Bright prospects for fund firms?

But that’s in the longer term. The problem in the short-term is that retail investors — frightened about possible losses on equities if markets turn bearish once again — aren’t investing much. As well, the big banks have been taking market share away from the independents, and analysts with TD Securities Inc. in Toronto believe this will continue.

That doesn’t mean investing in AGF Management Ltd., CI Financial Corp. (both based in Toronto) and Winnipeg-based IGM Financial Inc. is a bad idea right now. “You can sit back and collect dividends now,” says Aiken, “and you will be rewarded [with share appreciation] in the long term.”

Even in the current environment, CI has just raised its dividend. Robin Cornwell, president of Catalyst Equity Research Inc. in Toronto, says further increases are very possible in the next year; he also thinks AGF and IGM could increase their dividends.

Aiken prefers CI in the short term, although he considers it a “hold.” TD analysts are more enthusiastic, rating CI a “buy.” (CI has the lowest operating costs of the three and its net redemptions are small; and both CI and IGM own a significant distribution channel.) Cornwell has a “buy” rating on IGM.

In contrast, none of the analysts surveyed are enthusiastic about AGF. That’s mainly because it doesn’t own a big distribution channel, but also because its investment performance has been poor for the past four years, keeping net redemptions high.

Acquisitions could produce some momentum for these firms. Neither Aiken nor Cornwell believe there’s much out there, but TD’s analysts say there may be some opportunities in the coming year because margin pressure will hurt smaller players, which “could be an important catalyst.”

A closer look at the three firms:

> AGF Management Ltd. AGF was hit hard by the 2008 global financial crisis: assets under management plunged to $35.6 billion by Nov. 30 of that year from $53.7 billion a year earlier. Four years later, AUM had reached $46 billion — and that includes about $8 billion in AUM that AGF had added when it acquired Acuity Funds Inc. in February 2010.

The heaviest bleeding was in retail mutual funds, with AUM of only $22.7 billion, including about $4 billion in Acuity AUM, as of Nov. 30, 2011, vs $30.1 billion four years earlier. Weak investment performance is a major reason; in the past four years, only about 25% of AGF’s long-term mutual fund AUM has been in funds with first- or second-quartile performance, according to Morningstar Canada data. With no in-house distribution, this is a problem because, says Aiken: “It’s hard for advisors to recommend a fund family with this record.”

AGF’s institutional and subadvisory AUM had plunged initially but rebounded quickly; at $20.1 billion as of Nov. 30, 2011, this was within shouting distance of the $19.8 billion AGF had on Nov. 30, 2007. However, the 2011 figure includes $3.8 billion in Acuity institutional AUM.

AGF’s high net-worth client business had $3.2 billion in AUM on Nov. 30, 2011 — still considerably shy of the $3.9 billion it had on Nov. 30, 2007.

Analysts consider AGF Trust Co., which had $1.8 billion in RRSP and investment loans and $1.2 million in real estate loans on its books as of Nov. 30, 2011, to be a negative. Aiken also doesn’t think the trust business “meshes well with the core business.” Cornwell has “no idea” why AGF is in the business anyway, saying it provides no “value added”; he thinks AGF’s shares would be more highly valued if the trust company was sold.

Another negative is AGF’s share structure: votes are confined to the Class A shares, of which 20% are held by Robert Farquharson and 80% by the Goldring family. This tends to mean the shares are priced at a discount.

Cornwell and the TD analysts have a 12-month target price of $16.50 for AGF’s stock, while Aiken’s is $15. The 95.5 million outstanding Class B shares closed at $15.69 on Feb. 17, with a dividend yield of 6.9%.

AGF’s net income was $113 million on revenue of $675.3 billion for the year ended Nov. 30, 2011, vs $117.8 million in net income on $614.6 billion the year prior.

> CI Financial Corp. According to Aiken: “CI has the best growth potential because it’s not only the most efficient operation, it also has the best investment performance and generates the most net sales. When equities markets rise, you [will] get more from CI than from the others.”

CI — which had $69.6 billion in AUM as of Dec. 31 2011, and $21.5 billion in assets under administration at wholly owned Assante Wealth Management Ltd. — is pursuing institutional business. CI currently has about $3 billion in institutional AUM; Bill Holland, executive chairman, says CI’s objective is to reach $10 billion in the next three to five years. Although fees are lower for this market, he notes, costs also are lower because the firm can leverage its existing investment managers.

On the acquisition front, says Holland, “We are looking everywhere all the time.” He thinks there are more opportunities outside Canada, as most European banks and insurance companies would be happy to part with their asset-management divisions. CI is deliberating whether it should make a foreign acquisition.

The TD analysts have a price target for CI’s stock of $25 vs Cornwell’s $23 and Aiken’s $22. The 283.6 million outstanding shares closed at $21.89 on Feb. 17. Its dividend yield is 4.4%.

CI’s net income was $376.9 billion on revenue of $1.5 billion for the year ended Dec. 31, 2011, vs net income of $328.6 billion on revenue of $1.4 billion in 2010.

> IGM Financial Inc. Cornwell considers IGM, with its $118.7 billion in AUM as of Dec. 31, 2011, to be “the best positioned mutual fund company in Canada.”

Aiken agrees — for the long term — because the advisory network at subsidiary Investors Group Inc., he believes, “will never be replicated in the Canadian landscape.” (Investors Group is growing its financial advisory network, which is currently at about 4,600.) However, Aiken adds, in the near term, net redemptions in Investors Group funds, which has seldom happened in the past, are weighing heavily on IGM’s stock.

The TD analysts are more concerned about net redemptions of $1.5 billion in 2011 at Mackenzie Financial Corp., IGM’s other large mutual fund subsidiary. Charles Sims, IGM’s co-president and co-CEO, who runs Mackenzie, says the subsidiary recognizes it needs to put all of its energy into investment management and find ways to grow its AUM.

One initiative underway is a partnership with Montreal-based Laurentian Bank of Canada to distribute Mackenzie funds; Mackenzie is looking for other strategic alliances. Mackenzie also wants to grow its institutional business, which is currently worth around $2 billion.

IGM also is interested in acquisitions. Sims notes the firm’s successful track record and “quite strong” balance sheet but says IGM will only do an acquisition if it adds to distribution. (Analysts note the deep pockets of Montreal-based parent firm Power Financial Corp., which owns more than 50% of IGM’s shares.)

Cornwell’s price target for IGM’s stock is $50, vs $48 for the TD analysts and $45 for Aiken. The 256.6 million outstanding shares, 100.6 billion of which is the public float, closed at $45.64 on Feb. 17. The dividend yield is 4.7%

IGM’s net income was $900.6 million on revenue of $2.7 billion for the year ended Dec. 31, 2011, vs net income of $730.7 million on revenue of $2.6 billion for 2010. IE