TD Mutual Funds.

Creo deal leaves sour taste

Eastman Kodak Co.'s $980-million (U.S.) agreed bid for Creo Inc. may be a bitter pill to swallow for some mutual fund managers.

On Jan. 31, the U.S. film and imaging giant offered $16.50 a share, or about $20.45 (Canadian), for Creo, a high-tech printing company that failed to deliver shareholder value. Trading records indicate many funds bought and sold shares in the Burnaby, B.C., company at the wrong time.

Creo went public in 1999 at $22.67 a share. Van Berkom & Associates Inc., manager of the Talvest Small-Cap Canadian Equity Fund, was an early convert. The fund bought 96,600 shares at an average price of $27.72 for a total of $2.7-million. The following year, Creo shares peaked at $75. But high costs and meagre profit pushed shares to a low of $7 in 2002.

Nevertheless, Talvest kept buying stock, pausing occasionally to sell in to the market. As of June 30, 2004, the fund had a paper loss of $3.3-million from its Creo holdings. The fund held 476,300 shares bought for $8.9-million with a market value of only $5.6-million.

TD Asset Management's TD Canadian Equity Fund, meanwhile, may have improved its fortunes had it sat tight for another year. Between February and April, the fund dumped 725,000 Creo shares for a total loss of about $800,000.

Shareholders getting vocal

A record 110 shareholder proposals have been submitted for voting at Canadian annual meetings this year, reports the Shareholder Association for Research and Education. Thirty-nine companies, a who's who of Corporate Canada, have been targeted by a mix of shareholder activists, and pension and mutual funds. There are some familiar names behind the proposals, including perennial management thorn Robert Verdun, as well as Ethical Funds, and Real Assets Investment Management.

Executive compensation, environmental and social disclosure, and the election of the board are the common themes, said Peter Chapman, executive director of Vancouver-based Share.

© 2007 The Globe and Mail. All rights reserved.

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