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IGM investors' returns leave gains of fund owners in the dust

Like the fund? Then you may want to consider the firm instead, KEITH DAMSELL says


Buy IGM Financial Inc. shares, sell the Investors Dividend Fund.

It's hard not to reach that conclusion when you consider some comparative data from the Winnipeg fund giant and its flagship $12-billion equity fund.

IGM, Canada's largest fund company, which is controlled by Montreal's Desmarais family, has a stellar track record. Sales growth is strong, especially within recent acquisitions Mackenzie Financial Corp. and Investment Planning Counsel Inc. On the Toronto Stock Exchange, IGM shares have a 10-year compound annual return of 22.4 per cent for the period ended Dec. 31.

The results of the Investors Dividend Fund, the largest retail fund in Canada, pale in comparison. The fund reported a compound annual return of 10.3 per cent during the same 10-year period, about half the gains enjoyed by IGM shareholders. The fund's returns also fall well below the 11.99-per-cent annual average for the Canadian dividend fund asset class over the past decade.

It's cash in the hands of investors and unitholders, however, that shows the most remarkable contrast. An IGM investor would receive a total of $13.46 a share in dividends over the 10-year period, gains that take into account a 1998 two-for-one stock split. And owners of Investors Dividend? They would have pocketed a total of $4.45 a unit in the same period.

It's worth noting that the Investors Dividend Fund is a key profit centre for IGM, holding more than 10 per cent of the fund company's total assets under management. The bulk of IGM clients pay an annual management expense ratio (MER) of 2.76 per cent to own the fund. That's about $330-million in fees for a single mutual fund. It's hard to get a sense of the fund's day-to-day operating costs; industry sources suggest a very generous estimate may be about 40 per cent of MER fees, leaving about $200-million in profit for parent IGM.

Investors Dividend enjoys enormous economies of scale. MERs have declined in recent years, dropping from a 1998 high of 2.98 per cent to their current level. Nevertheless, the fund is pricey when compared with the industry average MER of 2.54 per cent for the asset class. That said, there are no plans to trim unitholder fees further any time soon. The advice delivered by Investors Group Inc.'s team of 3,700 consultants costs money, said Murray Taylor, co-president and co-chief executive officer of IGM and Investors Group president and CEO.

"People want advice. As people age, they're wanting more of it, more complex, long-term advice. We feel what we charge is appropriate and we're being very diligent with our costs," Mr. Taylor told reporters following the company's recent annual meeting in Toronto.

But Mr. Taylor was quick to add that mutual fund investors will get some cost relief soon, thanks to the recent federal budget. Unitholders pay the GST on MERs, a "somewhat significant . . . hidden cost," he said. Ottawa's move to cut the GST from 7 per cent to 6 per cent will "serve our unitholders very well in terms of cost reduction," he said.

Once again, the math tells a different story. Assuming an average fund MER of 2 per cent, the GST cut will amount to a princely 2 cents of savings for every $100 worth of mutual funds held.

Diversify, diversify, diversify

"I feel we needed a good 'tree-shake' and we had it arrive this week rather swiftly. We need to clean things out periodically and that's now happening. I like volatility because it creates opportunities, but only for the few who are poised to take full advantage of them. And yes, I do like the stocks I own in my two portfolios. However, I also love the other part of the portfolio that isn't invested in stocks. I would make three important points:

1. I have over $2.2-billion in cash.

2. I have over $2.2-billion in cash.

3. I have over $2.2-billion in cash."

-- Gerald Coleman, lead portfolio manager of CI Financial Inc.'s Harbour Advisors, on May's volatile markets.

Vancity Inhances fund business

Vancity, with a nod to the big banks of Bay Street, is boosting its presence in the mutual fund business.

In 2001, the Vancouver credit union partnered with little-known Real Assets Investment Management Inc., a money management firm that focuses exclusively on socially responsible investing. Vancity has cranked its interest to 95 per cent, and as of February, Real Assets changed its name to Inhance Investment Management Inc.

Kerry Ho, an accountant by training who has 10 years working with investment guru Peter Cundill, was appointed to the Inhance corner office a year ago. He's moved quickly to build a solid team, a group that includes chief investment officer Steve MacInnes, an industry veteran that held the same title with HSBC Asset Management (Canada), and portfolio manager Michael Brown, formerly of Phillips Hager & North Investment Management.

Vancity wants to sell the Inhance lineup of five funds across its network of about 50 branches in B.C. At present, the credit union has a team of 52 financial advisers that can sell funds to members.

© 2007 The Globe and Mail. All rights reserved.

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