IA seen merging Clarington funds

The Industrial Alliance takeover of Clarington Funds is set to close after Christmas, giving shareholders some extra cash to pay down their holiday spending. But what lies in store for some Clarington sub-advisors may not be quite so pleasant, according to one industry observer.

“We can expect to see fund mergers, terminations and manager changes as the two fund firms become one,” said Rudy Luukko, investment funds editor of Morningstar Canada, in an online article published on Tuesday. “Between the $4.2 billion that Clarington manages, and Industrial Alliance’s $1.2 billion, there are many duplicate mandates and small, uneconomic funds.”

While $5.4 billion is a fair chunk of change, it is divided up between a combined total of 50 funds, not including different versions of the same mandate. Some of the managers may be eliminated as IA merges overlapping funds, such as Clarington Canadian Value and IA Canadian Conservative Equity.

Luukko says the winner in that dual will likely be the IA fund’s manager, Leon Frazer & Associates, as the performance has outpaced that of the Clarington fund, managed by Beutel Goodman.

But perhaps the firm with the most at stake is Seamark Asset Management, which manages many of Clarington’s “core holding” funds — the kind of funds that are guaranteed to duplicate those of IA.

At the end of November 2005, Seamark claimed $9.7 billion in assets under management on behalf of clients. About $2.67 billion — or 27% of assets — are managed for Clarington.

“Seamark’s performance numbers over the past five years have generally been average to well below average,” Luukko wrote on the Morningstar Canada website. “For example, the largest Clarington fund — the $1 billion Clarington Canadian Dividend A, has a one-star Morningstar Rating and is a fourth-quartile performer over one, three and five years.”

He points to IA’s future stable of small specialty funds as being especially uneconomic, including the R Life & Health fund ($16.4 million in assets), the R High-Yield Bond ($2 million) and the Clarington Canadian Resources Class ($3.6 million).

Not all of Clarington’s sub-advisors are necessarily facing termination. Luukko calls QVGD Investors a “highly probable keeper,” especially since the firm took home one of the 2005 Canadian Investment Awards. QVGD manages Clarington’s $261 million Canadian Small Cap Fund. Other “keepers” include Clarington’s Target Click life-cycle funds, which have proven popular, pulling in $78 million in assets since their launch in February.

While the fund mergers will make economic sense, they seem to contradict some of the statements made during the, at times heated, battle between CI Funds and Industrial Alliance for Clarington. CI made no secret of its plans to merge the less economic Clarington funds into its own products, saying the economies of scale would allow it to cut the management expenses paid by Clarington fund-holders.

On the other side of the bidding war, Industrial Alliance seemed to make protection of the Clarington brand one of the central planks in its bid.

“We respect our clients’ choices,” Industrial Alliance executive vice-president, Normand Pépin said on December 2. “Investors chose Clarington funds over all other industry funds because of certain unique features. We think that they should be allowed to keep their Clarington funds.”

IA’s president and CEO, Yvon Charest also heaped praise on the Clarington name, saying the 87% premium his firm was offering “recognizes that the strengths of the Clarington brand, sales and marketing expertise.”

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

(12/20/05)