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Mutual Fund News

Downtrodden fund firms may be ripe for picking

So much for the saying about investing in the shares of mutual fund companies instead of their products.

If mainstream mutual funds all performed like fund company shares have in the past 12 months, we'd have an investor revolution on our hands. The company behind the Investors Group family has held up pretty well, but CI Financial Income Fund, AGF Management and Saxon Financial have fallen 20 to 35 per cent or so.

Smelling a potential buying opportunity here? You should because the mutual fund industry in Canada is a money-making machine. Bear markets, run-ins with securities regulators, ceaseless media complaining about high fees - none slow the fund industry down for long, if at all.

Frankly, the bit about buying fund company shares instead of funds is less a piece of sound investing advice than it is a subtle slam of the fund industry. The subtext is that funds are so prohibitively expensive to own that it's better to own fund companies than their products.

If you need a simple way to buy diversified, professionally managed exposure to stocks, bonds and the money markets, then by all means be a discriminating buyer of mutual funds. If you invest in individual stocks and want some rewarding exposure to financial services beyond the big banks, then buy fund company stocks.

Fund company shares are heavily influenced by what the stock market is doing, so stay away if you think there's a bear market coming or that the markets will continue the vertiginous ups and downs of the past 10 months. If the markets don't look all comfy, investors won't buy funds.

In fact, fund sales are almost a contra-indicator for investing in general. Get into the stock market if fund sales are down and sell when fund sales hit a crescendo. Right now, sales are slumping. The Investment Funds Institute of Canada reports that first-quarter sales were just a bit over half of last year's level for the same period, and that money market funds accounted for most of what action there was. Money market funds are a short-term parking spot for money and don't generate as much in fees as long-term funds like those in the equity categories.

This sales slump is one reason why fund company shares are down. Another is the fact the fund industry is part of a global financial services industry that has fallen way out of favour with investors since the U.S. subprime mortgage crisis hit the news last summer. Banks and investment dealers have by far the most exposure to investments tied in one way or another to bad mortgages, but fund companies have not been immune to the recent market turmoil.

Some funds were way over-invested in U.S. financial stocks and have lost serious money for their unitholders. Last summer, there was a scare about some money market funds holding securities that have been tainted by their association with subprime mortgages. Investors have been protected against any negative fallout, but the fund industry did briefly look bad.

Fund companies have endured worse and thrived. Remember the market-timing scandal of 2004? Following an Ontario Securities Commission investigation, five big fund companies agreed to pay a total $205.6-million to rank-and-file investors who were taken advantage of for the benefit of wealthy clients. Since then, the total amount of money invested in funds surged to $688-billion at the end of March from $465-billion four years ago. No lasting damage there.

There are two tiers of publicly traded fund companies here in Canada. The big boys are IGM, which includes the Mackenzie name as Investors Group families, plus AGF and CI. Both IGM and CI also run financial advice businesses, while AGF is primarily a fund company. The second tier is represented by smaller names like Saxon Financial, which runs the Saxon family, and DundeeWealth, a diversified asset management company with a subsidiary that operates the Dynamic fund family.

We'll shortly be able add Sprott Inc., one of the hottest mutual fund companies in the country, to this list. Despite the negative market sentiment toward fund company stocks, Sprott has filed a prospectus for a $200-million share issue.

Sprott is different from your standard fund company in that it spends almost none of its time and resources on stroking the investment advisers who do most of the fund selling in this country. Sprott focuses on making money and it has done very well at this, even during the last bear market.

One area where Sprott will resemble other fund companies is in its plan to pay a dividend to shareholders. Dividends are the foundation on which the case of investing in fund companies is built.

In fact, both IGM and AGF are among the country's top corporations for regularly raising the amount of cash they pay out as dividends. AGF's dividend has risen by a compound average rate of 24 per cent since 1997 to the current $1 a year from 9 cents. IGM has a history of raising its dividend every six months and over the past five years has gone to 48.75 cents per quarter from 24 cents.

Saxon Financial, which went public back in 2005, has increased its dividend by 35 per cent to 23 cents from 17 cents. Until it trimmed its monthly distribution earlier this year, CI also had a good record of dividend increases.

CI president Bill Holland said at the time that the cut reflects "a cautious outlook toward asset levels for 2008." CI has said it could reverse this cut at midyear, but Mr. Holland's caution shouldn't be ignored. If the stock markets weaken and fund sales do likewise, then fund companies may have to temporarily curtail their dividend growth, or take even more drastic action.

The good news here is that IGM and AGF increased their dividends earlier this year, despite unsettled markets. And as bad as things got in the last bear market, both companies never failed to sustain their upward dividend trend.

If you bought 100 IGM shares back in the bear market gloom of mid-April 2001, you'd have paid $1,940 and received annualized dividends of $70. Today, those shares would be worth about $4,738 and your dividends would be $195.

Your shares would have more than doubled, and the dividend yield on your original investment would be about 10 per cent.

That's the best argument possible for investing in fund companies.

Fund stock fact sheet

Mutual fund company stocks have been great money makers over the long term, but they've been hit hard lately. Here's how these stocks stack up right now:

CompanyTickerMarket cap. ($million)Dividend/ distribution yield1-year change in share price5-year change in share priceAnalyst consensus rating
AGF ManagementAGF.B$2,088 4.27%- 38.2%91.8%Buy
CI Financial Income FundCIX.UN$6,334 8.53%- 21.4%116.3%Hold
DundeeWealthDW$2,018 0.58%- 9.8%164.6%Buy
IGM FinancialIGM$12,520 4.12%- 11.4%80.8%Buy
Mavrix Fund ManagementMVX$6 -- 69.3%-Sell
Saxon FinancialSFI$213 5.88%- 32.4%-Hold
Sceptre Invesment CounselSZ$119 5.65%- 23.1%80.9%Hold



© 2007 The Globe and Mail. All rights reserved.

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