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Teachers could give lessons on hedge funds

Pension plan did a staggering amount of research before investing in the asset class -- and it's paid off, KEITH DAMSELL writes

MUTUAL FUNDS REPORTER

Investors could learn a thing or two about hedge funds and due diligence from the Ontario Teachers Pension Plan.

Unbeknownst to many, Teachers is one of North America's largest investors in the asset class. The pension fund has a whopping $4.8-billion invested in hedge funds and managed futures accounts, about 5.7 per cent of its $84.3-billion total assets under management.

A staggering level of research went into Teachers' decision to invest in the asset class way back in 1996. Today, a team of seven front- and back-office staff is dedicated solely to hedge funds, and is continually monitoring performance, trading and investment style.

To limit risk, Teachers uses more than 100 individual hedge fund managers, each with less than 1 per cent of the portfolio. Annual management turnover is significant.

"It's worked out very well for us," said Bob Bertram, Teachers' executive vice-president. The asset class is key to the plan achieving annual returns of 4.3 to 4.5 per cent above the consumer price index in order to meet the demands of retiring teachers in Ontario, he said.

Teachers is somewhat of a lone wolf in this country. It's estimated that fewer than 20 per cent of Canadian institutional investors own hedge funds.

"If you don't understand something, you don't do it. Our attitude is . . . we first understand it and then we decide if we want to do it or not," Mr. Bertram said.

Even so, more investors are expected to turn to hedge funds to juice returns, despite a spate of recent scandal in the sector.

"Go for the best in the crowd, especially if it's your first commitment," advises Pierre Caron, a hedge fund specialist at Mercer Investment Consulting Inc. Every year, the Montreal consulting firm looks at about 200 funds of hedge funds; only a handful receive top marks.

"If there is something fishy or something that looks weird, stay away," he said.

Market timing payouts on way

The cheque may soon be in the mail for mutual fund unitholders.

The five mutual fund companies that reached settlement agreements for permitting market timing in their funds expect to be firing off reimbursement cheques to unitholders in August and September, about three months ahead of schedule.

The fund companies submitted a draft distribution plan to the Ontario Securities Commission earlier this month. The regulator is expected to sign off on the arrangement soon, clearing the way for the cheques to be issued.

Last winter, five companies -- AGF Management Ltd., AIC Ltd., CI Fund Management Inc., Franklin Templeton Investments Corp. and Investors Group Inc. -- agreed to distribute $205.6-million to unitholders for permitting rapid, in-and-out trading in mutual funds, a practice that raises costs and hurts the returns of long-term investors. An investigation published in The Globe and Mail last June found that market timing in mutual funds totalled more than $220-billion between 2000 and 2003.

Several sources said the industry is anxious to put the market timing scandal behind it. The OSC's original deadline for receipt of the plan from the first batch of fund companies was Sept. 30.

But unitholders would be wise to hold off on any plans for a shopping spree. Payouts to investors will be pocket change. One fund company estimates that if you held $5,000 in a fund for the entire three-year period when market timing occurred, you'd receive a princely $25.

Do you want ribs with that?

Hot and spicy ribs, a pint of cold beer and a dividend income fund.

Six mutual fund companies are sponsoring Toronto Ribfest, the Rotary Club of Etobicoke's sixth annual celebration of barbecued pork this Canada Day weekend.

AIM Funds Management Inc., Fidelity Investments Canada Ltd., Franklin Templeton Investments Corp., Mackenzie Financial Services Inc., Northwest Mutual Funds Inc. and, lastly, TD Mutual Funds are all tied to the event.

Surprisingly, some fund companies contacted to participate were a little mystified when asked about the event. Several in the image-conscious industry were wary when they visited Ribfest's website and took in images of a dancing pink pig in a red apron.

Turns out that a good chunk of the Etobicoke Rotary Club's 80 members are financial advisers. Several tapped the purse strings of fund companies.

"The mutual fund companies have all been very generous," said Ed Torres, general manager of Skywards Traffic and Ribfest's chairman of advertising and sponsoring.

Ribfest runs June 30 to July 3 at Centennial Park in Etobicoke. Last year, the event raised more than $200,000 for local charities.

Anything-goes fund at Beutel

It's the dog days of summer and Bay Street is in search of The Next Big Thing.

Interest rate fears have seized the trust market, scandals have capsized hedge funds and the oil patch has become a pricey proposition. Dollars are on the sidelines, waiting for more direction.

Money manager Beutel Goodman & Co. Ltd. thinks it may have a product on its hands ready to capture the market's attention.

The BG World Focus Fund is an equity fund with an anything-goes mandate. The fund has no sector or geographic restrictions and can invest anywhere, at home or abroad.

To alleviate risk, a single company cannot make up more than 8 per cent of the portfolio and emerging market exposure is capped at 10 per cent.

Managers Gavin Ivory and Brian Brownlee expect a tightly managed portfolio of 25 to 40 equities. The two veteran managers like the "global best of" concept and expect the end of foreign content limits will help spur interest in the fund.

From the outset, World Focus will be available to only BG's institutional clients. But if it's a success, the Toronto investment firm expects a retail mutual fund will get the go-ahead.

kdamsell@globeandmail.ca

© 2007 The Globe and Mail. All rights reserved.

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