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Mutual Fund News

One firm's regulatory nightmare is another firm's financial jackpot

New disclosure rules a boon for companies that service the sector, KEITH DAMSELL writes


The increasing regulatory burden may be a headache for mutual fund companies but it's a financial windfall for the back-office firms that service the sector.

Dynamic Mutual Funds, for example, has hired ADP Investor Communications of Mississauga to deal with NI 81-106, the new continuous disclosure rule. Fund companies have a long list of new obligations, including fund-specific financial statements, management reports of fund performance and proxy voting disclosure. All that data must be processed and made available to unit holders.

"It's such a huge change and huge requirement for them in this initial year. It's a great opportunity for us," said Sue Britton, senior vice-president of ADP, a division of New Jersey's Automatic Data Processing Inc. The company does not release figures for Canadian operations but the fund business makes up the majority of sales in this country.

Details of the continuous disclosure rule were announced only three months ago and went in to effect June 1. Nevertheless, there's been little foot-dragging from the industry.

"We have had no late night calls . . . at this point the clients are well on their way," said Doreen Rigby, managing director of State Street Corp.'s investment servicing business. The Toronto subsidiary of the New York company prepares financial statements for seven of Canada's 20 largest fund companies.

It's expected business for these service companies will only get better. A series of new regulatory requirements for the fund business is waiting in the wings, including the "fair-dealing model" that mandates more disclosure from investment advisers.

Hot seat awaits new IFIC boss

The search for a new leader to head the Investment Funds Institute of Canada is highlighting some of the divisions within the powerful mutual fund association.

An IFIC committee is canvassing members on the skill sets required of the man or woman tapped to replace Tom Hockin, IFIC's outgoing president and chief executive officer. The team is also getting input from some third-party stakeholders too, including the Ontario Securities Commission.

The Coles Notes for the new boss include:

A strong knowledge of the fund business and the regulatory climate;

Great communication skills with industry, government and the media;

Ability to motivate senior management at member firms to get actively involved.

And most important, candidates will need excellent negotiating skills to juggle the sometimes opposing views of the membership. Many in the IFIC tent are unhappy with the status quo. Some believe the new boss must bring peace to the fund dealers and the money managers or send somebody packing.

Mr. Hockin's 11-year tenure gets mixed reviews from members. His strong political ties assured the fund business always had Ottawa's ear but some argue IFIC under his watch failed to play a leadership role on important regulatory issues.

Not surprisingly, Mr. Hockin's supporters and critics have different views on the future of the executive suite. The big banks favour a conservative approach; one member wants the new CEO to be "just like Tom." The independent firms, meanwhile, want a more proactive association. One company wants the search team to find "an anti-Hockin" for the corner office.

IFIC's new CEO will likely be named by the end of the summer. Mr. Hockin is due to leave his post in October.

The Google conundrum

Fund managers are bracing for the Google ride.

Shares of Google Inc. hit a record high of $288 (U.S.) last week on the Nasdaq Stock Market but several fund managers interviewed have no plans to sell their interest in the Internet search engine company any time soon.

"For us it's been a long-term play," said Grant Bowers of Franklin Advisers Inc. of San Mateo, Calif. Three funds he manages own a combined total of 8,300 Google shares, including Canada's Franklin World Telecom Fund. Mr. Bowers, along with other managers interviewed, bought shares in August last year when the company went public at $85 (U.S.).

Mr. Bowers likes Google's plan to leverage its brand and build a long list of new on-line services, including shopping, e-mail and satellite imagery.

"You try to envision what Google can be," he said. "You can see a long-term growth trend. I do see a lot of blue sky."

Google's success "is not the same as the old Internet days of no earnings, no revenue, just eyeballs. This is truly a company doing a tremendous amount in terms of earnings and cash flows," said Noah Blackstein, manager of the Dynamic Power American Growth Fund. Google shares make up about 8 per cent of the $164-million (Canadian) fund, in all its classes.

"I'm not a buyer up here," he said. "But I'm not selling it either. It still represents a tremendous growth opportunity and I want to hang on."

Mr. Blackstein expects Google's piece of the advertising pie will continue to grow, noting that consumers spend an estimated 20 per cent of their leisure time on-line, yet the medium only receives a tiny 2 per cent of advertising spending.

A handful of Canadian funds have bailed on the stock.

For example, the Altamira Science and Technology Fund sold 24,100 Google shares last year for a profit of more than $557,000. The fund bought and sold another Google position earlier this year and no longer owns the stock.

"It's not outrageously expensive but it's not cheap either," said Reza Samahin, lead manager of the Altamira fund. He likes the company's prospects but said "too much good news," including some very bullish analyst forecasts, has made Google pricey.

At least two other funds have profited from unloading Google shares, too, but the sell call was principally a result of new management overhauling the portfolio. CI Fund Management Inc.'s BPI group of funds sold 45,000 Google shares in the first quarter, while Ethical Funds Co.'s Ethical North American Equity Fund dumped 13,300 shares last month.

© 2007 The Globe and Mail. All rights reserved.

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