Marketing will focus on what’s been hot
Ray Turchansky
Province
Mutual-fund companies are marketing machines, says Michael Lee-Chin. Photograph by : Bruce Stotesbury, Times Colonist
EDMONTON — Recent visits from financial-institution executives have provided a hint of what’s in store this coming RRSP season.
“Mutual-fund companies, generally speaking, are marketing machines,” said Michael Lee-Chin, chairman and CEO of AIC Ltd.
“If they are marketing machines, they are going to sell what is hot. So just look at what was hot in 2005 and it will tell you what the theme will be for the RRSP season.”
That would be income trusts, plus dividend-paying stocks and mutual funds, areas that recovered nicely after federal Finance Minister Ralph Goodale’s pre-election announcement of no tax on income trusts and an increase in the dividend tax credit.
“We are careful and skeptical of some of the best-performing areas,” said Jonathan Wellum, chief investment officer with AIC. “The trusts are a good example.
“It goes back to our fundamentals that wealth is ultimately
created by staying in the right places and not getting sidetracked.
“One of the things we focus on is tax efficiency; we’re not moving around the market and market-timing. We make sure the companies we’re buying can take any economic downturn and come through it in a stronger position from a business point of view, even if their stocks are weaker.”
AIC’s decision to spit into the wind by shunning income trusts is part of its strategy to project itself as being different from other mutual fund companies.
“The banks are certainly very, very strong in the industry since their entry in 1989, to the point where the mutual-fund product has been commoditized — a lack of differentiation,” said Lee-Chin.
“Most companies will find it a challenge to differentiate themselves, and if they can’t differentiate themselves, they can’t grow.”
Fund companies are using a variety of approaches in an attempt to set themselves apart. AGF Funds Inc., for instance, is presenting a novel approach to fees. Four of five new portfolios it is launching will rebate portions of their management fees if they fail to meet their performance benchmarks.
In the case of AIC, it’s staking its territory through long-term value investing and globalization.
“What we’ve tried to do, again for differentiation, is to add more
global funds to our stable,” said Wellum. “For the next 10 years, people should be taking advantage of a high Canadian dollar and taking advantage of the fact that while their assets are creating high
valuations today, they should be diversifying prudently and carefully.”
“We are interested in long-term secular trends,” said Lee-Chin. “For instance, we have invested in an Indian company, Infosys, which provides software business solutions. A software engineer in India makes $12,000 a year; a software engineer in North America makes $72,000 a year.
“Infosys in 2002 had 13,000 engineers; today they have over 42,000 engineers. And software engineering standards are universal.”
However, by reducing exposure to energy among Canadian holdings and retaining financial stocks, AIC is joining an industry trend.
Mutual-fund research firm Morningstar Canada reports that “energy stocks have continued their torrid pace while managers continued to underweight this hot sector. Meanwhile, the S&P/TSX composite index’s largest sector, financial services, saw its weighting in Canadian equity funds increase as the weight of the sector dipped slightly within the index.”
It comes down to volatility.
“We do have very good financials in this country, when you look at Manulife, Sun Life, Power Financial and TD Bank,” said Wellum.
“I think financials — although they’ve done well and some of them might be a little ahead on price-to-book and some valuations you use — they still have pretty decent embedded growth in them.
“The energy market is more of a wild card.”
Lee-Chin said AIC is unique in using the philosophy of the richest people in the world: Use other people’s money, own fewer than a handful of high-quality businesses that you understand and are in long-term growth industries, and hold them for the long run.
© The Vancouver Province 2005
