The end of Clarington Corp. is expected to deal a crushing blow to long-time partner Seamark Asset Management Ltd.
Tomorrow, Clarington shareholders are widely expected to tender their stock to suitor Industrial Alliance Insurance and Financial Services Inc. The Quebec City-based company has offered Clarington investors $15 a share, an offer that values the Toronto fund company at $222-million. The deal bests a hostile offer from CI Financial Inc. worth $14.75 a share, or about $218.3-million. The two cash offers do not include about $59-million in Clarington debt.
Seamark of Halifax has been an anxious observer of the takeover fight. The fund company manages about $10-billion in assets, including about $3-billion for Clarington. While CI planned to sever ties with Seamark and cut Clarington fees, Industrial Alliance has been less forthcoming, pledging only to keep Clarington fees competitive.
Observers suggest Seamark's days as Clarington's preferred adviser are numbered. The firm manages about 70 per cent of Clarington's estimated $4.2-billion in assets under management.
"What would have happened in a blink of an eye under CI will be done in a more nuanced and genteel manner" under Industrial Alliance, said Rudy Luukko, funds editor with investment website Morningstar.ca.
When the two companies are combined, there will be too many duplicate mandates and small, uneconomic funds. The combined total of $5.4-billion is spread among 26 Clarington funds and 24 from Industrial Alliance. Only about a dozen of these funds have at least $100-million in assets, Mr. Luukko said.
Seamark has two strikes against it. First, CI's decision to emphasize fees during the takeover battle has put pressure on Industrial Alliance to curb expenses. It's much more cost-efficient to keep fund management in-house than farm it out to a third party.
Secondly, Seamark's management team is stuck in a rut. The firm's growth-focus investment mandate is out of style; many funds are underweight on the red-hot energy sector and overweight on the depressed U.S. market, said Dale Noseworthy, analyst at Beacon Securities Ltd. in Halifax.
A glimpse at the data of rival Canadian dividend funds indicates the hole Seamark is in. The Seamark-managed Clarington Canadian Dividend Fund has $1-billion in assets under management and a pricey management expense ratio of 2.75 per cent. The fund has returned an annual average of 6.4 per cent since its launch in 1999.
In contrast, the R Dividend Income Fund, a $216.6-million fund managed internally by Industrial Alliance, has a competitively priced MER of 1.83 per cent and has returned an annual average of 12.7 per cent since inception in 1994.
"I will be surprised if Seamark has the majority of the Clarington mandates 12 months from now," said John Aiken, an analyst at National Bank Financial Inc.
The index fund dilemma
"The passive investor who bought the S&P 500 index [fund] five years ago would have negative returns today. The same investor who bought in 10 years ago would now only be breaking even. Investing in an index fund can be dangerous to your wealth because in the real world, timing the market is impossible." -- Ned Goodman, chairman, president and chief executive officer of Dundee Wealth Management Inc., in defence of active fund management
Defence the best offence
Financial forecasting is a mug's game, says Vancouver financial adviser Adrian Mastracci.
"I can make a case for the good, the bad and the ugly," he says, adding that his best guess for 2006 is "a roller coaster with volatility."
With that in mind, Mr. Mastracci's advising clients to consider a six-point defensive plan:
1. Diversify the portfolio into a number of asset classes.
2. Sprinkle the nest egg among a variety of sectors around the world.
3. Decide on your appropriate asset mix and stick with it.
4. Take a pass when it comes to chasing sizzling, red-hot sectors.
5. Don't get smitten with borrowing to invest.
6. Focus on the quality of the investments. If you crave a little raciness, set aside a specific amount for such picks.
A question of ethics
Barrick Gold Corp. is in the sights of Ethical Funds Co.
The Toronto-based miner has the dubious distinction of receiving a record four citations in the fund company's shareholder action program for 2006. The Vancouver-based socially responsible fund company plans to challenge Barrick next year on the sustainability and biodiversity of the Pascua Lama project in South America, as well as improving stakeholder relations and expanding its HIV/AIDS programs.
In addition to Barrick, a handful of blue-chip companies received more than one mention on the action list for 2006, including Alcan Inc., Royal Bank of Canada and Teck Cominco Ltd.
Ethical Funds, manager of about $2-billion in assets, owns shares in each firm on the action list. The fund company contacts senior management about its concerns and attempts to reach a solution or level of understanding. Depending on the company's response, Ethical Funds may put forward a shareholder's resolution for debate at the target firm's annual general meeting.
"In a changing world and changing economic environment, sometimes companies aren't aware of all of the damages they are doing," said Elaine McHarg, the money manager's chief marketing officer. "We don't want to be accusatory or negative or penalizing. It's really about trying to help companies do good."
© 2007 The Globe and Mail. All rights reserved.
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