Financial advisors can expect a new line of Brandes-Sionna mutual funds to be available before yearend, if all goes according to plan.

Kim Shannon, president of Toronto-based Sionna Investment Managers Inc. and a high-profile fund manager, recently left CI Investments and the $7.9 billion she managed for it to form a strategic retail alliance with Brandes Investment Partners & Co. of Toronto.

While Shannon waits out a 60-day notice period on terminating her contract with CI, Brandes is busy preparing the legal and marketing materials for the new funds.

“Our intention is to launch a number of funds with Sionna as portfolio manager,” says Brandes president Oliver Murray. “While we can’t talk specifically about the funds at this point, Kim is a specialist in the Canadian equity arena, in the value area. And some funds will probably have a global component managed by the Brandes international team.”

Shannon will have the advantage, at least initially, of managing a much smaller pool of assets than at CI. There, the size of CI Canadian Investment Fund, in particular, restricted her to trading in large, liquid companies that seldom offer the growth potential of small to medium-sized firms. With her new funds, she’ll be able to browse through all capitalizations in her search for diamonds in the rough.

“Capacity is something that is extremely important to us at Brandes,” says Murray, adding that outside Canada, the San Francisco-based parent company has closed its global funds to new investors. “We don’t want to take on too much money because we want to maintain our investment style.”

“First and foremost, we are mutual fund managers, not marketing machines,” Murray says, “and we want to do what is in the best interest of clients. Any advisor who had capacity concerns with Sionna at CI will see — the issue will go away with the new funds.”

Shannon has not been available for comment since the announcement in September of her decision because of the terms of her contract with CI. She was required to give 60 days notice that she was terminating her contract.

The move to Brandes was a sudden end to a 10-year relationship with CI, where she was best known for managing the $5.1-billion CI Canadian Investment Fund. According to Morningstar Canada, the CI Canadian Investment Fund has a 10-year average annual compound return of 13%, handily beating the Canadian equity category’s median return of 10.6%. Its top-quartile performance was instrumental in Shannon being named Fund Manager of the Year at last year’s Canadian Investment Awards.

Shannon had a subadvisory relationship with CI, whereby her compensation was based on a percentage of the assets she managed. Her deal with Brandes involves an equal sharing of Sionna-managed funds’ costs and revenue, while Sionna remains an independent firm.

Initially, Shannon won’t be earning anywhere close to what she made managing money for CI. But the long-term prospects for Sionna at Brandes show greater potential and are more secure than a subadvisory relationship, which can be terminated with notice by either party at any time. And in subadvisory relationships, the interests of the fund sponsor and subadvisor may not always be aligned.

“Sionna’s deal with Brandes is potentially more lucrative in the long term,” says Dan Hallett, president of Windsor, Ont.-based mutual fund research firm Dan Hallett & Associates Inc. “There will be a full sharing of revenue and expenses. Once she gets beyond a certain level of assets, the revenue will far exceed the costs. The move is not without risk — but there is a huge potential payoff.”

At this point, it is not known how much of the assets Shannon managed for CI will follow her to Brandes. After she gave notice, CI moved quickly to appoint a talented successor to CI Canadian Investment Fund — Danny Bubis, president of Winnipeg-based Tetrem Capital Partners Ltd. He is also a value manager with an impressive long-term record (see story on page 47).

Apart from any assets that may be pried loose at CI, Brandes will also be looking to attract new money to the funds, which will be in place for the coming RRSP season.

When Brandes Investment Partners decided to open a Canadian division in 2002, it terminated a similar subadvisory relationship it had with Toronto-based AGF Funds Inc. to be in greater control of its destiny, Murray says.

@page_break@Although it is impossible to measure how much of Brandes’s current assets in Canada have come from AGF, AGF International Equity Fund, which stood at $7.4 billion before Brandes departed as subadvisor, subsequently has dropped to $3.3 billion. AGF originally appointed Chicago-based Harris Associates LP as Brandes’s replacement, but it recently moved responsibility in-house, to Dublin-based subsidiary AGF International Advisors Co.

“AGF had an uphill battle hanging on to AGF International Equity Funds’ assets after Brandes left because Harris had no Canadian track record,” says Hallett. “But if advisors perceive Shannon’s replacement to be strong, they will probably take a wait-and-see attitude before advising clients to switch.”

In Canada, Brandes has expanded to almost $5 billion in assets in its mutual funds, with a further $8 billion in Canadian private and institutional accounts. Altogether, the Canadian company accounts for about 10% of parent Brandes Investment Partner’s global assets.

Brandes employs a strict deep-value style in its global portfolios. Shannon is known to take more of a relative value approach, however, and Brandes hopes that the introduction of the Sionna-Brandes line will strengthen the company’s Canadian equity business.

Although it launched Brandes Canadian Equity Fund when it opened its doors in Canada in 2002, the fund has garnered only $237 million in assets. It has a 6.1% average annual compound return for the three years ended Sept. 30, ranking it in the fourth-quartile in its peer group, according to Morningstar. The fund is managed by an investment team based in San Francisco.

“Brandes needs bench strength on the Canadian side,” says Hallett. “Shannon has built some solid relationships with advisors and will definitely get some money to follow her.”

Murray’s relationship with Brandes goes back to 1994, when he was working at 20/20 Funds Inc. of Toronto; 20/20 hired Brandes as a subadvisor for the global equity fund that ultimately became AGF International Value Fund when 20/20 was later acquired by AGF.

Murray has known Shannon for more than 20 years. He worked as a sales and marketing manager for Royal Life Insurance Co. of Canada and she managed segregated funds for Royal Insurance, now Royal & Sun Alliance Insurance Co. Canada.

Murray says he and Shannon spent a lot of time on the road talking to insurance advisors about value investing and they remained friends. When Brandes first set up shop in Canada, Murray says he “chatted” with Shannon. Nothing came of it.

At the time, Shannon was chief investment officer of Merrill Lynch Canada Inc., and went on to launch Sionna and take on the CI account, as well as some institutional business. About four months ago, Shannon and Brandes began exploring opportunities together, Murray says. IE