As star mutual fund manager Larry Sarbit is finding out first hand, the barriers to entry for start-up fund companies can be intense.
Mr. Sarbit, a former U.S. equity manager at AIC Ltd., struck out on his own earlier this year. But he's gotten a cool reception from the Berkshire Group of Cos. The financial advice firm has said no to Sarbit Asset Management Inc.'s new fund, citing a Sept. 27 policy noting new offerings must have a five-year track record and a minimum of $200-million in assets under management.
The Winnipeg manager described the criteria as "extremely suspect"; Berkshire is AIC's sister company and both firms are controlled by Mr. Sarbit's former boss, fund mogul Michael Lee-Chin. In a statement, Berkshire said its policy is "in no way connected to any specific product."
Despite Mr. Sarbit's skepticism, distribution companies are gun-shy when it comes to new offerings and the criteria necessary to make it onto the product shelf is daunting. The recent meltdown of Portus Alternative Asset Management Inc. and other investment firms has left financial advice companies in a cautious mood.
"I've always pushed the idea of focusing on a few large companies, and now that we've seen just how bad things can go at smaller shops, it is tougher to afford them too much attention," said Raynor Burke, head of fund research at National Bank Financial Inc. "Truth is, you'd need a team of forensic accountants to discern if every new, small shop is credible. You know Fidelity isn't going to run off with your money."
If a money manager goes wrong, history indicates it's likely a small player. In recent weeks, two once-promising start-ups fronted by well-known industry players have run into trouble:
Logix Asset Management Inc. has failed to achieve necessary economies of scale to continue operations and on Nov. 14, will terminate its retail funds. Gordon Garmaise, company president, was the architect of Mackenzie Financial Corp.'s well-regarded STAR asset-allocation service.
On Sept. 20, the Quebec securities regulator froze the assets of Argentum Management and Research Corp., citing a "substantial decrease" in the value of its assets under management. The fund company was launched in 1998 by Fred Pye, a former marketing executive at Fidelity Investments Canada Ltd.
From the outset, small players are facing significant financial hurdles simply just to stay afloat. Bare-bones costs to operate a single mutual fund are about $250,000 annually, estimates Avenue Investment Management Inc. The Toronto firm was launched in 2003 by a trio of former fund managers with TD Asset Management Inc. To curb costs, Avenue manages equity and fixed-income accounts rather than traditional mutual funds.
"It's expensive to be in this business," said Bill Harris, Avenue principal and portfolio manager. Each day, Mr. Harris and partners Paul Harris and Paul Gardner juggle investment management, operations and marketing duties from a basement home office in north Toronto.
"You've got to make sure you have a unique story you can hang your hat on," Mr. Harris said.
"You have to get up in the morning and tell everybody you know, from my house to the subway, when you are in the coffee shop, you have to tell people it [the company] exists."
When things go wrong, fund dealerships can find themselves on the hook with clients and as a result, a long list of criteria must be met before a new product is approved. For example, Assante Corp. of Toronto wants a long-term performance record, a commitment to technology to facilitate trades and a benchmark of $500-million in assets under management.
"This has nothing to do with Larry [Sarbit], it has nothing to do with Portus, it has everything to do with vetting everything," said Joe Canavan, Assante president and chief executive officer.
Mr. Sarbit may get the last laugh. The Sarbit name has opened many doors and to date, 12 distributors have agreed to sell the Sarbit U.S. Equity Trust, including five of the six major banks.
ROI wants lawsuit dismissed
Labour-sponsored fund Return on Innovations Inc. wants the court to dismiss a $1.2-million lawsuit filed by Gould Leasing Ltd., claiming the company's complaints have no merit.
Loans to a troubled Toronto landscaping company are at the centre of the dispute. In May, 2004, ROI, a Toronto debt-financing company, lent $3.5-million to Brooklin Concrete Properties Inc. That same month, Gould lent Michael Crupi, Brooklin's owner, an additional $1.5-million. Brooklin's first secured lender was the Bank of Montreal while ROI was in second position, ROI claims.
Brooklin ran into financial difficulty and was unable to meet its bank payments. Through a series of transactions, ROI acquired control of Brooklin for $25.1-million in March of this year.
In its July 19 lawsuit, Gould claims ROI snapped up Brooklin to protect its reputation and thwart creditors.
In a Sept. 9 affidavit, John Sterling, ROI president, claims the fund acted in the best interests of its unitholders and the employees of Brooklin during the company's long receivership process. ROI has subsequently agreed to sell Brooklin for $31.3-million, a 25-per-cent gain on its initial investment.
"Gould's oppression claim is an abuse of process and should be dismissed," said John Sterling, ROI president, in a Sept. 9 affidavit.
© 2007 The Globe and Mail. All rights reserved.
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