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Canadian Fund Companies, Facing Slowed Sales, Merge to Achieve Economies


TORONTO - Badly slumping sales in the Canadian fund industry have put pressure on small and mid-sized firms, leading to a round of mergers. Through the first eight months of 1999, three well-known companies and their respective founders have struck deals to be acquired by larger independent firms. All three takeover targets and their acquirers are based in Toronto, where most of the industry is concentrated, and all of the merged firms remain in Canadian hands.

The largest transaction - the estimated $230-million acquisition (all figures in Canadian currency) of BPI Financial by C.I. Fund Management - vaults C.I. Fund Management to $14.2 billion in mutual fund assets, up from a pre-takeover level of $10 billion.

Similarly, Strategic Value Corp.'s takeover of O'Donnell Investment Management, announced in April, added $1.3 billion in mutual fund assets, bringing Strategic Value's total to $3.3 billion. In the third merger, Dundee Bancorp is adding about $1 billion in assets through its takeover of Infinity Funds Management, bringing its total fund assets to an estimated $7 billion.

Achieving economies of scale is a major impetus for all three deals. C.I. Fund Management, which moved up two rungs to 10th place among member firms of the Investment Funds Institute of Canada, said in a statement that the merger will lead to savings in fund operating expenses and greater efficiencies in sales and marketing activities. Improved profitability will enable C.I. to generate additional cash flow which can be reinvested in brand-building and distribution, the company said.

Competitive pressures such as the maturing of the fund industry and its more moderate growth rate, and the consolidation of distribution channels which has intensified the competition for shelf space, were factors in precipitating its merger, said Mark Bonham, chairman and CEO of Strategic Value, earlier this year. Strategic Value has moved to 26th place in the IFIC rankings, up from 29th place before its takeover.

"This industry is ripe for consolidation," said Bonham. Keys to success in the current industry climate include product diversification, strong marketing and branding efforts, top ranked investment performance, strong focus on client service, and cost discipline, he said. The rationalization and cost cutting is under way at Strategic Value. In late August, the company announced plans for three fund mergers in the newly-acquired O'Donnell family and another two mergers in its existing family.

At C.I., however, the early emphasis has been on adding new product lines rather than rationalizing. The company said it will offer BPI funds alongside its other fund families.

One of the most attractive features of BPI for its new owner is its global money management unit, BPI Global Asset Management, said Bill Holland, executive vice president and chief operating officer at C.I. The unit, based in Orlando, Fla., is seen as a good fit with C.I.'s longer-term vision of itself as a Canadian-based international fund company with money management capabilities both inside and outside Canada.

Before the takeover, C.I. had developed an in-house money management capability only in North American markets, and was dependent on sub-advisers for its overseas products. The addition of BPI's global unit brings C.I. full circle from its early years, when it relied exclusively on contract managers.

Meanwhile, Infinity gives its new owner, Dundee Bancorp, a third fund family to offer along with its two existing styles of funds offered under the Dynamic trade name. Under their new ownership, the Infinity funds are to receive switching privileges into other funds sponsored by Dundee, which are sold mainly through independent financial advisors, said Ned Goodman, president, chairman and CEO of Dundee.

The Infinity funds are best known for their emphasis on investing in the wealth management industry.

While the acquiring firms eagerly welcomed new assets, they were far less willing to find new executive posts for the previous owners and top executives. In fact, all three of the most prominent executives associated with the target firms - James McGovern, president and CEO of BPI, James O'Donnell, chairman and CEO of O'Donnell and David Singh, founder and major shareholder of Infinity - have moved on.

The departure that attracted the most attention was O'Donnell's sudden split with Bonham. It followed the earlier, short-lived appointment of O'Donnell, one of the industry's pioneers and longtime president of Canadian fund giant Mackenzie Financial, as chairman of the merged firm and head of its marketing department.

In McGovern's case, the parting was cordial and the door was left open to possible future collaboration. C.I. and McGovern, who was a co-founder of BPI in 1987, said they are considering a joint venture in offshore management.

"We would be pleased to continue working with him (McGovern) if the opportunity presents itself," said Holland of C.I.

The takeovers have been occurring as sales have slumped and more funds have chased fewer buyers. According to IFIC, the national trade group, net new sales in the first seven months of 1999 totaled just under $16 billion, down 46.2 percent from $29.7 billion in the comparable 1998 period.

A recently-released report from the Investment Dealers Association of Canada, the self-regulatory body for the brokerage industry, corroborates that trend. It reported that gross sales of equity funds totaled $9.4 billion in the first seven months of the year, down nearly 50 percent from the corresponding period in 1998.