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Spotlight shifts to Gluskin Sheff

Coming Sprott Asset Management IPO draws attention to other money managers

Falling markets have battered the shares of Gluskin Sheff + Associates Inc., but some observers see upside in the stock of this money manager catering to well-heeled investors.

Gluskin Sheff is expected to gain more attention now that Sprott Asset Management Inc. - which also earns potentially lucrative performance fees on top of management fees - plans on going public next month.

The subordinate voting shares of Toronto-based Gluskin Sheff yesterday closed at $22.99, down 81 cents on the Toronto Stock Exchange.

"There are going to be direct comparisons between Sprott and Gluskin Sheff," Genuity Capital Markets analyst Gabriel Dechaine said in an interview.

And Gluskin Sheff now "appears attractively valued" compared with Sprott based on details in Sprott's preliminary prospectus, and expected initial public offering in the $9.50-$10.50 price range, he said.

At those prices, Sprott would trade at an enterprise value to assets under management valuation of about 20 per cent compared with about 11 per cent for Gluskin Sheff, Mr. Dechaine said.

"If that is what Sprott is worth, then Gluskin should be worth more," said Mr. Dechaine who has a "buy" rating on Gluskin Sheff with a one-year target of $30.

Toronto-based Sprott had assets of about $6.9-billion at Feb. 29, including mutual funds, hedge funds, and discretionary managed accounts. It has gained a strong reputation from top-performing resource-oriented funds.

Gluskin Sheff, which went public in 2006, manages money for clients with greater than $2-million in investable assets, and institutions.

Founded by its chief investment officer Ira Gluskin, and chief executive officer Gerald Sheff, the firm has experienced rapid asset growth in recent years after a tough time during the technology-related market downturn in 2000.

Their strategy switched to aggressively wooing high-worth private client business as opposed to institutional investors, and adding portfolios that included hedge funds.

Sprott arguably has a more robust growth outlook than Gluskin Sheff because of a broader distribution strategy that includes selling through financial advisers, Mr. Dechaine said. "Sprott also enjoys high brand recognition."

That firm also "possibly has" a better chance of earning performance fees because most funds only need to beat market benchmarks, or generate positive performance to do so, he added. Most of Gluskin Sheff's funds earn a performance fee based on exceeding a 15-per-cent hurdle rate.

But Gluskin Sheff is also "very attractive" because it has higher margins since its business relies on referrals and doesn't pay ongoing trailer fees to advisers as Sprott does, Mr. Dechaine said.

And only 20 cent of Gluskin Sheff's net operating profit goes to the bonus pool for managers compared with 25 per cent at Sprott, he said.

The special dividend policy at Gluskin Sheff also appears "at first glance" to be more favourable to investors than the one at Sprott, he said.

Gluskin Sheff pays up to 80 per cent of its after-tax performance fees as an annual dividend. Sprott has not indicated how much of its performance fees will be paid out as a special dividend, but the amount is limited to 75 per cent of the total, after allocating 25 per cent to the bonus pool.

Mr. Dechaine expects Gluskin Sheff's operating profit to climb 26 per cent to 28 cents a share from a year ago when the firm reports its third-quarter results on May 8. But that will be off 4 to 5 per cent from the second quarter due to weak markets, he suggested.

GMP Securities Inc. analyst Stephen Boland also has a "buy" rating on Gluskin Sheff, but has a one-year target of $25.50 based on moderately conservative assumptions about performance fees.

Gluskin Sheff is well positioned to benefit from the growing affluence among Canadians with expansion outside Ontario and Quebec as one growth driver, Mr. Boland wrote in a recent report.

"Performance fees remain key upside potential," he said. "Management has earned performance fees in 21 of 23 years since inception."

While performance fees are never certain, he expects Gluskin Sheff to pay a special dividend of 80 cents to $1.20 a share at the end of fiscal 2008, and that could reach $1 to $1.40 at the end of fiscal 2009.

*****

Gluskin Sheff

by the numbers

Assets under management at Dec. 31: $5.6-billion

Stock's 52-week high: $31.22

Stock's 52-week low: $18.30

P/E: 8

IPO price in 2006: $18.50

Market capitalization: $717-million

Annual dividend: 44 cents per share.

Dividend yield: 1.9%

Special dividend in 2007: $1.50 per share

© 2007 The Globe and Mail. All rights reserved.

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