The cruel, cold and slush-filled month of February is the most awful time of the year. Unless, of course, your line of work is selling investments, in which case it's supposed to be the next best thing to Christmas. Most Canadians dislike taxes - more than freezing temperatures, even - and this month provides the final chance to defer some, by shovelling money into your RRSP.
The fund companies once feasted off this annual ritual. They'd draw us in with catchy and expensive television ads starring Spider-Man and the Incredible Hulk. Not any more. Now, this is the season that exposes how weak they've become.
Strangely, in a business that holds the view that Bigger is Better, size is proving to be no cure for what ails mutual fund sellers. On the contrary: The lumbering giants who dominated the business in the nineties are hurting the most. January was horrific. AIM Funds, which owns one of the best franchises in Trimark, suffered $818-million in net redemptions of "long-term" funds (that is, non-money market funds). CI bled more than $500-million; Mackenzie Financial lost $316-million; Fidelity and Franklin Templeton each lost similar amounts.
In part, these numbers simply reflect a bad market; customers are panicking and pulling their money out. But look closer, and there's a trend. The markets were up in 2007 around the world, yet Mackenzie and AIM both saw their assets shrink (the latter by 8.4 per cent). AGF has been growing, modestly, with the help of acquisitions, but its stock price is lower now than it was seven years ago.
By far, the greatest disappearing act has been by AIC. The privately-held fiefdom of Michael Lee-Chin has gone from $14-billion to $10-billion to $8-billion and is now managing $6.6-billion after losing nearly one-quarter (not a misprint) of its assets last year. The perennial rumour that Mr. Lee-Chin wants to sell has taken on new life, but with momentum like that, how much would a buyer pay? A company that was once worth billions is now likely worth less than $500-million - and that's being generous. AIC is falling faster than Hillary Clinton.
How did this happen? Yes, the banks got serious and began taking market share from the fund companies. But that alone can't explain it. Something else is going on.
The fund companies have lost touch. They've become unmoored. As they morphed into giant asset-gathering machines, they somehow lost their feel for what their customer wants. Maybe it's more accurate to say they lost sight of who their customer is: Most exist to serve financial advisers, rather than investors.
You see this in a number of ways. Canada has some of the largest fees on mutual funds in the industrialized world (so says a paper by three finance experts from Citigroup, the London School of Economics and the Harvard School of Business). The industry sells far too many funds - there are more than 2,200 funds with at least $25-million, according to globefund.com.
By itself, that might not be a problem, but the vast choice exists for all the wrong reasons. No investment trend is too silly or short-term for the mutual fund marketing colossus to jump on. When Boom, Bust and Echo was a hot book, they created "demographics" funds. There are more than 100 niche resources or precious metals funds and more than 60 emerging markets funds. Most of these, needless to say, are sold after that investment theme has been hot. Contrarianism is a powerful investment strategy, but the fund industry practically discourages it - with predictable results. Over time, the vast majority of mutual funds fail to beat the index.
If the fund companies are going to indulge in short-termism (opening tech funds during the Nasdaq bubble, for instance), they should hardly be surprised when their customers do the same (withdrawing their money the moment the markets turn bumpy). This leads to a vicious cycle. To slow the redemptions, the fund guys will do anything, even the wrong thing. So they'll push their oil fund, when they really should be the manager who's investing in U.S. bank stocks, which have been hammered and look cheap.
That's the problem - but why did it come to this? Here's one theory. The industry's top executives used to be investors. Mackenzie had Alex Christ; Trimark had Robert Krembil; AGF had Warren Goldring. They were CEOs, but they were also professional money managers - and that kept them grounded.
Today's fund companies - including these three - are dominated by sales and marketing types. When Trimark was sold to AIM, its new CEO drew analogies between selling funds and selling shampoo. The current chief, Phil Taylor, began his career in consumer products for the company that sold Clearasil acne cream. Mackenzie's Charles Sims is an accountant and long-time fund executive, but not a money manager. Fidelity's Canadian unit is run by an ex-bank executive. You get the picture.
Maybe what ails the mutual fund business isn't the state of the stock market at all; it's - dare we say it - a problem of leadership. Maybe it's time to put the investment guys back in charge.
© 2007 The Globe and Mail. All rights reserved.
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