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Magna shareholders advised 'to suck back several Rolaids'

Bay Street waits and watches to see if Stronach can stay one lap ahead of auto parts competition, KEITH DAMSELL writes

MUTUAL FUNDS REPORTER

Bay Street is sitting on its hands when it comes to Magna International Inc.

This past week, the auto parts giant was all over the news, including speculation that it's looking to cut a deal with ailing DaimlerChrysler AG, slashing its dividend in half and reporting some disappointing fourth-quarter results. Class A shares of the Aurora, Ont.-based firm took a pounding, slipping about 8 per cent in value over the past five trading sessions to close the week at $85.66 on the Toronto Stock Exchange. On Feb. 20 -- only two weeks ago -- the stock hit a 52-week high of $94.75.

Interviews with a number of major shareholders -- including a handful of fund companies -- indicate investors are taking a wait-and-see approach to Magna.

There's a long list of negatives to contend with. The U.S. auto giants are reeling in red ink and the uncertainty of a potential acquisition. Then there's the "Frank factor," a reference to the sometimes controversial leadership of chairman Frank Stronach. Institutional investors have complained publicly about Magna's share structure and the compensation of Mr. Stronach. On May 2 of last year, six of Canada's largest equity mutual funds that held shares in Magna all abstained when it came to voting on the auto parts maker's proposed board of directors.

And there was an interesting coincidence lurking in the Feb. 27 earnings, said one Toronto analyst whose wealth management firm owns more than a million shares. Magna agreed last year to buy two golf courses from Magna Entertainment Corp. for $84-million, a sum not far off the estimated $82.7-million in annual savings generated by the dividend cut.

Magna investors "have to suck back several Rolaids," the analyst said, who described share ownership as a "conundrum" for many investors.

The dilemma is the genius of Mr. Stronach. Time and again, he has proven he is one step ahead of the rest of the auto sector. Under his leadership, Magna has outlasted its rivals, diversified its customer base and built a hefty $1.8-billion cash position.

The auto maker is "a very high-quality company going through difficult times," said one major U.S. investor. "There is great upside potential . . . the industry will survive and Magna's track record suggests the company will be the winner."

A handful of investors took profits in the fourth quarter of last year, when class A shares rose to as high as $94.40 from $81.70. The single largest seller was Franklin Resources Inc. of San Mateo, Calif., parent of Toronto's Franklin Templeton Investments Corp. The mutual fund giant sold about 1.1 million class A Magna shares, reducing its position to about 1.6 million shares.

Words of wisdom

"Divide your fortune into four equal parts: stocks, real estate, bonds and gold. Be prepared, most of the time, to be in a lost position on one of these parts. During times of inflation, be prepared to lose money on bonds and make gains in real estate and gold. Periods of deflation will cause losses in real estate but gains in bonds while stocks will post varying results over time. When spreads in returns represent a high imbalance, it is advised that you re-establish the balance among the four parts of your fortune." -- timeless asset allocation advice from German aristocrat Jacob Fugger II, the Rich, 1459-1525.

What goes up . . .

Correction? What correction?

It was a chaotic week in the markets but the consensus is mutual fund investors largely shrugged off the news. Fund firms large and small reported strong sales through last week and net sales for February are expected to reach $7.8-billion, the Investment Funds Institute of Canada reported Friday.

There was at least one voice of caution, however. Bill Holland, chief executive officer of CI Financial Income Fund, described the S&P/TSX composite index's 364 point tumble on Feb. 27 as "totally and utterly meaningless" for mutual fund investors -- a sign of complacency that should be a cause for concern, he said.

"I'd feel better if there was a bit of panic. I would think that people are being a little more rational and realistic, that markets can go down," Mr. Holland said. "There's that one-way feeling again and historically that hasn't been a good feeling."

kdamsell@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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