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AIC proves small fund firms in play

For many small mutual fund companies, it's getting tougher to compete against the banks and insurance giants.

And Burlington, Ont.-based AIC Ltd. threw in the towel yesterday, saying it had agreed to be bought by insurer Manulife Financial Corp.

Michael Lee-Chin, who owns the private fund company, said the sea change in the mutual fund industry forced him to put AIC on the auction block.

"It's certainly a different world versus five or 10 years ago," said the 58-year-old Jamaican-born entrepreneur.

"Margins are shrinking in this business because of competition from different products and competitors. With $4-billion in assets, it's not at a scale where you can be competitive."

As a result of the deal, which is set to close by Sept. 25, Manulife's fund arm will be the 13th- or 14th-largest player in the Canadian industry with $13.7-billion in assets.

It will be running neck-and-neck with MD Management Ltd., a fund company catering to physicians, but still far below the big five banks.

Mr. Lee-Chin would not reveal the price of the deal or other bidders, but acknowledged that Manulife was not necessarily the highest bidder.

"Manulife stock is the one that I wanted to own for the long run," he said in an interview. "The share price has tremendous potential."

He already has a relationship with the insurer after selling his financial planning company, Berkshire-TWC Financial Group Inc., to Manulife in 2007 in exchange for mostly shares. And he is getting another whack of shares for AIC plus a contract to run 12 of the AIC funds as an external manager.

Manulife is looking to increase its business both organically and through acquisition. While many people see further consolidation in the mutual fund industry, Paul Rooney, chief executive officer of Manulife, said he's not seeing many businesses for sale.

Independent fund manager Dan Hallett said that Manulife's purchase of AIC is part of a trend by the big Canadian financial institutions wanting to become the centre for all services - from banking and insurance to offering brokerage services and investment funds.

"It's all consistent with the trend of increasing their presence in wealth management," he said.

In recent times, Bank of Nova Scotia has acquired chunks of CI Financial Corp. and DundeeWealth Inc. Royal Bank of Canada bought Phillips Hager & North Investment Management Ltd. And Clarington Corp. was bought in 2006 by Industrial Alliance Insurance and Financial Services Inc.

With the AIC deal, Manulife has gained "increased scale" in one fell swoop, Mr. Hallett said. "There is not much organic growth [these days] and this comes on the heels of Manulife cutting their dividend. One of the potential uses of the cash they saved by cutting the dividend in half is acquisitions."

At the end of July, AIC, whose funds hold lots of financial stocks, had $3.8-billion in assets - off sharply from $15-billion at its peak in 2001.

Peter Loach, an independent fund analyst, said AIC benefited in the 1990s from the move by many baby boomers to rush into mutual funds as interest rates fell.

"Their funds were concentrated in the bank and non-bank financial sector," he said. "But everything is cyclical. Those stocks came off so the lion's share of their funds underperformed last year."

AIC faces not only competition from the traditional fund companies, but also from the providers of exchange-traded funds (ETFs), which can give "cheaper access to the same financial sector that made AIC one of the strongest fund companies in the 1990s," he said.

The ETF competition is not only coming from independents like iShares Canada, but even Bank of Montreal recently began offering these low-fee funds that trade like stocks.

Bill Holland, CEO of CI Financial Corp. and an aggressive consolidator, agrees that it's difficult to be a small fry in the fund industry.

"There is no way for small companies to be able to get the scale they need to be profitable in the world today," he said. "The top 10 companies are maybe 60 per cent of the market - maybe more now."

AIC is not the only firm being shopped around, Mr. Holland said. "Anybody that is under $10-billion that isn't affiliated with a large institution would be for sale. They can't make money."

© 2007 The Globe and Mail. All rights reserved.

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