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AGF sells back-office unit to Citigroup for $122-million

Deal expected to reduce AGF expenses

MUTUAL FUNDS REPORTER

AGF Fund Management Inc. has agreed to sell its back-office business to U.S. giant Citigroup Inc., a $122-million deal that will help the Toronto company tackle mutual fund costs paid by investors.

Under the terms of the cash transaction, AGF unit Unisen Inc. will be sold but will continue to service the company's mutual fund operations for the next 10 years, bringing economies of scale that will drive down annual management fees paid by unitholders, the company said.

Management expense ratios (MERs) across AGF's funds "are going to see a drop in a pretty big way" over the next three years, predicted Blake Goldring, AGF's president and chief executive officer, in an interview. The company did not disclose specific MER targets for its family of about 50 funds.

Unisen's record-keeping services in Canada will be folded into Citigroup's global transaction services unit, a vast network that processes more than $1-trillion (U.S.) in fund transactions each day, Mr. Goldring said.

"It all comes down to one word: scale. Whoever has got the bigger scale will inevitably get the lower ERs [expense ratios]. The M [management cost] part I can control," he said.

The move to lower fees was applauded by industry observers.

"Anything you can slice off the fee side accrues directly on the bottom line of fund investors. Those are all good things," said Dan Hallett, an independent fund analyst based in Windsor, Ont.

AGF is the latest fund company to rethink fees. In January, Fidelity Investments Canada Ltd. cut MERs on a series of funds by 20 to 30 basis points, a measure that will save investors about $12-million (Canadian) in fees annually. This September, CI Fund Management Inc. plans to fix administration fees for its funds.

AGF's sale of Unisen has been in the works for months. The firm began restructuring operations a year ago, including a review of non-core assets. In-sourcing by large investment firms and the growth of non-fund products have been pressing challenges for Unisen. The Mississauga-based unit lost $1.3-million on revenue of $129.1-million in fiscal year 2004.

There was some sentiment yesterday that the repercussions of the Unisen sale may help address AGF's core issue of mutual fund redemptions. The company has fallen out of favour with investors in recent years and mutual fund assets under management have shrunk to $21.6-billion, down from $29.9-billion in 2001.

In a research note yesterday, John Aiken, an analyst at National Bank Financial Inc. said the deal "should provide some additional marketing benefits as the competition in the industry on fund efficiency begins to heat up." He added that the $122-million price tag represents a "good deal" for AGF; in earlier research Mr. Aiken estimated the business was worth $70-million to $80-million.

© 2007 The Globe and Mail. All rights reserved.

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