The purchase of Natcan Asset Management by Fiera Sceptre Inc. FSZ
, announced on Feb. 27, isn't all that surprising given that Fiera has historically grown its asset base through acquisitions. In 2005 it acquired Senecal Investment Management and YMG Capital. In 2010 it merged with the beleaguered Sceptre investment Counsel which had been actively looking for a partner following a combination of missteps and consistent manager turnover.
What is unexpected though is the price tag. At first glance Fiera appears to have gotten favourable terms with the deal estimated at about 1.2% of Natcan's assets under management. In the past two years we have seen purchases of investment management firms in Canada come in at above 2% of assets. However, the discount may be a result of intangibles, as the deal gives the bank two of the 12 seats on the board of Fiera. National Bank will also participate in the nomination of a CEO for the eventual succession.
Fiera has a history of assimilating the investment managers it acquires by assuring that managers adopt the Fiera investment discipline. This can be a source of friction for new investment managers whose views differ from those of their new employer. Fiera has also shown a willingness to make manager changes in the case of similar offerings. In October 2010, Fiera managers Patrick Potvin and Martin Dufresne lost their responsibility for running small cap equities when Michael Chan and Ashish Chaturvedi of Sceptre were handed the reins.
In Natcan's case, a merger of this sort carries the risk of damaging a culture that had just begun to show signs of improvement. Through much of the last decade Natcan underwent considerable personnel turnover at the senior level, the pace of which had just begun to slow over the last two years. There had also been an improvement in the risk management function, which appeared almost non-existent in the past.
Given that Fiera hasn't been afraid to shake portfolio management teams up in the past, and the fragile state of Natcan's culture, this transaction creates uncertainty for unitholders. We wouldn't be shocked to see personnel turnover or changes to management teams. We also wouldn't be surprised to see smaller funds merged away. Until we have a chance to sit with management to discuss the details regarding manager retention agreements and product mix, we are placing both Fiera's and National Bank's stewardship grades and funds under review.
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Recent Fund Analyst Notebook Entries
Brandes funds placed under review
Adam Fisch | 11-07-12
Brandes Investment Partners announced recently that long-time CEO Glenn Carlson was stepping down from his post, effective Feb. 1, 2013. Current managing director of investments Brent Woods is slated to take over the position, having been with the firm for 17 years and a partner since 1998. In addition to this change, the firm announced a change to the structure of the Large Cap Investment Committee, creating two committees to each manage half of the firm's large cap products.
This change in structure represents a fundamental change to the firm's investment process, and as such, we have placed the three Brandes large cap funds that we cover --
Brandes Sionna Canadian Equity
Brandes Global Equity
Brandes International Equity
-- under review until we have had a chance to meet with the firm and gain some familiarity with the new structure and those team members assigned to each.
Changes at Jarislowsky Fraser
Adam Fisch | 11-06-12
On Nov. 5, Jarislowsky Fraser Ltd. announced the resignations of Len Racioppo and Marc Trottier from the firm, effective Nov. 30. Racioppo acts as chair of the Investment Strategy Committee, and is the longest tenured member of the team. The committee will now be co-chaired by Margot Ritchie and Chris Kresic, himself a transplant from Mackenzie Investments and co-head of fixed income at the firm. In addition, firm co-founder Stephen Jarislowsky will begin transitioning into retirement and out of his responsibilities as CEO of the firm.
Both Ritchie and Kresic will join JF's Executive Committee, a new committee established in place of the CEO role that will also include Pierre Lapointe and CFO Erin O'Brien. The additional workload on Kresic's plate is likely to be minor since he has been a member of the Investment Strategy Committee since he joined the firm, and his new executive responsibilities are shared with the other members of the committee.
We have placed the firm's three retail offerings --
JF Select Canadian equity
JF Select Income
JF Select Balanced
-- under review until we have had an opportunity to speak to relevant members of the team to get a sense of how these changes will affect fund management.
Lead manager of largest health-care fund to retire
Nick Dedes | 09-05-12
Vanguard announced today that Ed Owens of Wellington Management will retire at the end of the year. Owens is the long-time lead manager of the largest health-care funds offered in both Canada (
Renaissance Global Health Care
with $306.6 million in assets) and the U.S. (Vanguard Health Care with US$22.4 billion in assets).
Owens has run Renaissance Global Health Care since its 1996 inception with remarkable success, especially considering the fund's hefty fee hurdle (its current MER is 3.28%). From December 1996 to August 2012, the fund posted an annualized return of 10.8% versus 5% for its benchmark MSCI World Health Care (CAD).
Owens charted a different course than his competitors. In marked contrast to most health-care investors -- generally a fast-trading, growth-leaning bunch -- he employed a slow-moving, value-oriented approach. He was among the first managers to appreciate the health-care sector's global nature. Even today, the fund's non-U.S. stake remains above the norm in the Health Care Equity fund category. Ballooning assets in the late 1990s and early 2000s made it increasingly difficult for Owens to invest in smaller names, but he continued to deliver strong results with moderate volatility.
Owens's successor, Jean Hynes, no doubt has big shoes to fill. But she appears well-equipped for the task. Hynes has co-managed the fund with Owens since 2008 but has worked with him for far longer. She has been on sub-advisor Wellington Management's health-care team since 1992. Investors should expect Hynes's approach to mirror that of her predecessor, and she'll be able to draw upon the insights of an experienced team.
--With files from Christopher Davis
Canadian fund managers fail to impress
Adam Fisch | 08-15-12
My fellow fund analysts and I are currently conducting our annual stewardship review, where one of the elements of our grading system is the fees charged by funds. Fees can weigh heavily on fund performance, as we were reminded earlier this year when Standard & Poor's released its annual S&P Indices Versus Active (SPIVA) scorecard for the Canadian market for 2011. The results were not encouraging for proponents of active management.
Over a five-year period, the proportion of domestic actively managed funds that outperformed the S&P/TSX Composite Index comes in at just under 3% on an asset-weighted basis. Fees for active management no doubt weigh on results compared to the benchmark (which includes no fees or transaction costs) and are an understandable element of the investment universe.
However, comparisons to funds sold in the United States are more concerning. Domestic equity funds in Canada underperform the S&P/TSX Composite by 2.7% on a five-year annualized, equal-weighted basis, while large-cap domestic equity funds in the U.S. underperformed the S&P 500 by only 0.1%. While some might argue that the Canadian market is more challenging, with a smaller opportunity set, U.S. Equity managers in Canada underperformed the S&P 500 (in Canadian dollars) on a five-year basis by 2.2%. International and global equity funds in the U.S. show five-year annualized returns of -1.3% and -4%, respectively, underperforming their benchmarks by 0.3% and 1.2%. By contrast, international and global equity funds in Canada show five-year annualized returns of -8.3% and -5%, respectively, underperforming their Canadian-currency benchmarks by 3.7% and 2.3%.
There could be many reasons for this underperformance, though manager ability should not be among them. Anecdotal evidence does suggest that fees in the U.S. are lower than those in Canada. Domestic equity funds in our southern neighbor have MERs that regularly fall below 1.5%, while in Canada, fees over 2% are the norm. This fee difference, while seemingly minor, feels the effect of compounding over a period of years.
Though these numbers are disheartening, investors continue to show interest in active management. Our fund analyst team strives to separate the wheat from the chaff, and to provide positive ratings of those funds that we think will beat their peer group on a risk-adjusted basis over time.
Standard Chartered in hot water
Adam Fisch | 08-07-12
On August 7, 2012, shares of the British bank Standard Chartered PLC dropped nearly 20% on news that the New York State Department of Financial Services (DFS) issued an order
accusing the bank of hiding a quarter trillion dollars in transactions tied to Iran. Allegedly, the UK institution, previously considered a safe and reputable alternative to its more aggressive peers, defied US sanctions and hid as many as 60,000 transactions over a decade that generated hundreds of millions in fees for the bank. The bank has denied any wrongdoing, and is slated to appear before the DFS on August 15.
As of our most recent data, the Canadian retail funds with largest exposure to Standard Chartered by portfolio weight are:
Apple’s second miss in a decade
Joanne Xiao | 07-26-12
The Tempest and the Teapot
Serkan Altay | 07-26-12
Nexen acquisition benefits these funds' investors
Adam Fisch | 07-23-12
Digging for the right data
Adam Fisch | 07-19-12
Reinstating Silver rating for Fiera Sceptre Equity Growth
Nick Dedes | 07-12-12
Portfolio manager David Arpin no longer with Mackenzie Ivy Team
Nick Dedes | 07-10-12
Dana Love joins Sentry
Salman Ahmed, CFA | 07-05-12
Experienced bond manager leaving Signature
Adam Fisch | 05-11-12
Watching Zynga's Bubble OMGPOP!
Adam Fisch | 05-03-12
Lead manager change prompts "Under Review" rating for Trimark Income Growth
Nick Dedes | 04-26-12
For more Fund Analyst Notebook entries…