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Mutual Fund News

Hot stock market boosts CI revenue, but profit slides

Stock-based compensation proves spoiler

CI Financial Inc. says a red-hot Canadian stock market helped boost its third-quarter revenue, and the mutual fund giant has made official its intention to convert into an income trust.

However, CI noted that profit for its fiscal third quarter ended Feb. 28 profit dropped 10 per cent from the same period last year, even though revenue rose climbed 8 per cent. Most of the drop related to $28.2-million in stock-based compensation; CI's share price increased 16 per cent during the quarter.

Excluding those expenses, profit climbed for the second successive quarter, as the mutual fund company capitalized on a soaring Canadian stock market.

Chief executive officer William Holland described his company's third-quarter performance as solid, "which was pretty easy, with the TSX up 8 per cent in the quarter."

The hot stock market helped boost CI's assets under management by 14 per cent from the comparable quarter last year. Gains were broad-based, with the company's top 10 funds accounting for only 61 per cent of total sales.

Toronto-based CI is also completing its conversion into an income trust. Based on third-quarter figures, the company expects distributable income of about $1.90 a share. Given CI's sales growth, actual distributions will likely be higher, executives said.

CI is also phasing out stock-based compensation for a less volatile restricted share program. Stock-based compensation is expected to disappear entirely within a year, the company said.

It said it will send a mailing at the end of May asking for shareholder approval to convert to an income trust, and expects the conversion to be complete by September of this year.

This will be the third time that CI has tried to convert to an income trust. Legislative uncertainty killed similar attempts in 2004 and in September of last year. Because of its previous failed attempts, the mutual fund company is using Sept. 1 as a tentative conversion date, even though the actual conversion may come much sooner if CI receives an early tax ruling.

The company applied for an advance tax ruling in the second week of January, and expects a reply within the next 30 days.

CI's move highlights a growing corporate exodus among financial firms from traditional taxation models, specifically in Ontario, where provincial taxes are higher than in other booming jurisdictions such as Alberta. Over the past year, several companies in the oil and gas sector either moved their headquarters west or converted into income trusts.

Recently, the urge to avoid taxes has taken hold in the financial sector. Late last year, shareholders voted overwhelmingly in favour of brokerage GMP Capital Trust's plan to convert to an income trust.

CI's announcement in late March that it would ask board approval to convert into an income trust fuelled speculation as to which mutual fund company would follow suit. Toronto-based AGF Management Ltd. recently said it's considering the option.

Because the Ontario's provincial government has not yet followed Ottawa's lead in reducing taxes on dividends, the income trust allure remains for many dividend-paying financial companies.

"Even if the Ontario government eventually decides to reduce taxes on dividends, the full effect of the cuts would not be felt until 2010, at the earliest," Genuity Capital Markets analyst Karin Huo said in a recent report to clients.

Yesterday, CI's board also announced a cash dividend of 6 cents a share, payable on May 15 to common shareholders of record on May 1.

CI shares rose 24 cents on the Toronto Stock Exchange yesterday to close at $33.01. The company's stock price has almost doubled over the past 12 months.

***

CI Financial

Q320052004
Profit$73.1-million$81.2-million
EPS26¢28¢
Revenue$330.4-million$306-million

© 2007 The Globe and Mail. All rights reserved.

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