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AFT hammered on distributions cut

Stock plunges 34 per cent for Quebec pulp mill equipment maker, KEITH DAMSELL writes

The end of cash distributions hammered Advanced Fiber Technologies (AFT) Income Fund on Friday, the latest trust to fall from grace in the sector.

The unit price of Advanced Fiber, the maker of equipment used in pulp mills, plunged 34 per cent on May 13 to close at $2.50, down $1.30 in trading on the Toronto Stock Exchange. In March, 2004, units of the Lennoxville, Que.-based company reached a record high of $14.60.

On Thursday, the company suspended its monthly cash distributions of 5 cents a unit. That's down from 10 cents a unit when the company went the trust route in 2002.

Advanced Fiber has come under intense margin pressure and is conserving cash. The pulp and paper industry is slowing, commodity prices are weak and new capacity is coming on stream in Asia and South America.

"The root cause here is their customer is not doing well," said Sandy McIntyre, vice-president and senior portfolio manager with Sentry Select Capital Corp. At one point, the Toronto wealth management company held a 10-per-cent interest in Advanced Fiber but sold the last of its units in March.

"This is a shame because people will use Advanced Fiber as an example of a busted trust," he said. "The reality is this is a very well-managed business . . . But when your customer is very weak, you absorb the margin compression."

The trust has close ties to Canadian Imperial Bank of Commerce. The bank was the trust's lead underwriter, raising $123-million when the fibre screening business was spun off from CAE Inc. three years ago. Paul Spafford, head of mergers and acquisitions at CIBC World Markets, was Advanced Fiber's chairman, resigning the post in March. And as of two months ago, CIBC Asset Management held Advanced Fiber units in its MD Dividend Fund.

CIBC World Markets analyst Alice Sun Dunning has soured on the company. In a Friday note to clients, she suspended her $5 target price "until further discussions with management" and is maintaining her "sector underperform" rating on units.

Ethical Funds hires new team

Ethical Funds Co. of Vancouver has hired a new team to oversee its U.S. equity fund, joining a growing list of firms seeking new advice on managing the difficult asset class.

Manning & Napier Advisors Inc. took the reins of the $100-million Ethical North American Equity Fund on Friday. The Rochester, N.Y. company replaces the Canadian arm of Alliance Capital Management LP, also of New York.

Ethical North American is in need of an overhaul. The growth-oriented fund has a heavy weighting in U.S. tech and information stocks and has suffered for it.

The fund has lagged behind its peer group and the S&P 500 composite index since 2000, slumping 8.6 per cent in the 12-month period ended April 30 and losing an average of 9.3 per cent over three years and 16.5 per cent over five years.

"Unit holders have taken their lumps," said Russell Moldowan, portfolio analysis manager at Ethical Funds. "We knew we had to make a change."

The fund company began an extensive search for new advice in September, reviewing a staggering 388 potential managers.

That list was whittled down to five in January, and in April, Manning & Napier got the nod.

The firm, manager of about $10-billion (U.S.), takes a "free-ranging" approach to investing that emphasizes growth and positioning, said Charles Stamey, managing director of client relations.

A strong Canadian dollar coupled with anemic returns on Wall Street have made the U.S. asset class a challenge.

In recent months, AIC Ltd., AGF Management Ltd. and CI Fund Management Inc. have shuffled the teams behind U.S. funds.

"Canadian investors haven't made any money in U.S. funds in the last five years," said Gavin Graham, vice-president and director of investments at Guardian Group of Funds Ltd.

Rebalancing strategies studied

Investment management doesn't stop with building the right portfolio -- a new study concludes that rebalancing can sweeten returns.

Mackenzie Financial Services Inc. looked at the returns generated by a balanced portfolio of funds -- 40-per-cent bonds, 15-per-cent Canadian equity, 10-per-cent Canadian small capitalization, 20-per-cent U.S. equity and lastly, 15-per-cent global equity from Europe, Australia and the Far East.

From 1970 through August, 2004, a portfolio with no rebalancing generated an annual average return of 10.6 per cent. Deviation from target weightings was significant. For example, the portfolio's U.S. equity weighting soared to 39 per cent in 1999.

But a portfolio rebalanced on a regular basis reported stronger average annual returns: 11 per cent if rebalanced on a quarterly basis and 11.1 per cent if rebalanced once a year.

State Street looks north

State Street Corp., the low-profile financial services company, is targeting Canada's booming hedge fund sector for growth.

By year end, the Boston firm plans to "actively pursue opportunities" to service this country's estimated $14-billion (Canadian) hedge fund market, Ronald Logue, chair and chief executive officer, said in a recent interview.

State Street provides back-office investment services, management and research to a staggering $9.5-trillion (U.S.) in assets around the globe. Over the past 15 years, the company has captured about 21 per cent of Canada's pension and mutual fund market.

Expect chief rivals Canadian Imperial Bank of Commerce and Royal Bank of Canada to keep close tabs on State Street's expansion plans.

© 2007 The Globe and Mail. All rights reserved.

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