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New mutual funds face more startup obstacles

The latest generation is battling to overcome tough competition, extensive regulation and inattentive advisers


There are more new kids on the mutual fund block.

Seamark Asset Management Ltd., an institutional money manager, plans to start a mutual fund family this fall. Mortgage lender Home Capital Corp. is getting into this fund business later this year.

And startups Steadyhand Investment Funds Inc. and NexGen Financial LP opened up shop last fall.

Welcome to the latest generation of new entrants in the fund industry.

As more players jump into a sector that has undergone major consolidation, they face a rougher ride because of increasing regulation, stiffer competition and financial advisers' shrinking shelf space, observers say.

"It's tougher because the industry is more mature," said Dan Hallett, a Windsor, Ont.-based fund analyst. "Try to find somebody who has never invested in mutual funds before. It's hard to do."

New players face rising costs from new rules aimed at improving disclosure to investors, he said. "And some of the information, I don't find that useful to be honest."

The paper burden increases costs and "slows you down getting your product to market," said Tom Bradley, president of Vancouver-based Steadyhand. (Mr. Bradley writes a column for Report on Business.)

And the mandatory creation of an independent review committee to oversee potential conflicts of interest is really designed for the banks, which buy stocks for funds, but also have operations that may underwrite the same securities or advise the corporations, Mr. Bradley said. "But it's another cost that we have to pay."

Jim Hunter, chief executive officer of NexGen Financial, agrees that "the regulatory regime is very expensive," especially since there is not one national securities regulator.

"It's expensive to launch a fund nationally," said Mr. Hunter, whose Toronto-based firm has come out with 14 funds. "There are fees for everything, and there are 10 provinces and three territories with their hands out."

Unlike the boom days of the 1990s, competition is stiffer now because the banks have become more formidable rivals and consolidation has made some fund companies bigger and more "bank-like," said Malvin Spooner, CEO of Mavrix Fund Management Inc., which opened shop in 2001.

"TD, RBC and the rest of them are essentially competing for the same dollars," Mr. Spooner said..

"They are a threat to us because they can spread their costs [over a larger asset base] and bring down management expense ratios. If we bring down our MERs, we don't make nearly as much money."

But Mavrix, a publicly traded firm with $720-million in total assets, has managed to boost assets by branching into specialty products like flow-through share funds and closed-end funds, he said.

Most mutual funds are sold through financial advisers, and it can be hard for smaller outfits to get their ear because the advisers want to deal with fewer firms, said Dan Richards, a Toronto-based fund marketing consultant.

"It's hard to be on top of funds from 10 or 15 different fund families," he said. "And all of the fund families have become much better at offering a full range of funds."

Winnipeg-based Sarbit Asset Management Inc. had a rough time getting attention from advisers in 2005 when it opened just after the collapse of Canadian hedge fund manager Portus Alternative Asset Management Inc.

Portus was shut down by regulators after executives allegedly misappropriated investors' money.

"Our timing was abysmal," founder Larry Sarbit recalled. "But now we have signed up more than 140 dealerships [who have approved Sarbit's funds for sale]."

Halifax-based Seamark plans to launch a fund business after losing its mandate last year to run mutual funds for Clarington Corp., which was bought by Industrial Alliance Insurance and Financial Services Inc.

Seamark hopes to capitalize on relationships with advisers whose wealthier clients already hold $1.5-billion of its products through wrap programs (packaged fund portfolios) at major banks, CEO Stuart Raftus said. "We think we still have a lot of brand recognition."

But NexGen's Mr. Hunter, an industry veteran, said the key to the competitive fund business is being able to generate strong performance and offer something different. "If you are going to be the same as Trimark, Fidelity, Mackenzie or CI, you are going to get crushed."

Three fund entrepreneurs and their pitches


Founded by Tom Bradley, former CEO of Phillips Hager & North until 2005. Steadyhand sells low-fee, no-load funds with concentrated portfolios. It offers a break on fees for higher accounts and loyalty with the firm. Steadyhand sells directly to the public and through advisers. It has about $22-million in assets.

NexGen Financial

Founded by Jim Hunter, former CEO of fund giant Mackenzie Financial Corp. Since last September, NexGen has started 14 mutual funds with various classes aimed at minimizing taxes. It is targeted at aging boomers. NexGen sells funds mainly through advisers. It has $160-million in assets.

Sarbit Asset Management

Founded in 2005 by Larry Sarbit who was a star fund manager at AIC Ltd. and Investors Group Inc. He is a Warren Buffett-style value investor. Mr. Sarbit has $160-million in assets in four mutual funds and one hedge fund. The latter's 20-per-cent performance fee only kicks in when Mr. Sarbit beats previous record highs.

© 2007 The Globe and Mail. All rights reserved.

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