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Mutual Fund News

Jittery investors weaken IGM asset levels


Shares of Canada's second-largest mutual fund company, IGM Financial Inc., took a beating yesterday as analysts slashed targets for the firm after it reported sharply lower fourth-quarter profit.

IGM is often seen as a proxy for the industry because it offers a diverse array of investing styles, and its funds are sold through different distribution channels. Shares of IGM tumbled nearly 6 per cent to close yesterday at $30.02 on the Toronto Stock Exchange. Its stock, which hit an intraday low of $28.36, has fallen 15.3 per cent so far this year.

Winnipeg-based IGM, which is led by Charles Sims and Murray Taylor who are co-presidents and chief executive officers, is a unit of Power Financial Corp., a company controlled by Montreal's Desmarais family. IGM controls Mackenzie Financial Corp., which sells funds through independent financial advisers, along with Investors Group Inc., whose funds are sold by the company's own financial advisers. Investors Group's advisers do a lot of hand-holding when markets are volatile in a bid to keep clients from redeeming assets.

During the quarter, Investors Group reported $60-million in net sales, while Mackenzie Financial suffered from $869-million in net redemptions.

Dundee Securities Corp. analyst John Aiken downgraded IGM stock to a "sell" after the fund giant suffered a drop in management fees due to falling assets in the recent stock market collapse.

"With no clear plan in place to aggressively reduce costs, we believe that overall profitability will remained constrained for several quarters until market sentiment improves," he warned in a report.

Mr. Aiken chopped his one-year target on IGM to $31 a share from $37 when he had a "neutral" rating on the stock.

Although IGM maintained its quarterly dividend when it reported a 66-per-cent drop in quarterly profit Friday, it was the first time that it did not increase its semi-annual dividend in over 10 years.

IGM said its quarterly profit fell to $79.8-million or 30 cents a share from $234.3-million or 88 cents a year ago. Excluding a $60-million after-tax write down of intangible assets, its profit stood at 53 cents a share versus consensus analyst expectations of 68 cents.

Total assets under management at the end of December were $101.7-billion, down 17.3 per cent from $123-billion a year ago.

IGM could improve its profitability in the latter half of the year if some of its cost-cutting initiatives work their way through the system, Mr. Aiken said. But its direct competitors are also actively pursuing cost reduction initiatives, and "IGM is likely to fare worse on a relative basis after its standing start," he said.

TD Newcrest analyst Doug Young said he believes that IGM remains the "pre-eminent franchise in the mutual fund sector" given its scale, multichannel distribution strategy and higher relative EBITDA (earnings before interest, tax, depreciation and amortization) margins.

But the independent Canadian fund sector will continue to suffer from lower assets under management, reduced inflows of money, increased competition from banks and lower margins, he said in a note to clients.

"IGM is not immune to any of these industry trends," Mr. Young said. He reduced his one-year target on IGM to $34 a share from $37 while keeping his "hold" rating.

GMP Securities analyst Stephen Boland cut his target on IGM to $34.50 a share from $40.50. "We continue to rate the shares of IGM a 'buy,' however, would be a seller into any strength in this stock," he told clients in a note.

The analyst said asset managers such as IGM can deliver downside protection through a diverse asset base, but he also wants them to have balance sheet flexibility in the current market for share buybacks and dividend increases.

"We believe that IGM has lost some of that capability at the current time," he said, referring to its dividends.

© 2007 The Globe and Mail. All rights reserved.

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