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Fund sector seen as ripe for further consolidation as competition heats up

INVESTMENT FUNDS REPORTER

A flurry of acquisitions in the Canadian fund industry is raising speculation that more takeovers are in the offing - a trend that means good news for investors in fund companies that can benefit from the trend toward ever-larger firms.

"Consolidation in the industry globally has picked up in the last three months, and asset management stocks have outperformed the market because of that" said Canaccord Genuity analyst Scott Chan. "[The wave of consolidation] is providing support for fund company stocks."

Mr. Chan says competition is forcing fund companies to get bigger in search of economies of scale and to fill holes in their product lineups.

Financial-service firms are extending their shopping expeditions around the world. Royal Bank of Canada struck a deal in October to buy British-based BlueBay Asset Management PLC, while U.S.-based Kohlbert Kravis Roberts & Co. (KKR) made an unsolicited bid for Australia-based Perpetual Ltd.

In Canada, AGF Management Ltd. last week announced a transaction to buy Acuity Investment Management Inc., while Bank of Nova Scotia recently struck a deal to buy DundeeWealth Inc., and CI Financial Corp. is buying Hartford Investments, the Canadian fund subsidiary of a U.S. financial-services giant.

Scotiabank's purchase of DundeeWealth has fuelled speculation it may also make a bid for CI Financial, in which it has a 36-per-cent stake. Mr. Chan believes a deal is unlikely to happen soon because of the need for the bank to first digest its latest acquisition.

Instead of being an acquisition target, CI Financial is more likely to become an acquirer, he said. For now, he has a "hold" rating on CI with a one-year target of $23.50 a share, but his projection doesn't include an acquisition that "would likely increase my target price."

Among the larger firms, he has a "buy" rating only on IGM Financial Inc. , with a one-year target of $50 a share. He believes IGM is attractive as a defensive play because its Investors Group unit has a network of advisers that sell its own funds.

IGM shares could also get a lift if the company succeeds in turning around its Mackenzie Financial subsidiary, which has been losing assets through net redemptions. "[Mackenzie] has a strong fixed-income brand in Sentinel which has been attracting strong fund sales, and if people start putting money back into global equity markets, Mackenzie will benefit because of its strong relative fund performance," he added.

M Partners analyst Ryan Roebuck is bullish on some smaller fund players because they are a "leveraged play on the global economic recovery," while industry consolidation is setting a floor for valuation. He has a "buy" rating on Sprott Inc. with a target of $8 a share, and on Gluskin Sheff + Associates Inc. , with a target of $24.50. He says both firms are attractive because a large chunk of their assets can generate performance fees if the funds beat their chosen benchmarks.

Paul Holden of CIBC World Markets doesn't see CI, IGM or AGF as takeover targets in the short term because they have significant or controlling shareholders. He believes they are more likely to be buyers of other fund companies.

There has been speculation that AGF, which has suffered 32 consecutive months of net redemptions, might be an acquisition target. But Toronto's Goldring family, the controlling shareholder, is unlikely to sell while the firm is at a low ebb, he said.

Mr. Holden expects slow economic growth and volatile stock markets will make it tougher to sell funds. As a result, he has a "buy" rating only on AGF with a one-year target of $19. "It has hidden value in its lending business, AGF Trust, and the fund portion is undervalued because everyone is expecting the worst," he said.

***

HOW CANADIAN FUND COMPANY STOCKS ARE FARING

Company nameSymbol$ Price Dec. 852-wk high $52-wk low $YTD % price chg% YieldMarket cap ($-mil)
IGM FinancialIGM-T43.1145.6036.711.74.811,266
CI FinancialCIX-T21.2822.6717.69-3.33.96,119
DundeeWealth Inc. *DW-T20.9621.5012.2551.92.93,125
AGF ManagementAGF.B-T18.3019.2513.367.75.71,620
Sprott Inc.SII-T7.207.313.2360.01.71,080
Gluskin Sheff + Associates IncGS-T19.2223.6515.98-6.52.9563
Fiera Sceptre Inc. **FSZ-T8.508.986.00**2.8119
Aston Hill FinancialAHF-X1.641.740.52198.20.0107
Jovian CapitalJOV-T7.8010.997.50-22.40.066
Matrix Asset ManagementMTA-T0.941.320.50-21.00.039
* Bank of Nova Scotia has struck a deal to buy DundeeWealth. ** Sceptre Investment Counsel merged with Fiera Capital on Sept. 1, 2010 to form Fiera Sceptre Inc.
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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