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Buy the fund, or buy the company?

Owning mutual funds can be a smart investment, but there's something to be said for owning the fund company's stock


Investors might want to take heed of an old saying from the days of the 1800's California gold rush - the best way to make money is to be the one selling shovels.

When it comes to the retirement savings boom, the same could apply to mutual fund companies. Historical returns indicate that owning funds might be a good idea, but owning their company's stock or income trust can be better.

For instance, the S&P/TSX composite index has posted an average annual return of 9.1 per cent, including reinvested dividends, for the 10 years ended Sept. 30, and domestic equity funds rose an annualized 7.9 per cent.

But the average annual gain of the three largest publicly traded Canadian fund companies was higher. They range from 10.7 per cent at IGM Financial Inc., which owns Investors Group Inc. and Mackenzie Financial Corp., to 12.6 per cent for AGF Management Inc. and 21.2 per cent for CI Financial Income Fund.

"I'd buy the stocks," said CIBC World Markets analyst Stephen Boland. "Over the long term - pretty well much over any 10-year period - the market is going to appreciate. ...You are also getting the upside from not only the market growth, but also net sales."

With mutual funds, investors typically get market-type returns minus the fees collected by their managers.

The allure of fund companies is that their business model allows them to collect fees on assets under management during the good and bad times.

And sales are also now getting a boost from baby boomers saving for retirement, and that should continue for at least another 10 years, said Robert Almeida, a fund manager with privately owned AIC Ltd. Publicly traded fund companies are also attractive because "their costs don't grow with the market" since it doesn't take much more effort to manage $115-billion than it does $15-billion, said Mr. Almeida who co-manages the AIC Advantage funds, which has more than half of its assets in fund companies.

Investors can even take their cues from CI chief executive officer Bill Holland, Paul Desmarais, founder of Power Corp., which controls IGM Financial, and AGF CEO Blake Goldring who all have "the majority of their wealth" tied up in their stock as opposed to the funds, Mr. Almeida added.

In order to boost sales and ultimately their stock price, a successful fund company also needs a diversified product line with various investment styles, access to many distribution channels, and a "strong sales and product innovation culture," he said.

While Mr. Boland likes CI and IGM, his top pick in the sector is AGF with a 12-to-18 month target of $41. It last closed at $34.27 on the Toronto Stock Exchange. "It has had a good run," but AGF's EBITDA (earnings before interest, taxes, depreciation and amortization) is expected to grow quicker than its peers, he said.

RBC Dominion Securities Inc. analyst Geoffrey Kwan has an "outperform" rating on IGM with a one-year target of $59 (last closed at $52.99). He likes IGM - whose Investor Group arm tends to have more conservative fund offerings and historically has had a low redemption rate - as a defensive stock for uncertain times.

"During the market downturn from 2000 to 2002, shares of CI Financial and AGF declined approximately 35 to 40 per cent," he wrote in a report. "During the same two-year period, IGM's shares generated a small positive return."

Mr. Boland said the risk in holding fund company stocks as opposed to their funds - which hold a basket of companies - is losing diversification. "If the market goes down, your funds are not going to go down as quickly as the market," he said.

The volatility in fund company stocks, which could unnerve some retail investors, is not lost on AIC, which does not invest 100 per cent of its cash in asset managers in its Advantage Funds.

"Every once in a while the markets do go down," Mr. Almeida said. "We try to complement it with companies that are uncorrelated to the market."

Company stocks beat the funds


AGF Management Ltd.

AGF Management: $145,431

AGF Canadian stock: $39,950

AGF International value: $30,974

CI Financial Income Fund

CI Fund Management: $246,426

CI Canadian investment: $50,792

CI Global: $20,916

IGM Financial Inc.

IGM Financial: $86,353

Investors Divident C: $32,407

Investors income Plus Portfolio C: $23,776


© 2007 The Globe and Mail. All rights reserved.

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