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AGF dips as analyst questions U.S. exposure


Dundee Securities Corp. analyst John Aiken downgraded shares of AGF Management Ltd. to a "sell" yesterday, saying "the outlook for AGF has worsened materially."

That sent AGF's B non-voting share tumbling 6 per cent yesterday on the Toronto Stock Exchange before rebounding to close off 3 cents at $14.97. Over the past year, AGF stock has plunged 53 per cent.

"Not only is AGF suffering from the highest relative level of net redemptions of the publicly traded mutual fund managers, its relative exposure to U.S. and international investments is creating an additional drag on assets under management, due to sustained weakness in the Canadian dollar," Mr. Aiken said in a report.

He slashed his one-year target on AGF's non-voting B-shares to $15 from a "buy" with a target of $23.

Given AGF's net redemptions in September, and declines in the market for October, it is unlikely it will be able to turn around the ship in the near term, Mr. Aiken said.

Toronto-based AGF, Canada's ninth-largest fund company, controlled by Toronto's Goldring family, suffered from $167-million in net outflows in September. AGF had total fee-earning assets under management of $43.2-billion for the month, down from $48.7-billion in August.

Mr. Aiken has the only "sell" recommendation on AGF. According to Bloomberg, there are six analysts with "hold" ratings and one with a "buy."

Despite progress by AGF on containing costs, the 11-per-cent decline in assets under management in September, plus further weakness in October, will "make it difficult to further align its cost structure in the near term," he wrote.

AGF slipped into net redemptions last December, and has suffered from outflows in nine out of the past 10 months.

It's not the first time in recent memory that AGF has suffered from net redemptions for a prolonged period. AGF was hit by a flood of outflows starting in 2002 after San Francisco-based Brandes Investment Partners LP, which ran one-third of AGF's global assets, left to set up its own Canadian company. AGF ended its four-year sales slump in the summer of 2006.

Adding to the fund company's woes this year was the loss of two award-winning fund managers, Charles Oliver and Jamie Horvat, who jumped ship to join rival Sprott Asset Management Inc.

AIC Ltd. manager Robert Almeida sold some AGF shares in his AIC Advantage funds earlier this year to meet redemptions, but does not agree that it's time to sell AGF stock.

AGF still has "a good brand name," large assets under management, and good relations with financial advisers and the banks who use its funds in wrap programs, said Mr. Almeida, who owns more than 5 per cent of AGF's B shares in his funds.

"Longer term, they are in good shape for when the market inevitably rebounds."

There is also "acquisition potential" in AGF, even though it is controlled by the Goldring family, he said. "If things get sufficiently bad, then the consolidation opportunity will look a lot better to the family and that becomes a potential creator of value in AGF."

Unlike its publicly traded peers IGM Financial Inc., CI Financial Income Fund and DundeeWealth Inc., AGF has chosen not to buy financial planning firms.

Not having affiliated distribution - in addition to being heavily weighted in equities in its funds - has probably hurt AGF in a bear market, Mr. Almeida said.

The problem with getting involved in the distribution business is that it requires enormous scale to be profitable, and that takes time and a lot of money, he added.

© 2007 The Globe and Mail. All rights reserved.

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