Holland still hunting for a deal

The TSX may have entered uncharted territory this week, but with just a handful of stocks powering the race to 15,000, much of the market has been left behind. For investors who have underweighted the resource sector, making money in 2007 has not been the easiest feat.

The same holds true for mutual fund returns, and erratic markets do little to inspire confidence in retail investors.

“This type of volatility is not conducive to good mutual fund sales,” said Bill Holland, CEO of CI Financial, speaking at the company’s annual meeting of trust unitholders on Wednesday.

He said sales have picked up in the past three months but that overall industry softness could present fresh opportunities for larger institutions looking to make an acquisition. Last year’s failed bid for DundeeWealth has dampened his interest in making a buy, as the maturity of the industry places some limits on growth.

“I believe we are entering an environment where, because it has been such a difficult last 12 months for the industry, there is likely going to be some meaningful acquisitions,” said Holland.

A company like CI Funds can reasonably expect to grow its assets under management by about 10% annually, he said, with about 4% coming from sales and 6% from market appreciation. While 10% is good, more significant asset growth can really only come from a takeover.

“There is some interest in several fund companies in Canada, and Dundee would have to rank as one of the more attractive ones for us,” Holland says. “There are some acquisition opportunities available, and it may not be straight funds; it may be more in the distribution business, but this type of market has to promote deals, in my view.

“I think we would be disingenuous to say we wouldn’t look at [Dundee]; we still would.”

Even for a heavyweight like CI, bulking up remains a priority, as the banks have roughly tripled their market share since 2000 and now dominate the industry.

“You can compete with the banks — there’s no doubt about it — but you have to be as big as the banks,” said Holland.

When asked whether the growing popularity of exchange-traded funds would prompt CI to enter that arena, Holland said it may be considered in the future, possibly by buying an existing ETF manufacturer, but he is currently more interested in a strategic acquisition in the mutual fund market.

The fly in the ointment for any acquisition plans is the company’s structure as an income trust. Holland said the company will convert back to a corporate structure before the January 1, 2011, deadline but that there is still no official timeline for such a move.

“Since October 2006, the response time from the government to clarify issues has been so poor that it has severely limited CI’s transaction flexibility,” said Stephen MacPhail, president of CI Financial. “The uncertainty about the income trust market has made it difficult for income trusts to use their units for acquisitions.”

Holland admitted that during his talks with Dundee, it was unclear whether federal rules would allow CI to issue more trust units to pay for the acquisition, and that lack of government clarity was partly to blame for the bid falling through.

Neither Holland nor MacPhail could pinpoint when the company would convert back to a corporate structure, saying they were still awaiting the guidance promised by the federal government back in 2006, when the decision was made to level the playing field between trusts and corporations.

“We’re not going to convert this year, but I think we have to start looking at it sometime in ’09 and convert as early as 2010, but we don’t know. It depends on how many obstacles being a trust is causing us and whether we’re getting enough advantage to offset the obstacles. We want to see the rules, too, on how to convert back.”

Holland says that on a tax-adjusted basis, the current distribution would translate into a corporate dividend of about 5%. That’s not going to happen. With the federal government poised to raise dividend taxes next year, Holland says, it would be better for investors if CI devoted more of its cash flow to share buybacks. The logic is that the resulting rise in share prices would allow investors to take their profits as lower-taxed capital gains by selling part of their holdings.

“A lot of that will be dependent on what the differentials are between dividend [tax rates] and capital gains [tax rates],” said Holland.

He also revealed why his firm pulled out of the Investment Funds Institute of Canada: it was over a failed lobbying effort to repeal the GST from mutual fund management fees.

“We were members of IFIC, and we thought getting them behind us on this issue would be the easiest thing to do. They actually turned us down,” Holland said. “We represent 10 million unitholders in this country, as a group, being charged a billion dollars in GST, and yet there are almost identical savings vehicles that don’t have GST. How could this be something that they won’t get behind? Well, they didn’t. We concluded that would be the end of our participation in IFIC.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(05/22/08)

Steven Lamb