Berkshire sale a gain or loss for embattled AIC?

Today’s conventional wisdom dictates that having an in-house distribution network is a definite advantage for today’s dealers. So with the announced sale of Berkshire-TWC Financial Group to Manulife Financial on Tuesday, some are asking what happens to Berkshire’s redemption-plagued corporate sister, AIC Limited.

The success of some of today’s biggest fund companies has been attributed to their ability to leverage their wealth management divisions to sell their products. The asset management divisions of RBC and TD are good examples of this, but the model has worked well for fund giants like Investors Group as well. If you have a product to sell, it helps to have a captive or at least affiliated sales force at your disposal.

Industry analyst Dan Hallett of Dan Hallett and Associates doesn’t know why Michael Lee-Chin, chairman of Portland Holdings, which owned Berkshire and AIC, decided to get rid of Berkshire. There are no signs that Portland ever tried to leverage Berkshire to increase sales of AIC funds, Hallett says.

“My impression is that Berkshire advisors were very much left to do their own thing. They were really left to be independent advisors,” says Hallett. “Even though they shared a head office there in Burlington [Ont.], when I talked to advisors at Berkshire, I never received a reply that they were pressured in the least to sell AIC funds. If that was the way they were using Berkshire, they wouldn’t be in redemptions.”

Hallett speculates that Portland may be planning to focus more heavily on its asset management business.

“My perception was that Berkshire was profitable, but probably not very profitable. I don’t actually know that, but that would be my hunch,” he says. “A possible motivation could be to refocus on the asset management business, because it is still seeing net redemptions. Perhaps the sale makes more capital available to help turn that around.”

Rudy Luukko, investment funds editor at Morningstar Canada, says there was probably some sort of favourable relationship between AIC and Berkshire, even if it wasn’t explicit.

“The sale of Berkshire will have implications for AIC. While the Berkshire financial advisors were not tied or restricted to AIC products, there obviously would have been an open-door policy for AIC wholesalers at Berkshire with some loyalties there,” he says. “Certainly a close corporate relationship existed, and the AIC products would have remained on the list of potential products that could be sold by Berkshire reps.”

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Luukko says AIC’s redemption problem is not about distribution but about the underlying performance of its funds.

“For example, their largest two funds are AIC diversified Canada and AIC Advantage, and both these funds are rated two stars by Morningstar,” he says. “They are both below-average performers over five to ten years in their Morningstar peer groups.”

Luukko says that AIC has rigidly stuck with its investment policy of “buy, hold and prosper” and has fallen behind its competitors in offering a diverse range of product lines.

“AIC strategically by design hasn’t had the same diversity of product lines that many of its competitors have,” he says. “It has a preference for investing in sustainable growth companies. The market has been largely led by commodity-driven sectors: energy, oil and gas. They’ve tended to be underweighted in those sectors.”

AIC’s patience may be paying off, he points out. Luukko says that in some cases redemptions on some of its funds have actually been masking some impressive performance.

“When AIC’s investment discipline is working, it has worked out well. It has been staging something of a recovery. The AIC advantage series funds were top quartile performers for the most recent quartile period,” he says. “They’ve had some good performers, The AIC American-focused fund in particular has been a standout.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/27/07)

Mark Noble