Saxon financial inc., the publicly traded money manager responsible for the venerable Saxon family of mutual funds, is working hard to gain a bigger place on advisors’ product shelves by introducing pro-ducts and sending its new team of wholesalers out to tell the story.

“We are more actively pursuing the financial advisor channel, as it represents the largest growth opportunity for us,” says Allan Smith, president of Toronto-based Saxon. “We recognize that we must pay attention to the needs of advisors to get a bigger take-up.”

Saxon’s most recent product is a principal-protected note, launched in September in partnership with Bank of Montreal and designed to appeal to the commissioned segment of the advisor channel. The note’s return will be based on the performance of Saxon Balanced Fund, named Canadian Balanced Fund of the Year at the 2005 Canadian Investment Fund Awards. The note offers a 100% guarantee on principal at maturity in 5.5 years, as well as up to 200% exposure to returns from Saxon Balanced Fund, the 15-year performance of which ranks second out of 40 Canadian balanced funds, Morningstar Canada data show.

“We want to bring out new products only when we think we can offer something better than our competitors,” Smith says. “We are not photocopying every product out there.”

The PPN has a MER of 2.45%, which is less than the industry average of 2.95%, although the compensation structure and trailer fee are competitive within the industry. Saxon will introduce one or two more PPNs in the first half of 2007, says Smith, adding that Saxon’s goal is to be below the median MER for any type of product it offers.

“We have a value investment approach, but that is not the only thing that speaks ‘value.’ Our costs are below the median on any pro-duct we offer,” he says. “The client wins, and the advisor wins by showing the client that he or she has found a great manager at below-average cost.”

All Saxon’s equity and balanced funds, including international and small-cap, have MERs of 1.87%, which compares with the industry average of 2.4% for Canadian equity funds and slightly higher average MERs for international and small-cap.

Although Saxon has positioned itself as competitively low on MERs, it has traditionally paid below-average trailer fees to the advisors who sell its funds, and has offered no deferred sales commissions. The Saxon equity and balanced funds pay an annual trailer fee of 50 basis points, about half the industry norm of 1% for comparable funds.

Saxon’s lower fees mean lower advisor compensation. But, says Smith, some advisors find they gain the confidence of investors by selling a low-fee fund family that performs well over time and holds up in bear markets. Ultimately, the advisors could end up with more assets from satisfied clients.

Saxon’s bond funds also have lower-than-average MERs, and pay a trailer of 25 bps, about half the industry norm.

“MERs are low on Saxon funds relative to their peer groups, and this is partly because of the low advisor compensation built into the funds,” says Rudy Luukko, investment funds editor at Morningstar in Toronto.

Smith admits that Saxon may have received less advisor attention than other fund families because of its compensation structure. But, he says, future PPNs and new funds coming down the pipe will be in line with normal industry compensation rates. MERs of new Saxon products will still be competitive, but probably not as low as the existing Saxon funds, he adds. There will be no increase in advisor compensation on the original line of Saxon funds that are being sold with the lower trailers, Smith says. Their MERs will stay low.

Saxon has a family of nine mutual funds totalling roughly $2 billion in assets. In addition, it manages about $10 billion in institutional and private money through subsidiaries Howson Tattersall Investment Counsel Ltd. and Howson Tattersall Private Asset Management Inc. About 70% of the $12 billion is managed on behalf of Ottawa-based CMA Holdings Inc. , a private company fully owned by the Canadian Medical Association, Saxon’s major shareholder. Through subsidiary MD Financial Group and its network of financial advisors, CMAH provides financial products and advice to its physician members and their families.

Saxon is a relatively new company, formed in 2004 after the Saxon funds’ original sponsor and investment manager, Howson Tattersall Investment Counsel, amalgamated with CMAH money-management subsidiary Lancet Asset Management Inc. Saxon subsequently went public in July 2005.

@page_break@Saxon mutual funds have been around for about 20 years, but they have historically kept a low profile, selling directly to clients on a no-load basis, as well as through advisors. Prior to the merger, Howson Tattersall Investment Counsel had quietly expanded its fund business through word-of-mouth promotion and steady investment returns. The new Saxon has become more aggressive on the business-building side.

“Saxon will get a lot more traction by being part of the same corporate family as MD Financial’s huge distribution channel,” says Dan Hallett, president of Windsor, Ont.-based fund analyst Dan Hallett & Associates Inc. “Saxon has always had a bit of a following among advisors, but the fund company wasn’t actively pursuing them. Now the access to deeper pockets is allowing it to do more on the marketing and product-development side.”

Smith won’t say what percentage of sales is currently coming from MD Financial’s network of 180 planners in 47 offices in Canada, but he notes it is the largest chunk. Saxon also sells through investment dealers, mutual fund dealers and discount brokers, in addition to selling its funds directly to the public. Since 2005, it has hired three wholesalers to beat the pavement and increase advisor awareness of Saxon.

Even before its amalgamation with the CMAH family, Smith says, Saxon was the top-selling third-party fund family sold by the MD Financial sales force, which sells its own proprietary MD funds as well as independent fund families. There is no financial incentive for MD Financial’s advisors to sell any one fund over another; they are paid a combination of salary and bonus, but no commission.

“MD Financial advisors saw that the Saxon family had the ‘Good Housekeeping seal of approval’ from head office and have continued to recommend Saxon funds, but even more so,” Smith says.

Saxon has enjoyed 68 straight months of positive inflows to its funds. At a time when some of its major competitors have stumbled into net redemptions, its sales growth has been well ahead of the industry. For the year ended Sept. 30, Saxon’s fund assets of $2 billion were up 25% from a year earlier, while industry assets of $609 billion were up 10%, according to the Investment Funds Institute of Canada. Saxon’s mutual fund assets have surged from a mere $110 million in 2001.

To broaden its product selection, Saxon has introduced four mutual funds, adding foreign stock and bond funds to its lineup. Saxon U.S. Equity and Saxon International Equity were introduced in the fall of 2004, along with Saxon Bond and Saxon Money Market. The four funds have subsequently brought in about $75 million in assets.

Along with the funds, Saxon has added to its team of managers, putting some bench strength behind Robert Tattersall, 58, executive vice president and senior portfolio manager; and Rick Howson, 55, chief investment officer and executive vice president. New managers hired since the amalgamation include Carmen Veloso, former vice president and portfolio manager, AIM Funds Management Inc.; and Suzann Pennington, previously head of global equities at Sceptre Investment Counsel Ltd. and portfolio manager at Synergy Asset Management Inc. Smith expects to hire one more portfolio manager in the coming year.

Howson and Tattersall are responsible for developing Saxon’s disciplined value investment style and long-term track record. They were equal owners of Howson Tattersall Investment Counsel before it became part of Saxon.

The two seasoned managers, who are closely identified with Saxon’s investment success, are under a contractual obligation to stay until Dec. 31, 2010, although, Smith says, there is nothing to stop them from staying on longer.

Last spring, Saxon introduced F-class versions of eight of its nine funds, excluding Saxon Money Market Fund, to serve the growing group of advisors conducting fee-based planning businesses. Smith says fee-based advisors, who charge clients fees based on a percentage of assets, don’t like funds with imbedded trailer fees, and the F-class funds are “crispy clean for this group.”

As well as low fees, Saxon funds have a record of low volatility and have held up well in bear markets. The $503-million Saxon Stock Fund, for example, has historically captured 72% of the market upside (as measured by the S&P/TSX composite index) and only 46% of the market downside. For the 10 years ended Sept. 30, Saxon Stock Fund had an average annual compound return of 12.09%, beating the TSX market average of 10.19%.

“The best way to mitigate risk is to buy cheap,” Smith says. “If you buy cheap, there is usually less of a fall in a down market. And, in the long run, the rest of the world will recognize value. Our low record of volatility has helped client retention enormously.” IE