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Retail funds warm to institutional methods

But complex strategies aren't about to supplant buy-and-hold way, KEITH DAMSELL writes


The days of the long-only fund manager are numbered.

That was the take away from a recent Toronto presentation by Putnam PanAgora Integra Canada to institutional clients. The joint venture of U.S. and Canadian money managers wants investors to employ some alternative investing strategies to limit risk and maximize returns.

The migration of institutional investing methods to the retail space is likely, said Eric Sorensen, president and chief executive officer of PanAgora Asset Management Inc. of Boston. "It does emanate from the institutional side. Ultimately, everything kind of does get populated in the retail space," he said.

Indeed, many fund companies are already boosting returns by using some little-understood methods favoured by institutional managers. Some funds managed by CI Fund Management, Dynamic Mutual Funds and others have the ability to sell short up to 10 per cent of a fund's net assets under management. And, for years, almost every major fund firm in Canada has used complex derivatives to allow investors to increase their foreign content exposure.

Nevertheless, there's much sentiment within the industry that the traditional strategies of retail fund managers are here to stay. The buy-and-hold philosophy may be tweaked here and there, but it's not about to be replaced in favour of a complex "portable alpha" strategy or absolute return investing.

First, Canada's equity markets have been the place to invest for the past three years. Bread-and-butter Canadian common stock funds are top performers, so there's little to justify the inherent risks of alternative strategies, said Gavin Graham, director of investments at Guardian Group of Funds Ltd.

"We've enjoyed some excellent returns," he said. "The necessity for using [institutional] techniques in Canada is lower than in the United States where you have made no money . . . over the last five years."

And explaining the intricacies of alpha, beta and the Sharpe ratio to a financial adviser, let alone the general public, is fraught with problems.

A fund manager's investing method must be easy to understand, said David Whyte, Dynamic's executive vice-president of national sales. "If the fund gets too complex, it gets just too complicated to sell."

Won't meet Reamey in St. Louis

Gary Reamey is staying put.

The well-regarded head of Canadian operations at Edward Jones & Co. was passed over last week to succeed Douglas Hill, the top executive at the St. Louis, Mo.-based financial advice firm.

The company's senior managers and external advisers appointed Jim Weddle to be the firm's new managing partner, effective Jan. 1. Mr. Hill must step down as part of settlement with the U.S. attorney's office over mutual fund trading irregularities. The firm paid a $75-million (U.S.) fine, including more than $3-million from Mr. Hill.

Mr. Reamey joined Edward Jones 28 years ago and, in 1994, spearheaded expansion into Canada. He is one of the firm's best-paid executives, taking home $4.7-million last year, thanks to an ownership interest in the partnership.

Amvescap takeover talk grows

It's déjà vu for the shareholders of Amvescap PLC.

Takeover speculation has driven the share price of the British-based mutual fund giant up 15 per cent in value over the past two weeks.

Last month, Amvescap appointed Loren Starr to the post of chief financial officer, the same title he held at U.S. fund firm Janus Capital Group Inc. until July. The popular theory in London's financial district has Janus in a defensive mood, fearing a takeover offer itself and preparing a move on Amvescap to thwart its own unwanted suitors.

"This is an unsourced market rumour first reported by one wire service . . . and now repeated indiscriminately by others without any further substantiation," Amvescap said last week.

Janus has declined to comment. The company is keen on U.S. expansion but has neither the cash nor clout necessary to pull off a multibillion-dollar takeover, said a source close to the company.

Amvescap's share price had a strong run in July when Toronto's CI Fund Management revealed it had made an unsolicited $7-billion (Canadian) cash offer for the company, best known in Canada for the AIM and Trimark brands.

Amvescap's board balked and in August, CI withdrew its offer. Under British takeover rules, CI must now wait until February before making further overtures to buy the company.

Better for shareholders, but ...

Clarington Corp. last week rebuffed a $254-million hostile bid from CI Financial and accepted a richer offer from Industrial Alliance, but advisers are questioning whether the deal is in the best interests of Clarington's clients.

In a Nov. 9 letter to Clarington chairman Terrance Stone, financial adviser Howard Fergusson took him to task for not considering CI's proposal to cut management fees. "I was outraged to discover that no consideration was given to the management fee reductions proposed by CI Financial for the Clarington funds when you agreed to sell your company to Industrial Alliance. Furthermore, Industrial Alliance blatantly avoided the question when asked about reducing management fees, making it clear they had no intention to do so, making it obvious that unitholders were financing the higher price they bid for Clarington shares."

© 2007 The Globe and Mail. All rights reserved.

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