A handful of young upstarts in the mutual fund business are pushing their way into an arena long dominated by a handful of industry giants.

While the giant fund companies are typically supermarkets with funds to cover every investment category, successful up-and-comers tend to have a product niche, investment edge or star manager that sets them apart from the competition. The latter group’s ranks include Hartford Investments Canada Corp., Galileo Funds Inc., NexGen Financial Ltd., Webb Asset Management Inc., ROI Capital Group Inc. and Redwood Asset Management Inc. (all of Toronto) and Excel Funds Management Inc. of Mississauga, Ont.

Although these emerging firms are seeing more rapid growth than the giants, on a percentage basis, the industry leaders are basking in economies of scale that significantly enhance profitability. Figures provided by the Investment Funds Institute of Canada show that the top 10 fund companies control about 70% of the mutual fund industry’s assets of $673.4 billion.

“Concentration at the top of the industry makes it hard for any young company to get attention,” says Dan Hallett, president of Windsor-based Dan Hallett & Associates Inc. “Any new entrant needs some kind of differentiator or unique angle — either some kind of innovation, advantage or big-name manager — or it may not be worthwhile to compete.”

Many of the rising young companies are not members of IFIC, but of those that have joined the industry association, the fastest-growing is Hartford, which saw assets under management leap 70% to $673 million in the year ended Jan. 31. Hartford is the Canadian subsidiary of U.S. based Hartford Financial Services Group, an industry giant that oversees US$131 billion in AUM. Although the Canadian operations were launched in 2000, the firm was initially run largely from the parent’s Connecticut headquarters. It wasn’t until 2004 that a new Canadian management team, headed by president and chief financial officer Laurie Davis, took the reins and spurred momentum.

Davis, who previously held senior positions at Brandes Investment Partners & Co., AIM Funds Management Inc. and 20/20 Funds Inc. , has built a team of seasoned industry veterans interested in working for “a small shop in which there’s a lot of flexibility and we can get things done,” as she puts it.

In addition to beefing up the sales and marketing team, her strategy includes building a superior product shelf by forming subadvisory relationships with an exclusive group of institutional and private money managers previously inaccessible to retail fund investors.

“The focus has been on building relationships with staff, with investment managers and with advisors,” says Davis. “We’re looking to build partnerships with five or six investment managers, different from each other but each committed to a strong philosophy that’s been proven over time.”

Besides respected Canadian institutional managers Beutel Goodman & Co. Ltd. of Toronto and Greystone Managed Investments Inc. of Regina, Davis has staged an industry coup by snagging Bill Kanko, president of Toronto-based Black Creek Investment Management Inc. The respected Kanko, who built his reputation at Trimark Financial Corp., both before and after it was acquired by AIM, manages Hartford Global Leaders Fund and the equity portion of Hartford Global Balanced Fund.

“Kanko is one of the best known Canadian managers of global equities,” says Rudy Luukko, investment funds editor at Morningstar Canada in Toronto. “He has excellent risk-adjusted returns and a well-defined bottom-up discipline, and has given some spark to Hartford.”

After Hartford, the second-fastest grower measured by IFIC is Meritas Mutual Funds of Cambridge, Ont., with $142.5 million in AUM and a focus on socially responsible investing. The largest of its seven funds is the $65-million Meritas Jantzi Social Index Fund.

Vancouver-based Inhance Investment Management Inc. is another small fund company that is riding the wave of interest in SRI.

“The news is full of environmental issues these days, and that gives a lift to fund companies specializing in SRI,” says Luukko. “There is more public interest in ethical and environmental issues, and that trend has positive implications for these funds.”

Also rising quickly is Toronto-based Caldwell Investment Management Ltd. , for which AUM increased 47% to $83 million in the year ended Jan. 31. Caldwell has a couple of red-hot funds, Caldwell Exchange Fund and Caldwell Growth Opportunities Trust, both fuelled by investments in fast-growing stock exchanges around the globe. Some of these stock exchange units are also prominent holdings in Caldwell’s other, more diversified funds and have powered returns.

@page_break@“Smaller fund companies need to be more creative to gain a foothold,” says Toronto-based Raj Lala, managing director of Jovian Capital Corp. and president of subsidiary Gibraltar Consulting Group. “The strategy is not to compete on core products but on the satellite products on the periphery of the market. There’s a lot of opportunity if you’re willing to pick up nickels and dimes. Rather than selling funds that might make up 40% of client portfolios, it makes more sense to go for 10%-15%. If companies are innovative, they can pick up [market] share that way.”

A year ago, Jovian launched BetaPro Management Inc. and its family of “bull or bear” funds — exchange-traded funds that allow investors to employ a leveraged long- or short-selling strategy on an entire section of the market rather than a single security. The family of 10 Horizon BetaPro funds offers investors the opportunity for short or long exposure in five categories — Canadian bonds, crude oil, Nasdaq-listed stocks, Canadian stocks and the U.S. dollar. The exposure is leveraged by 200% to magnify the returns, both negative and positive.

“The biggest challenge for small companies is that they lack brand awareness,” Lala says. “Clients are not going to their advisors and asking for an unknown company, so they don’t get the push/pull on sales. It’s a hard climb to get the critical mass at which the company can be profitable, especially if it needs to spend on advertising, marketing and branding.”

Outside of the IFIC membership, a variety of small companies have zeroed in on promising market niches. For example, Excel Funds’ AUM increased 200% to $441 million in the year ended Jan. 31, based on growth in a small family of funds specializing in India and China. In January, it introduced Excel Income and Growth Fund, investing in income-generating securities issued in a variety of emerging and developed markets.

Excel Funds president Bhim Asdhir launched his company on the belief that the emerging middle class in India and China, which together account for 2.4 billion people, or 40% of the world’s population, is a lasting phenomenon with long-term investment potential.

ROI, for its part, has introduced two new funds designed for both growth and a steady income payout, which are unique in that they include “mezzanine financing” securities such as the secured debt of companies that have not yet gone public and therefore offer higher returns than more established fixed-income securities. ROI has partnered with a handful of pension fund managers such as Sceptre Investment Counsel Ltd. of Toronto to manage the equity and bond portions of the ROI funds’ portfolios.

NexGen — founded by former executives from Mackenzie Financial Corp. of Toronto including former president James Hunter — has targeted tax efficiency as its claim to fame, introducing a fund family that gives investors control over the type of income they receive and the timing of taxable transactions.

At Redwood, which has a family of four funds that use short-selling techniques, the company has made an unusual decision to cap the AUM of each fund at $150 million, allowing the funds to stay small and nimble enough to trade “high-octane” securities of relatively illiquid small companies.

Webb Asset Management is riding on the reputation of its chairman, Derek Webb, who previously managed funds for AIM and CI Investments Inc. of Toronto. Webb Canadian Performance Fund is applying his systematic investment process to a long/short strategy.

Dan Hall, executive vice president of Galileo Funds, says his strategy in creating awareness has been to arrange one-on-one breakfast and lunch meetings with selected advisors rather than dog-and-pony shows at the firm level.

Galileo Funds’ seven retail funds were launched in November by institutional money-management firm Galileo Equity Management Inc. , also of Toronto, and include two unusual “active/passive” funds. The strategy involves “passively” investing 60% of AUM on an equally weighted basis in the top 50 companies making up selected market indices, while “actively” investing the rest of the fund in individually chosen small and medium-sized companies.

The firm is competing on the basis of a unique product as well as low costs, and is limiting management expense ratios to 2%.

After 20 years in the fund business, including positions at 20/20, CI and Mavrix Fund Management Inc. of Toronto, Hall finds his long-time advisor relationships are helpful.

“Advisors are bombarded, and you must have a compelling story to get their interest and attention,” he says. “When you’ve been in the business for 20 years, you have a lot of contacts and friendships, and people know who you are when you call.” IE