AIC sale signals end of an era: analysts

Manulife’s purchase of AIC highlights just how much has changed in the mutual fund industry in the last decade. According to a couple of analysts, to reverse a near decade-long trend of redemptions will require addressing the new realities of the business.

In the late 1990s, AIC’s fund family was a top performer, posting strong returns on its core financial stock holdings — its message of “buy, hold and prosper” was a winning motto for advisors. At its peak in 2002, AIC administered more than $15 billion in assets under management and was available through almost every advisory firm in Canada, says Peter Loach, an independent mutual fund analyst.

A higher fee model that drove revenues and consistent double-digit returns from financial service stocks are a bit of a relic of the last decade.

For almost seven years, assets have been drained on a consistent basis as advisors and investors alike have become disenchanted by the performance of the funds that are historically dominated by financial service names, and the firm’s unwillingness to alter its management philosophy. At the time of sale, the firm managed roughly $3.8 billion in retail assets.

Loach says AIC ended up with a gross sales problem as advisors abandoned the fund family. The advisor channel became more interested in shorter-term performance and more cost-efficient products, once clients came off their deferred sales charge schedules at the mid-point of this decade — having purchased the funds in late 1990s.

“When you have a lot of deferred sales charge schedules getting down to the 1% level, it’s much easier for advisors to make the switch out of the funds. It’s a lot more difficult when it’s a 4% or 5% DSC, and back in the day AIC funds were primarily sold as DSC — as were most mutual funds in the mid- to late-1990s,” Loach says. “Back in the late-1990s, you [projected] net sales by taking a look at the two to three year annual compounded returns. Now that measure is more like the three to six month returns.”

Dan Hallett, another independent in the fund industry and president of Dan Hallett and Associates, attributes much of the firm’s early success to capturing the right theme at the right time. He says the firm’s refusal to change its management style didn’t sit well with advisors.

“In my view the firm, overall, didn’t prosper on its heel of its portfolio management skill — but rather they caught the right theme at the right time, which I’m sure they would disagree with,” he says. “To a large extent, they really rode the financials and wealth management theme — it’s funds have been pretty dominated by that sector. It’s so concentrated there [that] the funds are pretty specific plays on Canadian wealth management and global wealth management.”

Loach says the concentrated nature of the mandates AIC offers have suffered from the challenge posed by exchange traded funds, both active and passive.

Manulife must stop redemptions

Both Loach and Hallett say the key to this acquisition being a success for Manulife is to retain the remaining assets at AIC.

“When you take a look at the monthly numbers as far as net sales and net redemptions, that’s something leadership and management can address. If you have a gross sales problem — you have a significant problem,” Loach says.

Loach believes Manulife’s purchase of AIC comes at an interesting time, because while AIC is still suffering redemptions, most of the DSC money is gone. He says there’s a real possibility that many of the retail assets at AIC are from investors committed to the firm.

“Ultimately I think it’s a not a bad fit. You have Manulife and their existing relationships and their existing clientele and you have the AIC brand,” he says. “AIC certainly needed the partnership to try to strive to be where they once were. Right now they have been stuck in redemptions for a long time.”

Loach adds, “I don’t know what the margins would be on the existing assets. It may be that the worst is over, in terms of redemptions, and the assets that remain are relatively sticky at this point.”

Hallett points out that, at the very least, Manulife now has a huge product shelf of other funds to capture the assets redeemed out of the AIC brand, should that trend continue.

“From a business perspective I think there is some real change coming that will stem the flow of redemptions or will reverse that trend, and at the very least direct all the redemptions to other Manulife funds,” Hallett says. “One of the reasons redemptions have been so persistent since the peak in ’02 is advisors haven’t seen a whole lot of action to turn the ship around. This sale certainly speaks volume about that. That will help the redemption issue.”

There is a sub-advisory agreement in place between Manulife and AIC that will essentially see Manulife distribute and AIC manage many of its flagship mandates. Hallett believes there will be some paring back of AIC’s fund management input.

Manulife will want to cut out a lot of the infrastructure and some of that will be the money management. Manulife has a fair sized team on its own now, and it’s pretty rare, you see an acquisition in this industry where funds and teams stay intact,” he says. “You’re going to see some dwindling of the portfolio reins at AIC as we know it today. I don’t view the AIC team as particularly strong, which makes this an even higher likelihood.”

AIC team sticking around

It should be made clear that not all the management team at AIC is going to Manulife. AIC’s CEO, Jonathan Wellum, told Advisor.ca that his firm will continue to manage institutional and discretionary high net worth assets.

The firm currently manages separately managed accounts for high net worth investors, and Wellum says his firm will be looking to possibly create some additional investment pools for accredited high net worth investors and institutions.

“Manulife is strictly buying the retail fund business. That’s the lion share of our assets of course. For us, if we’re going to sell the retail mutual fund business prospectus type of fund it would be through Manulife, they are our distribution partner,” he says. “If we do something with institutional or accredited investors, that will be done separately through our firm.”

Part of AIC’s turnaround plan had been to create a number of strong sub-advisory relationships with an internationally renowned roster of value and sector specific management firms, such as Brookfield Asset Management and Third Avenue Management. Wellum says there is no word yet on whether Manulife will continue these relationships.

“All those relationships remain intact,” explains Wellum. “Manulife has expressed interest in them and will evaluate them. Keeping them is going to be Manulife’s call.”

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Read: Manulife buys AIC funds

(08/12/09)