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Resolute cites expensive regulation in decision to wind up flagship fund

Other industry players complain new governance rules are overkill


Tom Stanley, one of Canada's top-performing money managers, is terminating his flagship mutual fund, citing escalating red tape and regulatory costs.

"Our decision to close is final," Mr. Stanley said in a Jan. 24 letter to unitholders of the $238-million Resolute Growth Fund.

"We have been facing ever increasing regulatory expenses, detrimental disclosure requirements, rising liability risks and increasing red tape. In summary, these new rules are not compatible with what we have been doing and would like to continue to do for you, our unitholders," the letter notes. The 12-year-old Toronto fund will return proceeds to unitholders on June 2.

The demise of the Resolute Fund sent a shudder through many executives at small fund companies. A growing and costly regulatory burden is making it tougher for small fund companies to make ends meet, they said.

"Our view is the increasing amount of regulatory work and the cost of it is exceeding the added benefit to the unitholders," said Allan Smith, president and chief executive officer of Saxon Funds Management Ltd., manager of $1.8-billion in mutual funds.

Mr. Stanley, president of Resolute Funds Ltd., has a knack for buying overlooked companies that are not widely followed. Returns have been stellar, averaging 27.7 per cent annually since inception. In 2005, the fund soared 100 per cent in value thanks to a heavy weighting in small-capitalization resource stocks.

Mr. Stanley shuns the spotlight and keeps his stock picks to himself. That unconventional style contradicted the aims of the Ontario Securities Commission and has led to the end of the fund.

As of June 1 last year, NI 81-106, the new continuous disclosure rule, went in to effect. Fund firms have a long list of new obligations, including fund-specific financial statements and proxy-voting disclosure. All that data must be processed and made available to unitholders.

"81-106 is designed to promote transparency of publicly offered investment funds to their investors. Every investment fund should comply," OSC spokesman Eric Pelletier said.

Resolute Growth fought for an exemption to the new disclosure requirements that force the fund to reveal its 25 largest holdings every quarter. Typically, the fund holds less than 20 equities and Mr. Stanley believes privacy is key to his success. Unitholders backed Mr. Stanley too, voting overwhelmingly in favour of asking for an exemption at a June, 2005, meeting.

"We failed to persuade the regulators," Mr. Stanley said in his letter, noting that large fund firms and their lawyers favour increased regulation of the fund industry. "It is my attitude that is inconsistent with the current industry environment and that there is no longer a place for a fund like ours."

Indeed, the OSC has a long list of further initiatives in the works. Later this year, for example, it's expected each mutual fund must create independent review committees to monitor conflicts of interest. Regulators are also considering mandatory compliance programs for funds, improved point-of-sale disclosure and an update of fund sales practices.

"It's overkill," said Jamie Colliver, a principal with Putnam PanAgora Integra Canada. The Oakville, Ont., firm manages about $3-billion in assets, including mutual funds. The OSC's proposals "add an extra cost to our infrastructure and to the investors because effectively it gets passed on," he said.

Oliver Murray, president and CEO of Brandes Investment Partners & Co., warned the increasing regulatory burden faced by small fund companies may ultimately mean fewer options for small investors. The Toronto company manages $4.4-billion in mutual funds.

"The unintended outcome . . . may be that other companies may follow the path that the Resolute fund is contemplating and in the end, this would not be good for the average investor," Mr. Murray said.

A resolute decision

Tom Stanley, one of Canada's top performing money managers, said his decision to close his flagship Resolute Growth Fund is final. The fund will return proceeds to unitholders at the close of business on June 2.

Resolute Growth

CATEGORYCanadian small cap
FUND TYPEOpen-ended
TOTAL ASSETS$238.1-million

Returns to Dec. 31, 2005

1-month simple rate of return4.88%
3-month compound annual- 4.91
6-month compound annual43.32
1-year simple rate of return100.48
3-year compound annual52.14
5-year compound annual43.76
10-year compound annual33.07
Since inception27.72


© 2007 The Globe and Mail. All rights reserved.

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