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IGM uses heft to slice fees


When it comes to investing in the stocks of mutual fund companies, big can be beautiful.

IGM Financial Inc., which has grown through acquisitions, has managed to keep its throne as Canada's largest fund player despite stiff competition from the banks.

And the Winnipeg-based company, which owns Investors Group Inc. and Mackenzie Financial Corp., is now trying to use its might to slice fees on its funds, and yet maintain significant profitability.

Mackenzie will be the latest company to start lowering its management expense ratios (MERs) on many funds beginning Aug. 1, once it gets unitholder approval. Investors Group has a similar proposal to be implemented this fall.

"IGM, being the largest player in the mutual fund space, provides a lot of heft and scale," Dundee Securities Corp. analyst John Aiken said in an interview. "That is becoming more and more critical."

With pressure on the industry to lower fees, "you have to have size to be able to allocate fixed costs over a great level of assets under management to bring down MERs," Mr. Aiken said. "IGM, with assets north of $100-billion under management, does have that."

Rising assets in the current bull market have helped lift IGM's stock almost 18 per cent, including dividends, over the past year. Its shares fell $1.02 yesterday to close at $52.58 on the Toronto Stock Exchange.

The stock has had a choppy ride because of concerns about the market and the fact that Mackenzie has struggled with net redemptions for most of the past year, Mr. Aiken said.

It's still early days, but Mackenzie came back with net sales for May and June. Meanwhile, IGM has managed to ring in overall net sales over the past year because Investors Group's numbers have been strong enough to offset Mackenzie's sales slump, he said.

Mr. Aiken, who rates IGM a "market outperform" with a one-year target of $62, also likes IGM because he feels it has the "lowest risk" profile of its peer group because of the way it sells funds.

Mackenzie funds are sold through independent financial advisers. But Investors Group funds are sold through its own network of financial planners, and that relationship has given it "a lot of sales resiliency in [market] downturns," he said.

In a recent conference call, IGM co-chief executive officer Murray Taylor bragged that redemptions on Investors Group's long-term funds [excluding money market products] had a low, 12-month trailing rate of 7.7 per cent at the end of March. (The industry average in 2006 was 15 per cent.) "This is our lowest redemption rate on record," Mr. Taylor said.

Besides the obvious risk to IGM stock from a prolonged market downturn that would depreciate assets and reduce fund sales, there is also a potential hit to the bottom line from lowering fees on funds. But Mr. Aiken said he believes that IGM "will be able to offset any profit declines with future efficiencies."

BMO Nesbitt Burns analyst John Reucassel suggested that Mackenzie's plans to cut fees could cost $15-million to $25-million, but he too expects IGM can reduce costs to offset any possible drag on profits.

There have been "a series of fee cuts at other firms like CI, RBC, Fidelity and AIM Trimark," Mr. Reucassel wrote in a report. "Given its scale, we believe that IGM can absorb these changes with minor impact to EBITDA (earnings before interest, taxes, depreciation and amortization) and earnings."

He rates IGM an "outperform" with a one-year target of $60, saying "IGM remains one of the cheapest fund companies in North America" from a valuation perspective.

Robert Almeida, a fund manager at Burlington, Ont.-based AIC Ltd., is also bullish on IGM Financial, saying its size, and the fact it is backed by the financial muscle of Montreal-based Power Corp.'s group of companies, makes it an attractive investment.

"IGM is basically a proxy for the entire industry" because it is very diversified in terms of asset classes, investing styles and distribution models, said Mr. Almeida. He is co-manager of the AIC Advantage funds, which hold just over 10 per cent of IGM Financial.

"Buying IGM is like buying the largest fund of funds," he quipped. "If the unthinkable happened - a bear market or prolonged downturn - the company is in the strongest position to survive."

By the numbers

IGM's assets under management at June 30: $111.4-billion or 15 per cent of the industry.

Number of Investor's Group advisers at the end of April: More than 4,000.

Controlling shareholder: Power Financial Corp. with a 56-per-cent stake.

2006 revenue: $2.6-billion

2006 profit: $766.7-million

P/E: 17.4

Dividend yield: 3.1 per cent

Return on equity: 21.4 per cent

Market cap.: $14.2-billion


© 2007 The Globe and Mail. All rights reserved.

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