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Mutual Fund News

Reports of hedge funds' demise greatly exaggerated

With last year's scandals behind it, the asset class is set for a comeback, KEITH DAMSELL writes


There are some signs that hedge funds -- the beat-up asset class beset with scandal last year -- are poised for a recovery.

"On the institution side, we're getting a lot of traction and retail is coming back," said François Godri, senior vice-president of sales at Lake Shore Institutional and Dealer Relations. The British-based alternative asset manager oversees about $900-million (U.S.) and is stepping up its presence in Canada.

The 2005 collapse of Portus Alternative Asset Management Inc. and Norshield Financial Group "were a kick in the knees," Calgary-based Mr. Godri said. "But the dealerships will come out of it stronger."

Indeed, there was evidence last week that investors are rethinking hedge funds. On March 1, UBS Canada opened a hedge fund administrative office in Toronto, part of the brokerage's "beefed up" support for expanding business from offshore and Canadian hedge funds, spokesman Graeme Harris said.

That same day, more than 100 European institutional investors and private bankers gathered in Switzerland to hear from about a dozen Canadian hedge fund companies. The forum included the launch of the Scotia Capital Canadian Hedge Fund Performance Index, a monthly snapshot that tracks funds managed by Canadian advisers with a minimum of $15-million (Canadian) in assets under management.

Attendees in Zurich had "a tremendous amount of interest" in Canada, said Les Marton, managing director of Scotia Capital Inc. and forum sponsor. Interest in hedge funds is "moving down to the next level" from institutions to more sophisticated financial advisers and retail investors, he said.

"Business has been great," said Jim McGovern, managing director and chief executive officer of Arrow Hedge Partners Inc., the Toronto manager of more than $550-million in assets. "It's been solid since the fall."

Morningstar lambastes group

Morningstar Canada plans to leave the Canadian Investment Funds Standards Committee, the industry research firm that defines and classifies mutual funds.

The CIFSC has become "ineffective and is not delivering," said Scott Mackenzie, president and chief executive officer of Toronto-based Morningstar. The volunteer organization is taking far too long to modify and categorize funds and is failing to enforce its decisions within the industry, he said.

"This, to me, is personally quite disappointing," said Mr. Mackenzie, founder of the CIFSC in 1998. Morningstar, the largest of the group's eight industry members, is developing its own fund classification system, he said.

"It's premature to say they [Morningstar] are leaving," said Ralf Hensel, chairman of the CIFSC and senior legal counsel of the Investment Funds Institute of Canada. Talks are continuing to address Morningstar's concerns, he said.

But if Morningstar and the CIFSC part ways, it will be a grim scenario for the industry: two competing -- and potentially confusing -- classification systems for mutual funds.

The CIFSC's fund classification data are linked to comparative performance data, a key industry sales tool.

Corks pop at AGF, Fidelity

There was rare cause to celebrate last week at Fidelity Investments Canada Ltd. and AGF Management Ltd. After many, many months of customer losses, the two Toronto firms crossed into positive territory with Fidelity reporting February net sales of $256-million (Canadian) and AGF $29-million.

There are a few lessons to be learned for firms struggling to dig themselves out of negative territory -- AIC Ltd., Altamira Investment Services Inc. and the newest member of the redemption club, AIM Funds Management Inc.

The adviser is king. The bulk of Fidelity and AGF's success hinges on listening to the needs of the financial advice community. AGF's sales team met with key advisers at least five times over the past 18 months. And for the first time in years, Fidelity did an extensive road show last fall. .

Be patient -- turning the tide takes a long time. Randy Ambrosie, the architect of AGF's turnaround, joined the firm in the summer of 2004. Fidelity's re-engagement with the Canadian public began with news of fund management fee cuts in November, 2004.

A catchy new product is key. AGF and Fidelity were late to the income trust party and paid for it. The two companies have discovered that so-called wrap accounts that bundle funds together can have traction with the right sales hook. Fidelity's new ClearPath group of funds are outselling competing life-cycle portfolios, a product that adjusts its asset mix as the investor ages. AGF's Elements portfolio -- a performance-linked wrap with a money-back guarantee -- has pulled in $270-million since its December launch.

© 2007 The Globe and Mail. All rights reserved.

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