Most banks, life insurers and property and casualty insurers once again posted strong results in the first quarter. But earnings were mixed for mutual fund companies, investment companies, distributors, suppliers and holding companies.

Overall, net income for the 42 publicly traded financial services firms surveyed by Investment Executive was up 14.7% from the same quarter a year earlier. But that includes a $335-million gain for Manulife Financial Corp., the result of its takeover of Boston-based John Hancock Financial Services Inc. in April 2004. Excluding Manulife’s gain, net income increased 9.1%.

The 42 companies exclude six whose results are consolidated with others in the survey, as well as newcomer Cervus Financial Corp. Inc. Earnings are before non-recurring or unusual items that are not part of normal business.

Two banks had lower net income: Bank of Montreal and CIBC, down 7.2% and 14.1%, respectively. CIBC’s results include a $75-million provision “related to matters involving CIBC’s dealings with certain hedge funds in the U.S. that engaged in market-timing.” IE considers this a normal part of business.

The only P&C insurer with declining earnings was Fairfax Financial Holdings Ltd., down 9.7%. Its reinsurer subsidiary — OdysseyRe — suffered from “catastrophe losses for current- and prior-period storms.”
Fairfax also reports some softening in insurance markets, as had been anticipated.

Of the mutual fund and investment-management companies, Guardian Capital Group Ltd., IGM Financial Inc., YMG Capital Management Inc., and Sceptre Investment Counsel Ltd. were the only three with profit increases — 22.8%, 8.7% and 2.7%, respectively. AGF Management Ltd., CI Fund Management Inc., Dundee Wealth Management Inc. and Seamark Asset Management Ltd. all reported lower net income year-over-year.

AGF is still in net redemptions — $1.6 billion for the quarter ended Feb. 28, although $884 million of it relates to Manulife fund mergers that brought management of assets in-house. In the following quarter, AGF has continued to suffer net redemptions of $603 million. The company has a new sales and marketing strategy that focuses on reconnecting with its advisor clients. It saw some positive results in early March, but that hasn’t developed into a sustained trend. AGF’s institutional and private client business is strong, however, with assets under management of $10.3 billion as of Feb. 28, vs $6.4 billion a year earlier.

This is the first quarter for CI in which year-earlier figures include Assante Corp., Synergy Asset Management Inc. and Skylon Capital Corp., acquired in November 2003; they don’t include IQON Financial Management Inc. and Synera Financial Services Inc., purchased in June 2004. Net sales for the CI and Assante funds were $436.6 million, $41.8 million less than a year ago. Skylon had $36.2 million in net redemptions, vs net sales of $326 million the previous year. Management expense ratios were reduced for CI funds on Sept. 30, and on Jan. 1 for Assante funds.

Dundee Wealth’s Dynamic funds had net sales of $716 million in the quarter ended Mar. 31, vs $294 million a year earlier. What produced the lower net income was that performance fees that apply to certain funds did not kick in this year. These amounted to $4.4 million in the first quarter of 2004. This is the first quarter in which year-earlier figures include Cartier Partners Financial
Group Inc., purchased in December 2003.

IGM subsidiary Investors Group Inc.’s funds had net sales of $428.3 million, vs $386.1 million the year before, while its Mackenzie Financial Corp. funds had net sales of $345.6 million, vs $343.7 million. Net sales for Counsel funds, acquired in May with Investment Planning Counsel, were $83 million.

Of the publicly traded investment dealers, three had lower earnings — Oppenheimer Holdings Inc., Rockwater Capital Corp. and Canaccord Capital Inc. — while net income at GMP Capital Corp. was up 115.9%. An Investment Dealers Association of Canada report says the quarter was generally disappointing because of higher compensation and lower trading revenue.

Power Financial Corp., which has a controlling interest in Great-West Lifeco and IGM, is the only holding company that increased earnings. Desjardins Group reported lower investment and trading activities, narrower interest rate spreads and increased non-interest expenses due to growth in business volumes. Dundee Corp.’s 35.8% drop was the result of declines at Dundee Wealth and weaker results for its corporate investments.

Twenty-four of the 42 companies increased net income, 15 had declines and three — Avenue Financial Corp., Integrated Asset Management Corp. and Mavrix Fund Management Inc. — were in the red. Those suffering losses are building their businesses.

@page_break@IAM’s partially owned subsidiary, Blumont Capital Inc., and Avenue are both in the hedge fund sector, which has suffered from the problems at Portus Alternative Asset Management Inc. Portus also affected Manulife, which took a $40-million after-tax accrual.

Not all companies with an increase in earnings are in great shape. For example, Royal Bank of Canada’s healthy-looking 19.3% increase hides its struggling U.S. operations. It has already sold its U.S.
mortgage operations.

Laurentian Bank of Canada, despite a 39.5% profit increase, is not in good shape at all, as witness its lowly 3.6% ROE. With only a 5% share of the Quebec retail-banking market, it has failed to interest any of the big banks in taking an equity interest of up to 50%. Laurentian sold BLC-Edmond de Rothschild Asset Management lnc. to Industrial Alliance Insurance & Financial Services Inc. on Dec.
31, 2004.

Sceptre, with assets at a third of the late 1990s’ peak of $19.3 billion, terminated its strategic alliance to sell Boston-based Putnam Investments Inc.’s products to Canadian institutional clients. Putnam got caught in the U.S. market-timing scandal.
Sceptre still provides money management to some of Putnam’s Canadian mutual funds, however. Putnam has apparently sold its 10% interest in Sceptre, and Sceptre is looking for merger partner to help it vault back into the big leagues of Canadian money management.

Seamark and YMG both have had management problems. Seamark president and CEO Robert McKim has left because of “irreconcilable differences” with the board of directors, and chairman Peter Marshall has temporarily returned as president and CEO.
Marshall denies that McKim’s resignation had anything to do with relatively poor investment performance in 2004; the company’s investment processes remains unchanged.

At YMG, former CEO Greg Edwards tried unsuccessfully to get shareholders to remove existing directors and elect new ones. “The current strategic direction is not optimal and is not creating appropriate value for shareholders,” he has said. He was also “concerned about the recent changes in senior investment management and believes YMG’s marketing and client services efforts needed to be substantially improved.” On May 16, the shareholders elected a company-nominated board of directors.

Management squabbles can be negative for companies, as can sudden changes in management — such as the recent one in CIBC’s wealth-management business.

It’s still too early to say that Guardian Capital is out of the woods, but the signs are encouraging. AUM is up 16.3% to $16.4 billion; earnings — now that the company is no longer investing heavily in business development — have hit or surpassed the $3-million mark for the past three quarters.
Twelve-month trailing ROE, however, is still only 6.1%.

Still, there are some impressive winners.
Home Capital Group Inc. and Hub International Inc. have both been on a tear for a number of years, posting ever-increasing profits as they build their businesses. Home Capital has not only been highly successful as an alternative mortgage provider, but it may have another home run with its home-equity VISA credit card. Hub is building a North American network of P&C insurance brokers. It has Canada covered, and is well along in creating a national U.S. network.

Canadian Western Bank and Pacific & Western Credit Corp. continue to show very good results. CWB acquired a P&C direct insurer in May 2004 and is also building a mortgage-origination business. P&W is launching an accounts-receivables continuous financing product.

Among the life insurers, it’s too early to tell how Manulife will do with the integration of John Hancock. And Sun Life Financial Inc.
still faces challenges with its Boston-based subsidiary MFS Investment Management, which took a $211-million charge for regulatory settlements in the 2003 mutual fund scandals. MFS’s AUM — at US$145 billion on Mar. 31 — remains well below previous years’.

Great-West Lifeco has successfully integrated Canada Life Financial Corp. and basks in a 20%-plus ROE. Industrial Alliance is expanding its wealth-management operations — increasing its ownership of FundEx Investments Inc. in April 2004 and acquiring BLC-Edmond de Rothschild at yearend.
IE