Toronto-based Stone Investment Group Ltd., which went public last December, is positioning itself to target a new generation of clients — as well as continuing to service their parents.

In the crosshairs are those who are now in their 20s and 30s — entering their key asset-accumulating years — who will be investing very differently than their baby-boomer parents, says SIG president and CEO Richard Stone, who started the mutual fund company in 1995.

This new generation of clients is technology- and Internet-savvy and they are used to doing their own research; as a result, they will be looking for tools, not solutions, says Stone, who expects that many of them will be putting together their own portfolios rather than depending on professionals to do it for them.

These clients will also be less risk-averse than their parents and will want to have positions in particular sectors and/or particular countries or regions, Stone believes.

So, mutual fund companies will need to make sure they have products that are appropriate and easy to fit into a do-it-yourself portfolio.

However, this does not mean that such firms should abandon their current managed-solution product offerings. Not only will aging baby boomers continue to want these products, but this next generation of clients will probably also want managed solutions for their retirement — when they will spend their time travelling and pursuing other leisurely activities.

So, Stone is positioning his company to offer products that cater to both these markets — products that also offer tax efficiency and aid in intergenerational wealth transfer.

Although tax efficiency has always been, and will continue to be, important, intergenerational wealth transfer will increase in importance as those in the baby-boom generation start to plan the final disposition of their assets.

Already, SIG has a number of core mutual funds that can be used as the centrepiece for portfolios catering to both these generations.

The mutual fund company also offers corporate-class mutual funds, in which transfers within the class don’t trigger capital gains. SIG also offers Stone & Co. Flagship Growth & Income Fund Canada, which has return-of-capital distributions that lower taxes.

However, the centrepiece of SIG’s strategy in targeting baby boomers and their children is the introduction of what it calls the “family office” model, which is geared toward high net-worth clients who have at least $10 million in investible assets.

The model features “executive directors” who co-ordinate all the clients’ financial planning needs, including insurance, tax planning, estate advice and money management. The model is ideal for meeting both tax efficiency and intergenerational transfer requirements, Stone says.

The executive director would work with all of a client’s advi-sors — including accountants, lawyers, insurance agents and investment managers — to achieve the client’s goals. (The model assumes that some of the assets will be managed by other firms.)

Stone expects this family-office business to account for 20%-30% of assets under management in the next three to five years vs virtually zero today. He believes the company’s total AUM could be $5 billion in 2012 vs $764 million as of July 31, which itself is almost quadruple the company’s AUM of $207 million three years ago.

As for SIG’s mutual funds business, although Stone thinks the banks will continue to get the lion’s share of mutual fund sales, he believes there’s great potential for small independents that offer superior investment returns and customer service.

One of the ways in which SIG offers superior returns and service is through specialized closed-end, flow-through-share limited partnerships, which Stone believes are the best way to invest in resources because of the associated tax breaks.

There’s little exposure to resources in SIG’s core funds because of their volatility, but flow-through shares have tax incentives that make them attractive as add-ons to portfolios, he explains.

The company plans to offer more specialty funds, all of which will be structured and closed-ended. The company’s next offering will be an infrastructure and/or a real estate fund.

Stone expects structured products to account for 20%-25% of SIG’s AUM in the next three to five years vs 8%, or $62 million, as of July 31. As a result of the growth expected from the new family-office business and the specialty funds, the company’s core mutual fund AUM will be 45%-60% (of SIG’s total AUM), vs 92%, or $702 million, as of July 31.

@page_break@As for SIG’s core mutual funds, there are eight, including Stone & Co. Flagship Money Market Fund; Stone & Co. Resource Plus Class Fund, in which investors in the company’s annual flow-through-share funds can park their assets after the limited partnerships expire; and Stone & Co. Dividend Growth Class and Resource Plus funds, which are the corporate-class funds.

However, three funds hold most of SIG’s AUM: Stone & Co. Flagship Growth & Income Fund Canada, with $393 million in AUM as of July 31; Stone & Co. Dividend Growth Fund, $156 million; and Stone & Co. Flagship Stock Fund Canada, $99 million. Combined, these three funds account for 92% of SIG’s total $702 million in mutual fund AUM.

In addition, SIG has two structured products: Stone Total Return Unit Trust, an income trust devoted to the small-cap universe that had $12 million in AUM as of July 31; and Stone Flow-Through Limited Partnership for 2007, which invests in Canada’s resources sector and had $50 million in AUM. (The mandate of the STRUTs is being reviewed because both invest 100% in income trusts.)

SIG uses three approaches in its funds, either solely or in combination: “pure total return” seeks a return from a combination of capital appreciation and dividend income, providing inves-tors with a tax-advantaged strategy; “growth and income” focuses on providing regular, tax-efficient income through a return of capital similar to that in income trusts; and “pure growth” concentrates on achieving above-average capital appreciation.

Although Stone prefers not to put a label of the company’s overall investment-management style, he admits it falls into the growth-at-a-reasonable-price category.

Specifically, the company invests in a basket of companies that will be positively impacted by at least one of three factors over the long term: sustainable long-term earnings and cash flow growth; multiple expansion in the price-to-earnings ratio; and sustainable growth in dividend payments and/or the dividend payout ratio.

SIG manages the Canadian equity portion of its funds. The fixed-income is managed by Toronto-based Marret Asset Management Inc. ; the global mandates are subadvised by Gryphon International Investment Corp. , also of Toronto, which has a similar investment style to SIG’s.

In terms of financials, SIG reported a loss of $497,698 in the nine months ended June 30 on revenue of $11.7 million. (There are no comparable figures available for 2006 because it wasn’t public then.) There was $11.6 million in debenture debt as of June 30.

SIG’s December 2006 initial public offering took the form of debentures with share warrants, which don’t trade.

The debentures are due Dec. 28, 2011, at which point holders can purchase one common share per warrant for 68¢. However, SIG can also purchase the warrants for cancellation under certain conditions. The warrants can also be turned into common shares if there is a change in control of the company or a common-share IPO.

There were 7.2 million warrants issued that, if exercised, would bring the number of outstanding shares to 32.2 million.

This method of going public gives SIG working capital, a higher public profile and access to financial markets without giving up any control to shareholders for a number of years. Stone says the company would have stayed private if it could have, but that wasn’t feasible, given its growth plans.

An offshoot of SIG going public is an investor services business, carried out by Stone Com-munications Services. Stone explains that SIG decided to set up its own investor relations department rather than outsourcing this function.

Having done so, it made sense to make the service available to other companies on a contract basis. Thus, SCS already has a couple of clients, but Stone doesn’t expect the business to become a core one for SIG.

As for other business opportunities, SIG has no plans to pursue institutional clients at this time because SIG hasn’t developed the service expertise expected for this market — which is high-maintenance, has thin margins and is controlled by third-party consultants. Stone does not, though, rule out participating in this market in the longer term.

Additionally, SIG is interested in acquisitions, particularly to build its family-office business. However, it would also look at opportunities to acquire mutual fund and investment-management companies.

But, Stone notes, SIG has yet to find an attractive deal — in terms of price — in any of these areas. IE