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Saxon's shares likely to hit the rough

History shows when small mutual funds go public their stock performance suffers


Potential investors in Saxon Financial Inc. had better fasten their seatbelts. Recent history indicates the shares of small mutual fund companies have a bumpy ride once they go public.

The no-load mutual fund company is in the midst of selling its story to Bay Street, hoping to raise about $110-million in its initial public offering. The deal, led by BMO Nesbitt Burns Inc., is expected to close by the end of this month at between $16 and $18 a share.

The company and its senior management team, Richard Howson and Robert Tattersall, receive good reviews. Industry watchers like the company's diversified revenue structure; about 80 per cent of assets under management are from institutional clients and the balance from retail mutual funds. Fund performance is above average and again, well diversified among asset classes, including Canadian and global equity, income trusts and balanced funds.

Prospects for boutique fund companies look good, says John Aiken of National Bank Financial Inc. Small managers benefit from "incremental leverage" in hot and weak markets for mutual funds, Mr. Aiken said in a June 6 report. In a slower growth environment, boutique firms "sustain above average industry sales growth" that will lead to increased profitability through the economies of scale, the analyst said. And when the market for mutual funds improves, smaller players "stand to disproportionately benefit from the eventual return of the retail investor."

Nevertheless, a look at the stock market performance of three boutique firms -- Seamark Asset Management Ltd., Clarington Corp. and Mavrix Fund Management Inc. -- suggests Saxon too can expect some volatility ahead. The three fund companies are each dealing with growing pains that have taken the wind out of share price performance.

Seamark: The Halifax money manager went public in 2001 at $11 a share. The company's strong institutional business pushed shares to a record high of $25.75 in February last year.

But a management shuffle has left the market uncertain and shares have slumped, closing down 4 cents at $19 on the Toronto Stock Exchange yesterday. Staff management issues led to the May 25 departure of president and chief executive officer Robert McKim. Chairman Peter Marshall is acting as interim CEO until a new boss is found.

"Upheaval at the highest level makes it difficult for people below to execute," said Raynor Burke, head of fund research at National Bank Financial.

Clarington: After an aborted IPO in 2003, the Toronto fund company succeeded the second time around, going public in March at $13 a share. Sadly, it's been downhill ever since. Its shares closed down 7 cents at $9 yesterday on the TSX.

There are two key issues, industry watchers said. Clarington recently renegotiated its financing arrangements on deferred sales charges, a complex deal that some fear may depress current profit. But more important, Clarington hires external advisers to manage money, including a significant 70 per cent of assets under management that's overseen by Seamark. Fund sales suffered last fall when Seamark posted mediocre results.

Mavrix: The Mavrix team, led by the guitar-wielding Mal Spooner, prides itself on its unconventional approach to investing. The niche fund manager cashed in on the income trust craze, and retail fund assets under management climbed to $432-million last month.

But analysts fear Mavrix may be a one-trick pony. The trust business is slowing and the fund outlook uncertain. The company is working hard to increase its retail following and is exploring new products. Yesterday, its shares closed up 19 cents at $2.58 on the TSX. It went public in April, 2004, at $3.75 a share.

© 2007 The Globe and Mail. All rights reserved.

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