Firms that generate lots of cash are going to have to find creative ways to return it to shareholders if dividend tax rates aren’t reduced, suggested CI Fund Management Inc. chief executive, Bill Holland, in the company’s first quarter conference call yesterday.

CI falls into the camp of companies that face this challenge. Holland said that although the Canadian fund industry has excess capacity and just a handful of firms are generating strong positive sales, he doesn’t see any obvious acquisition opportunities. The consequence is that CI is building up cash, and Holland acknowledges that this becomes a problem.

If there are no great strategic deals to make and the option of flowing the cash back to shareholders by structuring as an income trust is closed off, or the appeal is substantially reduced by government changes to the rules around trusts, then firms will have to look for innovative ways to return money to shareholders. Traditionally, that has been through dividends, although Holland said he cringes at how high dividend tax rates remain.

To be more efficient at returning cash to shareholders, firms are going to have to get inventive. Holland said he’s not suggesting such a move, but he theorized that dividends could be replaced by ongoing buybacks in an effort to give shareholders capital gains instead.

While having too much cash is a nice problem to have, Holland suggested that it won’t be disappearing anytime soon at CI. He noted that the firm is well positioned to enjoy continued strong sales.

However, that doesn’t mean that the fund industry overall is fighting fit. Holland pointed out that CI is one of the few large independent firms generating meaningful sales, and that the banks are coming to dominate the fund business.

He dismissed suggestions that the banks’ sales will wither once markets turn and investors are drawn back to sectors where the banks’ fund lineups aren’t as strong, such as foreign equity funds. Holland said that the banks now really understand the fund business, and they are doing an excellent job of capitalizing on their strategic advantages, such as large in-house sales forces. He doesn’t see that trend disappearing anytime soon.