A couple of the bank brokerage firms picked up research coverage on their rivals in the Canadian wealth management sector this week, yet the overall outlook for the fund industry remains subdued.

CIBC World Markets Inc. is initiating coverage on Dundee Wealth Management with a “Sector Outperformer” rating and a price target of $11.00.

A research report inaugurating the coverage on Dundee notes that the firm is different from its larger public fund company peers in a number of ways: its ownership structure; its brokerage operations; its a vertical integratation; and most importantly, strong organic earnings growth potential in the near and medium term.

The firm suggests forecasts EBITDA growth in 2004 and 2005 of 18% to 19%, “well above the single-digit organic EBITDA growth we are forecasting for the company’s larger peers”. And, it says, “[Earnings per share] growth is almost materially higher than its peers.”

The industry-beating EBITDA growth will be based on several factors, CIBC suggests, including: the opportunity to convert assets under administration (AUA) to higher margin assets under management (AUM); cost cutting efforts, particularly within the brokerage operation; and improved redemption rates.

The report notes that Dundee expects to complete its integration of its latest major acquisition, Cartier Partners Financial Group, by mid-2005. Its earnings estimates anticipate annualized cost savings of $25 million achieved by 2005, and a modest shift of AUA to AUM resulting from the acquisition. “In both cases, it is difficult to forecast the extent to which Dundee will be successful in achieving these goals,” it says. Other possible risks to the forecast include: broad equity market weakness; legislative changes that impact the popularity of mutual funds; and, basic business execution risk.

While CIBC WM is bullish on Dundee, BMO Nesbitt Burns Inc. is initiating coverage with a “Market Perform” on GMP Capital Corp. It forecasts fully diluted EPS of $1.50 in fiscal 2005, up from $1.32 in fiscal 2004, and $1.45 in fiscal 2006.

“It currently trades at a premium to Canaccord Capital and large/regional U.S. investment dealers,” BMO Nesbitt notes. “We believe the premium reflects GMP’s superior financial metrics (higher operating margin, return on equity and dividend yield), higher leverage to fee-based (agency) revenue and greater exposure to equity-related financing and advisory services.”

“At the current price level, the stock appears to be reasonably valued,” it concludes.

As for the fund industry overall, BMO Nesbitt says in a recent report, “the mutual fund environment remains challenging and there is no strong indication of a turnaround. As such, we continue to expect modest fund flows in the autumn months.” It says that any recovery in industry fundamentals will depend on improving gross sales.

CI Fund Management is the only fund company it’s currently recommending, it’s rated “Outperform”, “given its attractive yield, positive net sales, strong strategic position and free cash flow generating ability. While industry conditions remain challenging, we believe CI is well positioned to capitalize on growth opportunities once these conditions improve. In the meantime, investors are paid to wait via the high and attractive dividend yield,” it says.