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Tug of war intensifies for Citadel funds

Opponents team up to combat Crown Hill's proposal that seeks to remove income trust expert Paul Bloom

FUNDS REPORTER

A proxy battle for control of the Citadel group of funds is heating up, with two firms working together to scuttle a proposal by Crown Hill Capital Corp. to merge them with its Crown Hill Fund.

Crown Hill Capital, which indirectly acquired the administrative contracts in June for the Citadel closed-end funds, is proposing a reorganization that includes removing income trust expert Paul Bloom, of Bloom Investment Counsel Inc., as investment manager.

Crown Hill is proposing that eight Citadel funds be merged with its Crown Hill Fund to create Citadel Income Fund, which will be run by Montreal-based money manager Jarislowsky Fraser Ltd.

Mr. Bloom, however, has partnered with investment manager Brompton Funds Management Inc. to come up with a proposal hostile to the planned new giant Citadel fund that will have about $900-million in assets. They plan to merge five Citadel funds into a new $700-million fund that they argue has better redemption rights, lower fees and strong management.

"Their [Crown Hill's] proposal is disadvantageous and will be harmful to Citadel unitholders," Mark Caranci, president of Brompton Funds, said yesterday. "It does not provide the same level of corporate governance and unitholder rights that we have in our proposal."

But Conor Bill, a spokesman for Crown Hill Capital and the Citadel funds, disputed those assertions, saying they are "completely erroneous and misleading."

Unitholders will vote on both proposals at special meeting set for next Wednesday in Toronto. The deadline for proxy votes is Monday at 9 a.m. (EDT). The Bloom-Brompton group is telling its story on the Web at therightwayforward.com, while the Crown Hill-Citadel side is at citadelmeeting.com.

Under the hostile proposal put forward by Blue Ribbon Fund Management Ltd., the new company - backed by Brompton and Mr. Bloom's Bloom Investment Counsel Inc. - would merge its group of Citadel funds to become Blue Ribbon High Income Fund.

The Blue Ribbon fund would let unitholders redeem their units once a year at net asset value (NAV) and charge a management fee of 1 per cent. The new Citadel fund, by contrast, would charge a fee for redemptions plus a management fee of 1.33 per cent, Mr. Caranci said.

The Blue Ribbon fund would also retain Mr. Bloom, who has generated "excellent long-term returns" on the Citadel Diversified Investment Trust - the oldest Citadel fund, he added.

Crown Hill's Mr. Bill said the decision to dismiss Mr. Bloom stems from the need for more than just income trust expertise given that Ottawa plans to tax trusts like corporations by 2011, meaning the sector is shrinking.

The Citadel funds need a "more broadly qualified investment manger" and it will get that from Jarislowsky Fraser, which is the largest independent money manager in the country, he said. "That is the fundamental investment choice for unitholders."

Mr. Bill also disputes the suggestion that the Blue Ribbon fund has lower fees, saying the total fee charged to unitholders will really be 1.4 per cent because it will also include a service or so-called "trailer fee" to investment advisers. The new Citadel is not paying trailer fees to "keep costs down," he said.

Mr. Bill acknowledged that the Citadel fund will have annual redemption charges when unitholders want to get out of the Citadel fund. But he pointed out that there will be a $14-million break fee if the hostile proposal gets the nod, and that will have the adverse effect of lowering the value of the Blue Ribbon fund for all investors.

Mr. Caranci of Brompton Funds said he got involved because his firm received calls in June from investors and financial advisers who were up in arms over Crown Hill Capital's original fund merger proposal that reduced unitholder rights.

In its circular, Crown Hill tabled the idea of delisting its proposed new closed-end fund from the Toronto Stock Exchange in favour of the more obscure Canadian National Stock Exchange. Crown Hill Capital has backed away from this plan.

Also upsetting investors was that Crown Hill Capital had extended the portfolio manager's powers to allow its Crown Hill Fund to hold private or illiquid assets, and that provision allowed the closed-end fund to use $28-million of unitholders' assets to buy the Citadel contracts, Mr. Caranci said.

"You have to question whether they are putting interests of management ahead of the unitholders of the fund," he said.

The Blue Ribbon proposal, meanwhile, has gained support among the big investment dealers like CIBC Wood Gundy and TD Waterhouse.

"We believe that the more favourable redemption features will result in the units of the Blue Income High Income Fund trading at a much tighter discount to NAV than the units of the Citadel High Income Fund," Lea Hill, a closed-end fund specialist at CIBC Wood Gundy, wrote in an internal report to advisers.

Investing expert Gordon Pape, who writes the Internet Wealth Builder newsletter, and who sold his Citadel funds this summer, said he is telling his readers to support the Blue Ribbon proposal.

Mr. Pape said he feels that Mr. Bloom is the best person to run most of the Citadel funds because of his intimate knowledge of their construction. "This is a very messy fight."

*****

The players

Crown Hill Capital Corp.: The Toronto-based investment firm runs Crown Hill Fund, a closed-end fund. The firm acquired the administrative contracts for the Citadel group of eight funds by having its own closed-end fund buy them for $28-million in June.

Bloom Investment Counsel Inc.: The Toronto-based firm specializing in income trusts has managed several Citadel funds since inception. Its president, Paul Bloom, is also an investor in some Citadel funds.

Brompton Funds Management Ltd.: The Toronto-based investment firm manages 13 closed-end funds on the Toronto Stock Exchange. Its president, Mark Caranci, is leading the charge in the hostile proposal by Blue Ribbon Fund Management Ltd., a partnership between Brompton and Bloom Investment Counsel.

© 2007 The Globe and Mail. All rights reserved.

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