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Consistency pays off for firm on two fronts

Saxon Financial's investments enjoying solid returns -- as are its own shares

MUTUAL FUNDS REPORTER

Be it shares or mutual funds, investors in Saxon Financial Inc. have done well of late.

The Toronto investment firm has managed a solid lineup of mutual funds since 1986. Its four core offerings -- Saxon Balanced Fund, Saxon Small Cap Fund, Saxon Stock Fund and Saxon World Growth Fund -- are consistent performers and receive strong ratings from fund research firms.

Last summer, the money manager became a shrewd investment itself when it went to the public market. A group of four underwriters led by BMO Nesbitt Burns Inc. raised a total of $118.8-million, selling about 7.2 million shares for $16.50 each. Significant shareholders include Dynamic Mutual Funds, Fidelity Investments Canada Ltd. and Phillips Hager & North Investment Management Ltd.

The stock has never looked back, climbing to a March 2 record high of $25.50 on the Toronto Stock Exchange. The shares gained 18 cents to $23.93 yesterday.

Investment performance drives fund sales, profits and ultimately the share price, industry sources said.

Saxon hasn't "tried to be all things to all people; they try to do their thing and do it well," said Rudy Luukko, funds editor with the investment website Morningstar.ca. "They've had performance focus, consistent personnel and a consistent style."

Retail mutual funds are a small fraction of Saxon's business. The company manages about $11-billion, up smartly from $9.3-billion a year ago. About $9.2-billion is managed for institutional clients; of this sum, about $8-billion is on behalf of CMA Holdings, a subsidiary of the Canadian Medical Association.

Saxon and the CMA have a deep relationship. The association, which represents the interests of about 60,000 physicians, bought a controlling stake in Saxon in 2003 and following the IPO, owns about 30 per cent of the company. Richard Howson and Robert Tattersall, Saxon's long-serving investment managers, each own about 7.6 per cent of the public company.

Retail funds, meanwhile, make up about $1.7-billion of assets under management and are the company's fastest-growing and most lucrative business. Saxon prides itself on its low-cost structure; nevertheless, it still collects an estimated average of 1.7 per cent in annual fees from managed assets in its retail business compared with a tiny 0.2 per cent average annual fee from institutional management. The firm recently hired three fund wholesalers to sell through third-party channels and industry sources expect the company's retail business may double in size within the next five years.

Lastly, the company's private client division represents a slender $227-million in assets.

Saxon's double-digit growth in assets under management is virtually impossible for larger publicly traded fund managers, such as IGM Financial Inc. and CI Financial Inc., said John Aiken, analyst at National Bank Financial Inc.

Major fund companies "are never going to be able to see 20-per-cent growth in assets under management given the size they are already," Mr. Aiken said. Saxon's small-cap momentum story "is what investors love to see."

Saxon's continued success hinges on investment performance. When that suffers, the share price follows suit as shown by the volatile stock charts of Clarington Corp., Seamark Asset Management Ltd. and Mavrix Fund Management Inc.

"Consistency of performance" is the key to the company's future, said John Reucassel, of BMO Nesbitt Burns, in a March 10 report. He is Bay Street's sole Saxon analyst. The company's following may change soon as a number of analysts have visited Saxon in recent weeks.

"There are opportunities for niche operators such as Saxon," said Mr. Reucassel. Last week, the analyst increased his 12-month stock target to $25 from $24 but is maintaining his "market perform" rating on the shares.

Rx for investors

Robert Tattersall (left) and Richard Howson, Saxon's long-serving investment managers, each own about 7.6 per cent of the public company. The Canadian Medical Association owns about 30 per cent of the money management firm.

Financials

Last close$23.93
Change from previousup 18¢
Intraday high since inception$25.50
Intraday low since inception$16.54
Year-to-date change11.30%
Market cap$325.71-million
Price / book ratio7.29
Revenue, 4th. Qtr. '05$10.40-million
Profit, 4th. Qtr. '05$2.92-million

SOURCE: THOMSON DATASTREAM; BLOOMBERG

© 2007 The Globe and Mail. All rights reserved.

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