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New kid Rockwater starting to play with the big boys

But the torrid growth has some questioning management's motivation, KEITH DAMSELL writes

Quick! What's the fastest-growing financial stock on Bay Street?

If you guessed Canaccord Capital Inc., up 20 per cent this year, or the class A shares of Dundee Corp. -- ahead more than 29 per cent in 2006 -- you'd be wrong.

Bragging rights belong to newcomer Rockwater Capital Corp., a Toronto asset manager that's stock price is up a heady 34 per cent since January. The stock closed down 5 cents to $7.05 on the Toronto Stock Exchange Friday, up 60 per cent from an Oct. 20 52-week low of $4.40.

"This is probably the fastest growth story in building wealth management that we've ever seen in Canada," said William Packham, president and chief executive officer, in an interview. Founded in 2002, assets under administration have swelled rapidly to about $8.5-billion. The company has a bold AUA target of $20-billion by 2008.

Some deft deal-making is driving growth. Mr. Packham, the former head of Midland Walwyn Capital Inc. and Merrill Lynch Canada Inc., stickhandled the 2004 acquisition of shrinking KBSH Capital Management Inc., money manager for Clarington Mutual Funds, Wellington West Capital Inc. and others. Rockwater plans to build its mutual fund platform over the next few months via KBSH and little-known fund division, the Disciplined Leadership Group.

But it's Mr. Packham's stewardship of Rockwater's Blackmont Capital Inc. that's making headlines. The asset manager is aggressively courting some of Canada's biggest brokers and investment advisers. Earlier this month, Blackmont hired four top performers from CIBC Wood Gundy, a move that prompted the bank-owned brokerage to take the unprecedented step of waiving fees for some clients that opt to stay loyal.

Competition for top advisers and brokers is intense. In addition to well-established players like Dundee and CI Financial Inc.'s Assante Group, there are many upstarts chasing a bigger piece of the pie. For example, earlier this month, MGI Securities, a unit of Toronto's Jovian Capital Corp., unveiled plans to more than double in size over the next two years, from 43 advisers to about 100.

The Blackmont team's head count has stayed flat but the firm has weeded out some lesser performers, Mr. Packham reports. Today, Blackmont has about 175 brokers and advisers managing an average of $50-million for clients; less than three years ago, the firm had some 200 advisers with an average client book of $17-million. By 2008, the broker tally may swell to 300.

The wining, dining and, ultimately, hiring of brokers has cost a lot of money. For the three-month period ended March 31, 2006, compensation costs climbed to $37.6-million, up from $31.8-million a year earlier. The head count at the firm, meanwhile, rose by only 15 people during the period to 673. That's an average of $55,900 per employee for the quarter, up from $48,330 for the same period in 2005.

Liquidity has soared, too. As of April, Rockwater had about 26.8 million average shares fully diluted, up from 16.4 million in March, 2005.

It's left some equity analysts who follow Rockwater uneasy. In a July 13 stock update, Horst Hueniken notes that "the likelihood for the investment dealers to meet their goals in recruiting [investment advisers] and build assets under administration may be too aggressive; or at least it will come at a high cost." The analyst at Westwind Partners Inc. has an uncommon "sell" rating on Rockwater shares and a 12-month price target of $5.30.

At TD Securities, Doug Young believes that Rockwater's share price may be overvalued. The stock trades at a forward price-to-earnings multiple of 15 times, compared to the 11.7 multiple of U.S. brokerages.

"RCC is much smaller, has less trading liquidity, operates only in Canada, is relatively new, and is still in build out mode," Mr. Young notes in a June 14 Rockwater update. The analyst has a "reduce" rating on shares and a 12-month price target of $6.50.

Meanwhile, Rockwater's ambitions are receiving a skeptical reception from the competition. Several sources within the financial advice community report Mr. Packham and his team are planning to do a quick flip, styled after Midland's $1.3-billion merger with Merrill in 1998: Build Rockwater's asset base and then unload it to the highest bidder. There's a growing list of potential buyers eager to expand their wealth management business, including Toronto-Dominion Bank and Bank of Nova Scotia.

Mr. Packham insists Rockwater is here to stay.

"There is no exit strategy. We built this company to be enduring and long-lasting," he said. "We are still very much in the early stages of developing this company. Why would we sell something that we spent three or four years just to get built?"

Keith Damsell is editor of GlobeinvestorGOLD

kdamsell@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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