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Mutual Fund News

What's an investment worth? That depends on accounting rules

Proposed changes in how the net asset value is calculated are making things difficult for the industry, KEITH DAMSELL writes

MUTUAL FUNDS REPORTER

The mutual fund industry is scrambling to avert an accounting crisis, the unexpected fallout arising from increased industry regulation and more rigorous reporting standards.

"It's going to be a challenge but we think it's doable," said James Loewen, financial services partner at KPMG LLP, following an industry forum on Friday. Mr. Loewen is a member of an industry task force that wants securities regulators to rethink complex continuous disclosure regulation.

At the heart of the issue is how the net asset value of an investment fund is calculated. According to 2005 securities rules that govern how fund companies share information with investors, fund companies must use generally accepted accounting principles (GAAP) to calculate the day-to-day value of an investment fund. Historically, fund companies have used the closing, last-traded price of securities to calculate a fund's value at the end of the trading day.

The catch is accounting rules changed last year when the Chartered Accountants of Canada adopted fair-value pricing for financial securities. GAAP guidelines now require fund companies to use a traded security's bid price to calculate net asset values.

The potential result? Two different values for the same fund, one using closing prices and the other, lower bid prices. In many funds, the price difference could be tiny but in funds that buy less liquid stocks or emerging market equities, the value gap could be great.

"It was a crisis in accounting," said Paul Moore, vice-chairman of the Ontario Securities Commission. "People woke up to the fact that 'My gosh, this means we are going to have to change the pricing methodology for mutual funds.' It will affect the price people pay when they subscribe, the purchase price when they redeem out and the day-to-day value of the fund."

The new regulation from the Canadian Securities Administrators was to go into effect in October, 2006. The Investment Funds Institute of Canada won a reprieve from the CSA and got to work this fall. An industry task force under the chairmanship of Mr. Loewen has submitted a 200-page brief to regulators on the complex issue. Their hope is regulators will remove the tie to GAAP accounting and let the industry use pricing methodology tied to closing values.

The potential catch for investors is even more confusing paperwork. Future management reports of fund performance could include two sets of figures -- one using a fund's closing net asset value and the other, the bid-calculated net asset value.

All in their heads

We're poorly prepared for retirement and death but hey, we've still got our health.

It's RRSP season once again and the mutual funds industry is using its favourite marketing tool: the public opinion poll. Here's the depressing data from an avalanche of recent surveys.

About 40 per cent of Canadians are shrugging off tax penalties and withdrawing money from their registered retirement savings plans early to invest in homes, pay down debt and cover living expenses, Bank of Nova Scotia reports.

Sixty-seven per cent of non-retired Canadians say their physical health is better than their financial health, Investors Group reports. Baby boomers are resigned to punching a clock in their golden years, with 65 per cent planning to work in retirement.

Just under half of all Canadians (46 per cent) have written a will, Royal Bank of Canada says.

More than half of baby boomers don't have a written financial plan, Bank of Montreal reports. Nevertheless, a brainy 21 per cent have a plan "in their head," the bank said.

Bissett's happy ending

Bissett Investment Management's patience with a sometimes-troubled holding paid off this month.

Way back in 1998, the Calgary money manager first kicked the tires of the newly created Alliance Atlantis Communications Inc. The firm paid about $26 a share for its first tranche of the media company's class B shares.

Debt concerns, costly film and TV production, and dilutive stock issues saw shares collapse, touching a low of $11 in 2003. Bissett hung on for "a very bumpy ride" and added to its position on weakness, said Chris Fernyc, manager of the Bissett Small-Cap Fund and the Bissett Microcap Fund.

The unit of Franklin Templeton Investments Corp. remained convinced of the long-term value of the company's "two golden eggs," he said: a roster of 13 specialty channels, including History Television, Showcase and the Food Network, and a 50-per-cent interest in the hit TV crime drama franchise CSI: Crime Scene Investigation.

By early January, Bissett held more than 15 per cent of the class B shares within its retail mutual funds and institutional accounts.

On Jan. 10, CanWest Global Communications Corp. agreed to pay $2.3-billion for Alliance Atlantis.

The deal, to be financed by New York investment firm Goldman Sachs Capital Partners, values the class B shares at $53 each.

For Bissett, the valuation represents a time-weighted return of about 30 per cent on its average stock purchase price.

The successful auction of the media company "was a matter of when, not if," Mr. Fernyc said. "Obviously, on behalf of our investors, we're really quite pleased."

kdamsell@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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