Two of Canada's biggest banks and their clients may be among the few parties to get the bulk of their money out of Norshield Financial Group.
Investors in the troubled hedge fund company gathered in Toronto, Montreal and Vancouver last week to hear the fate of money sunk into the insolvent company. At the time Norshield filed for receivership, about 1,900 investors had $131.9-million in the company's funds, while a group of institutional clients had $210-million invested.
Receiver RSM Richter Inc. detailed a Byzantine scheme that involved millions of dollars in offshore accounts and dozens of companies. The best-case scenario for investors is a potential three-year wait for a dismal 10 cents of every dollar.
But Royal Bank of Canada and Bank of Montreal appear to be two Norshield partners that will escape relatively unscathed.
RBC lent $300-million to Mosaic Composite Ltd., Norshield's Bahamas-based investment arm. The loan was inherent in an option program that saw RBC manage a basket of $330-million in hedge funds. Mosaic used funds from the pool to cover increasing redemptions from Norshield investors.
RBC liquidated the basket of funds in 2004, leaving behind equity of $44-million. A Mosaic-related company then sold the bulk of the $44-million in shares to a unit of New York's Merrill Lynch & Co. Inc. A measly $8.4-million -- the subject of a series of lawsuits -- is potentially all that's left over from Mosaic's hedged assets.
Meanwhile, the Norshield team acted as an adviser to about $20-million in hedge fund-linked notes backed by RBC. The notes fell beyond the scope of RSM Richter's mandate and were redeemed in June last year. Similarly, Norshield managed about $2.2-million in funds for Bank of Montreal. Again, the bank notes were not part of RSM Richter's mandate.
Recognizing managerial sins
The seven sins of fund management, compiled by Dresdner Kleinwort Wasserstein Securities Ltd.
1. Forecasting: pride.
The London brokerage found 75 per cent of fund managers consider themselves above average at their jobs. But evidence suggests that many fund managers are overconfident and poor forecasters.
2. The illusion of knowledge: gluttony.
"Noise and news have fused together in a bewildering deluge of data," DKW Securities notes. The brokerage advises managers to focus on a handful of key factors before buying a stock.
3. Meeting companies: lust.
Meeting company management could be a waste of time. Companies give overly optimistic forecasts and fund managers tend to be overawed by corporate authority.
4. Thinking you can outsmart everyone: envy.
The pressure to perform on a month-to-month basis is driving professionals to prolong their exposure to risky situations. The sell call is being timed to perfection and, sadly, some managers get crushed in the rush to the exits.
5. Short time horizons and overtrading: avarice.
Performance is measured on increasingly short-term time horizons. This can lead to closet indexing where retention of assets becomes the end objective.
6. Believe everything you read: sloth.
Investors make decisions based on stories or the allure of growth. DKW Securities urges investors to avoid distractions and focus on fundamentals.
7. Group-based decisions: wrath.
Investment by committee runs the risk of polarized views and group think. Members of groups enjoy credibility when providing views and information that meets with the group's approval.
Active or passive management?
The continuing debate between active and passive managers got some mixed data last week.
Actively managed mutual funds in the Canadian and U.S. equity categories lagged their benchmark index in 2005, Standard & Poor's reported. In Canada, the S&P/TSX composite index outperformed 87.1 per cent of actively managed Canadian equity funds, while the S&P 500 index beat the returns of 57.8 per cent of U.S. equity funds during the same period.
Small-cap fund managers, however, had the edge, with 63.4 per cent beating the S&P/TSX small-cap index in the past year. Active managers of small-cap funds have had a better chance of beating their benchmarks because of relative inefficiency of the market, said Jasmit Bhandal, director of business development for Standard & Poor's Canadian index services.
A history of high returns
One of Canada's best-performing small-cap funds is back on the market.
The Northwest Specialty Equity Fund, a $239-million fund that's returned an annual average of 14.5 per cent since its inception 20 years ago, is open to new investors as of last Friday. Management closed the fund in January last year, citing difficulty in finding good small-cap value stocks necessary to maintain the quality of the fund. The fund will be capped once again when assets reach the $500-million mark.
Deans Knight Capital Management Ltd. of Vancouver has managed the fund since 1994. All new money will go to Montreal's Montrusco Bolton Investments Inc., manager of the Northwest Specialty Growth Fund.
© 2007 The Globe and Mail. All rights reserved.
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