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Mutual Fund News

More than one way to craft a takeover

Bay Street's $700-billion marketing machine - the mutual fund business - is locked in a stalemate. The Desmarais family's Power Financial still rules. Three big banks and CI Financial are not far behind. A handful of independent groups survive and prosper, while others, such as AIC, stagnate or shrink.

But no one is moving. The place is practically a merger-free zone. During the great bull run of the 1990s, fund companies were trophy assets, often the targets of splashy nine- or 10-figure deals. Now, the big players fight over scraps. CI's Bill Holland, by far the industry's most acquisitive CEO, is reduced to buying second-tier brokerage firms, just to stay awake.

The asset he really covets is AIM Funds Management, better known as AIM Trimark. At $50-billion in assets, it's among the largest fund managers and highly profitable. Two years ago CI tried to buy it, with no success. But Trimark may have bigger problems than it appears. It's still not for sale, but that won't necessarily stop the competition from trying to dismantle it.

Last week, the firm lost one of its senior Canadian money managers, Geoff MacDonald, who up and quit with nowhere else to go. Too bad, so sad, so what? This happens all the time. People who succeed at a high level on Bay Street inevitably get rich and some of them decide it's time to play Lego with the kids. Mr. MacDonald is a smart dude - smart enough that he was given several billion dollars to run - but he's not famous like Warren Buffett or Bill Miller or Bill Gross. His departure is hardly a fatal blow.

But when you understand the reasons for it, the move takes on a different hue. Invesco, a huge London-based fund group formerly called Amvescap, took over Trimark seven years ago, but the marriage has always been an uneasy one. Invesco is a classic fund marketing operation: It's about sales. The head of its Canadian unit, Philip Taylor, started his career in consumer packaging. He's not a money manager.

Trimark is, or at least was, a unique beast. It was started by people who were career investors. Sometimes that hurt the company: When the stock market went bananas for technology and Internet stocks, Trimark shunned the trend. Bob Krembil and others couldn't fathom why any sane person would pay 80 times earnings for Cisco Systems when they could buy a perfectly good cement company for a 10th the price. They were right, but as they missed out on techmania, the money flowed out, precipitating the sale of the firm.

So a culture clash - Invesco's marketers versus Trimark's big-brained investors - existed from the start. What kept the enterprise from falling apart was the change in the market. As the overhyped and overvalued tech sector crumbled, bland-as-Melba-toast value investing came back into fashion. Trimark had cachet again, and the combined firm's assets have roughly doubled since the merger in 2000.

What's happening now, though, is that old gang is breaking up. Bill Kanko and Keith Graham split the scene, and now Mr. MacDonald has too. Publicly, he has said only that he'd like to work at a smaller firm. But those familiar with his thinking say he was fed up and unhappy and that the impending departure of Patrick Farmer, the chief investment officer, was a factor in his decision. (Mr. Farmer, too, apparently quit without another destination in mind.)

No individual is bigger than the firm, but one aspect of Trimark's business is that it has turned several fund managers into stars, and those stars run a huge percentage of its assets. Mr. MacDonald was one of them; Richard Jenkins, Tye Bousada, Heather Hunter, Ian Hardacre and perhaps two or three others are the core. They represent a healthy proportion of Invesco's operating profit, since the parent gets about 20 per cent of revenues from Canada.

Everyone in the business knows this and executives at rival fund companies wonder at the possibilities. To buy AIM Trimark would probably cost $4-billion to $5-billion, and in any event, Invesco doesn't want to sell.

But what if you could write a much smaller cheque and lift out the most important half-dozen people en masse? Conceivably, then, you could get billions in customer assets to follow them. That's much better than a takeover. This tactic has been tried before in the fund management business; earlier this year, Deutsche Bank started a nasty little fight on Wall Street when it hired 16 investment pros from a competitor. The victim? Invesco.

© 2007 The Globe and Mail. All rights reserved.

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