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At last, CI takes the income trust plunge

Fund company's shareholders vote overwhelmingly for tax-light structure, KEITH DAMSELL writes

CI Financial Inc.'s on-again, off-again flirtation with trust conversion is finally near an end.

Shareholders of Canada's third-largest mutual fund company voted a stunning 99.96 per cent in favour of the tax-advantaged income trust structure last week. A final tax ruling and court approval of the conversion are expected this week. Units of CI Financial Income Fund will likely begin trading by June 30.

It's been a long, three-year courtship for CI. In 2004, a proposed cap on trust ownership by pension plans shelved CI's trust initiative. Then, last September, Ottawa stopped providing advance tax rulings to companies thinking of starting trusts and CI once again put its plans on hold. Then in March of this year, Ontario failed to make changes to dividend taxes in its budget, pushing the company once again toward conversion.

Last week's vote was not without its wrinkles. Sun Life Financial Inc., the owner of about 35 per cent of CI's shares, already receives its CI dividends on a tax-free basis and saw no benefit in converting to a trust. Sun Life's support was needed for the deal to proceed, so CI granted the insurance giant the right to buy exchangeable units of a CI limited partnership ahead of other shareholders.

Some institutional investors and executives chose the Sun Life option. About 55 per cent of all shares will be converted to exchangeable units. The remaining 45 per cent of shares, a group that includes the bulk of retail investors, will receive regular income trust units.

"It's an outrageously complicated process," Bill Holland, CI chief executive officer, told investors at the conversion meeting. Indeed, many small investors in attendance were baffled by much of the company's 200-page conversion circular and tax implications.

The bottom line, Mr. Holland assured them, is lower taxes.

"This is about saving taxes and maximizing profits. . . . We are lowering the tax rate of the company for the benefit of the owners," he said.

Early indications are CI management is putting its money where its mouth is. Annual cash distributions per CI trust unit will total $2.01, a princely 205 per cent above the company's annual stock dividend of 72 cents.

Covington freezes redemptions

The Covington Group of Funds has taken the unusual step of halting redemptions in a $54.1-million labour-sponsored fund.

On June 16, the Toronto-based money manager announced plans to wind up the Covington Fund 1 and "optimize exit valuations" to improve shareholder returns. The 11-year-old fund's investments are a mix of small Canadian businesses, including Adult Safe Hockey League Ltd., troubled trust Atlas Cold Storage Holdings Ltd. and investment management firm Claymore Capital Management Inc.

The bottom line for the fund's estimated 20,000 investors? No withdrawals until June, 2008.

"Hogwash," Toronto investor Paul Farrell said of the company's plan. "The fund has been in net redemptions for months and this is the investment manager's way of stemming redemptions."

Indeed, assets under management have shrunk dramatically from a peak of $175-million six years ago. Returns have gone south, too. The fund was up a stellar 20.1 per cent in 1999, a meagre 2.4 per cent a year later and then posted losses for the next five years. The fund has lost an average of 2.5 per cent annually since its 1995 inception.

The redemption freeze was a difficult decision for management, said Scott Clark, managing director of Covington Capital Corp. The move was taken to make the most of an undisclosed investment with "tremendous upside," he said.

"Under normal course, we would have to go sell that investment well before maturity. We thought the right thing to do . . . was to put the fund into a formal wind-up process," he said.

The fund's unit price, valued at $7.52 when redemptions were halted June 16, will benefit substantially, he said.

"Come back and hold us accountable in six months time in terms of what the net asset value is," Mr. Clark said.

Keith Damsell is editor of GlobeinvestorGOLD.

A tale of two hedge fund disasters

There are some striking similarities -- and stark contrasts -- between two recent Toronto meetings of investors in two collapsed hedge funds, Portus Alternative Asset Management Inc. and Norshield Financial Group

Investors in Portus Alternative Asset Management Inc. met in a Toronto arena last Wednesday to find out when they might get back some of their money.

The Venues


Feb. 21, at the John Bassett Theatre, the plush home of Canadian Idol.


June 21, at the utilitarian Ricoh Centre, home of the Leafs farm team the Toronto Marlies. A lousy concert venue.

The crowd


About 200 frustrated small investors, joined via video link by hundreds more in Vancouver and Montreal. About 1,900 institutional and retail clients had about $342-million invested with the Montreal company when it was put into receivership a year ago.


An irate gathering of 500. At the time it was put into receivership in March, 2005, Winnipeg-based Portus had about 26,000 clients and more than $800-million in assets.

The best-case scenario


A maximum of 10 cents for every dollar invested. The payout may take as long as three years.


A princely 85 cents for every dollar might be recovered. Trustee KPMG LLP declined to provide a time-frame.

The reaction


Dismay and frustration. "I think it's absolutely pathetic, a travesty." -- investor Gary Johnson.


Outrage and hostility. "What a waste of time."-- Shaun Collier, an Ajax, Ont.-based financial adviser.

And the fallout

for management?


Founder John Xanthoudakis did not attend the meeting. In November, he was beaten up by three men with alleged ties to organized crime, an assault related to the firm's troubled business dealings.


Co-founder Boaz Manor is in Israel and faces possible imprisonment for failing to turn over $9-million (U.S.) in diamonds.


© 2007 The Globe and Mail. All rights reserved.

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