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Consolidation on horizon for fund firms

FUNDS REPORTER

The recent stock market carnage is expected to spark more consolidation in the Canadian fund industry as the bigger players snap up smaller outfits suffering from declining assets, industry observers say.

"October will see considerable net redemptions," Bill Holland, chief executive officer of CI Financial Income Fund, predicted yesterday.

"This market favours very large, well-capitalized and well-branded companies," said Mr. Holland, who heads Canada's third largest mutual fund company. "There will be more pressure on more smaller firms to merge."

The industry suffered about $4.6-billion in net outflows in September - a record since 1990 when the Investment Funds Institute of Canada (IFIC) began collecting data.

"When you lose 25 per cent of your assets as a small company, or half of your assets, you are going to have a problem," Mr. Holland said.

"There are tons of funds out there that are down 50 per cent from their high. You can't align your costs when you have this kind of a market."

Canada's S&P/TSX composite index has plunged 29 per cent so far this year, while the U.S.-based S&P 500 index has plummeted 32 per cent.

CI Financial was one of few bright lights last month. It was the leader in net sales, attracting $152-million.

Smaller players in net redemptions included AIC Ltd. with outflows of $86-million; Brandes Investment Partners, $25-million; Acuity Funds Ltd., $17-million, and Mavrix Fund Management Inc., $4-million.

There are other companies whose monthly net sales or redemption numbers are not available because they are private and not members of IFIC, or are public companies reporting numbers quarterly.

Independent fund analyst Dan Hallett said he expects more mergers among smaller players facing financial woes. Industry executives "will always try to swoop in before somebody goes under, and scoop up some assets on the cheap," he said. "If they wait too long, they may not retain those assets."

Private companies don't have pressure from shareholders to sell, but smaller publicly traded outfits like Mavrix, whose stock is off 75 per cent over the past year, "may be forced to take action," he said.

"[Mavrix] generally has an aggressive management style. They tend to do well in bull markets and get creamed in bear markets."

Burlington, Ont.-based AIC, which is closely held largely by billionaire Michael Lee-Chin, has seen its assets plunge to $4.6-billion recently from nearly $15-billion at its peak earlier this decade.

AIC has suffered because of its out-of-favour value style, and more recently from its funds getting hammered from holding beleaguered financial stocks, Mr. Hallett added.

Independent fund analyst Peter Loach does not expect the industry to return to net sales until at least the first quarter of 2009 as investors deal with the "wrath of the storm" in the markets.

Investors will likely wait until the end of the registered retirement savings plan (RRSP) season before making their investments to get the tax credits, he said.

"It's going to be very challenging period" for fund companies especially those with less than $5-billion in assets, Mr. Loach added. "There is going to be more consolidation."

Frank Hracs, chief economist of Toronto-based Credo Consulting, also expects the industry to report more net outflows in October given the current market conditions.

"We are close enough to the RRSP season - that if this type of equity market continues - you can get another washed-out RRSP season," he said.

There was basically zero net new money flowing into the higher-margin long-term stock and bond funds in the first quarter of 2008 as opposed to cheaper money market funds, he said. "That could happen again."

© 2007 The Globe and Mail. All rights reserved.

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