AGF Management Ltd.’s recent deal to buy Acuity Investment Management Inc. will create a better balance in AGF’s product lineup and, as well, add products and expertise in the popular area of socially responsible investing. Both companies are based in Toronto.

“The hot-selling areas for the industry have been balanced and fixed-income,” says Blake Goldring, AGF’s chairman and CEO. “We’ve had a strategy to fill the pipe with products in those areas, and in one fell swoop we’ve done it with award-winning products.”

The $325-million combined cash and share purchase of Acuity, expected to close in February, will boost AGF’s mutual fund and institutional assets under management by $7.4 billion, or 14.5%, to $51 billion. Acuity’s owners, including company founder and president Ian Ihnatowcycz, will receive 60% of the purchase price in cash and 40% in AGF Class B non-voting shares. A portion of the purchase price will be deferred and subject to an asset-based adjustment during the three years after closing.

“We can now offer our clients more choice in the balanced and fixed-income areas that are most in demand, ” says Goldring. “The SRI product allows us to appeal to a broader range of investors in a space that few of our competitors have entered.”

Acuity has 25 retail funds, 19 pooled funds and five wraps in its lineup, including four retail balanced funds with first-quartile results for the most recent 10- and 15-year periods. Three of these have been in the top 10 for the past 10 years, including Acuity Pooled High Income, Acuity Conservative Asset Allocation and Acuity High Income.

Acuity also has some niche funds in such areas as small-capitalization, cleantech/environment and social values.

“Acuity is well established with pooled funds,” says Goldring, “offering an upscale product for the high net-worth market that’s efficient and cost-effective.”

On the mutual fund side, AGF has been suffering from net redemptions in many of its 60 retail funds, in a market increasingly overshadowed by the big, bank-owned firms and their vast networks of retail branches. According to figures from the Investment Funds Institute of Canada, AGF has experienced net monthly redemptions for 32 consecutive months. Acuity, on the other hand, has seen its sales picture flatten recently, suffering net redemptions since last April.@page_break@After the merger, the percentage of products invested in equities will drop to 58% of the total from 63%, while balanced and fixed-income will increase to 40% from 35%. Says a research note by Stephen Boland, analyst with GMP Securities LP in Toronto: “The addition of balanced, fixed-income and [SRI] funds could provide a catalyst for net sales.”

The Acuity acquisition increases AGF’s high net-worth AUM by 29% and its institutional AUM by 20%. After the two firms have merged, the retail and institutional lines of business will be more balanced, with 43% of the business in institutional products and 49% in retail, with the remaining 8% of AUM in high net-worth.

“The institutional side allows us to have a profitable line of business that we can diversify, both in Canada and internationally,” Goldring says, adding that AGF has been winning significant institutional mandates. “Our goal is to grow in different markets, including the Middle East, Asia and the U.S., and to lever the excellent investment talent that we already have. The people providing the retail product expertise are the same people who could be managing a sovereign wealth fund.”

Without the distribution and commission costs associated with the retail side of the business, Goldring adds, the profit on the institutional business is about equal despite its lower fees.

The Acuity investment team remains intact and will report to AGF’s executive vice president and chief investment officer, Martin Hubbes. Acuity’s fund managers will become shareholders in AGF with long-term incentives and lock-in clauses to keep them focused on delivering superior performance at AGF. Acuity’s Ihnatowcycz will retire from the day-to-day running of the business, but will join AGF’s board of directors.

“We will be one family, but the investment styles of each team are distinct,” says Goldring. “We understand the need to keep it that way to grow and flourish, although there will be opportunities for synergy, interplay and exchange of ideas. It’s no different than our investment team members in Ireland — they may not wear exactly the same jersey, but they play for the same team.”

There probably will be some rationalization of funds once the merger is concluded, Goldring says, but it’s too soon to say which funds might be folded into others.

Ihnatowcycz explains that Acuity’s growth had levelled off and, as a mid-sized firm, it was becoming increasingly difficult to compete with the industry giants: “In an environment of consolidation and competition, we concluded that we need to increase our size rapidly to maintain a competitive edge.” IE