It is a boast few investment-management firms can make: Saxon Financial Inc.’s mutual fund division has enjoyed 55 consecutive months of net sales. Add in its institutional and private client businesses, and the newly public firm has seen assets under management quadruple to $10 billion from $2.5 billion in the four-and-a-half years ended June 30. And president and CEO Allan Smith sees further strong growth ahead.

The Toronto-based firm’s goal, says Smith, is to be “a pre-eminent investment-management firm respected for investment performance and depth of knowledge, experience and integrity.”

Saxon — formed in 2003 when Howson Tattersall Investment Counsel Ltd. merged with
Lancet Asset Management Inc., the institutional investment arm of CMA Holdings Inc.
— is well on its way to achieving that goal. Four of its nine mutual funds (balanced, high income, small-cap and stock) had positive returns each year from 2000 to 2004; a fifth,
Saxon World Growth Fund, was down 5% in 2000 and 2.9% in 2002. Four others — bond, money market, international equity and U.S. equity — were launched in the past year. Overall, the nine funds account for $1.5 billion in AUM as of June 30.

That’s only 15% of Saxon’s $10 billion in AUM. Another $8.5 billion is managed for institutional clients and $168 million for private clients.

Saxon takes the same approach for all its clients — a disciplined, low-turnover value style that limits downside risk. Its target customers, says Smith, are “long-term investors who are knowledgeable and buy into our approach to investing. [These clients] understand exactly what they are doing and are prepared to stick with it. They accept that you can’t outperform every quarter.”

The company believes it is responsible for educating investors, be they retail or institutional. “So if they are not in our camp at the beginning, they get into that camp and come away well-educated and knowledgeable before they invest their first dollar,” Smith says.

Going public in early July is part of Saxon’s strategy to become better known. The 7.2-million-share IPO, which netted the company $15.5 million, provides share ownership to attract and retain top portfolio managers and the financing capacity to make acquisitions.

On the acquisition front, Saxon is particularly interested in buying private-client companies. “We know of lots of firms in which the principals are in their late 50s, early 60s,” says Smith.

Saxon would also look at another investment-management firm if there was a fit in terms of culture and investment approach.

The IPO also provided its major shareholders — CMA Holdings (the principal business subsidiary of the Canadian Medical Association), Richard Howson and Robert Tattersall — to cash in a portion of their shares. Each sold about half their holdings.

Saxon also has to become better known to boost its penetration of the discount market and advisor network. Although the firm doesn’t complain, as many smaller companies do, of not being able to get shelf space — the no-load funds are offered by all the bank-owned brokerages — it needs to become better known. “We’re anxious to work more closely with independent advisors to help meet their needs and the needs of their clients,” says Smith.

To expand its advisor network, Saxon has hired mutual fund wholesalers for the first time, and three are now on board. The company pays a 50-basis-point trailer fee on its equity funds. There are no trailers on the fixed-income funds. MERs are less than 2%.

The company has also dramatically increased its retail advertising.

Saxon’s financial performance has also been strong. Revenue increased to $28.3 million in 2004 from $13.3 million in 2002, while net income jumped to $9.5 million from $2.3 million two years earlier. For the first six months of this year, the company had revenue of $17.8 million and net income excluding unusual items of $5.7 million. Saxon increased expenses in the second quarter in order to position it for future growth. It has no long-term debt.

The IPO share price was $16.50, and shares were trading around $18 in early September.
Of the 12.7 million shares now outstanding, CMA Holdings holds about 30%, with Howson and Tattersall each holding 8%. Howson and Tattersall, key members of the investment team, are committed to staying with the firm until the end of 2010. The IPO was not needed to provide them with an exit strategy, as CMA Holdings had previously agreed to buy all their shares by the end of 2010.

@page_break@Almost 90% of Saxon’s $8.5-billion institutional business is with CMA Holdings, managing about 50% (or $7.4 billion) of MD Management Ltd. ’s $15.1 billion in assets.
MD, another CMA Holdings subsidiary, manages money for CMA members and their families; its 18 funds are sold exclusively through MD’s 180-person sales force. Most of the investment management provided to MD is fixed-income, which was Lancet Asset Management’s specialty.

The association with CMA Holdings is one of Saxon’s aces. MD Management sells Saxon funds as well as its own, either directly through a call centre or through its sales force. These channels account for about 50% of Saxon’s mutual fund sales, with the rest coming from discount brokerages and financial advisors. The company expects MD to continue to expand its sales force and its AUM, thereby providing growth for Saxon. In addition, CMA Holdings provides Saxon with mutual fund and trust accounting,
unitholder record-keeping and other administrative services.

On the institutional side, Saxon has a vice president of business development, who networks the asset-management consultants that serve institutional clients such as pension plans, foundations and companies offering wrap accounts. This year, $70 million of new assets have come in; the company plans to hire another person to make calls by the end of this year. As of June 30, Saxon had $398 million in pension assets, $643 million in wrap accounts and $15 million in foundation assets.

The company has a vice president for Eastern Canada based in Montreal, who has just received his licence to market to institutional and private clients in Quebec.

Private-client assets stood at $168 million as of June 30. There is one person in Toronto serving these clients and another is being recruited.

Saxon’s nine mutual funds offer what Smith believes is comprehensive asset diversification — Canadian, U.S. and global equity, Canadian balanced, Canadian small-cap, income trusts, Canadian bond and money market. (The small-cap fund is no longer open to new investors.) There are no global balanced or global bond funds, nor any plans to offer them. Clients can put together globally diversified equity portfolios with the existing funds and, Smith says, “For most investors, Canadian bonds are appropriate for the fixed-income portion.”

The equity style is value while the fixed-income takes a top-down approach, involving macroeconomic analysis, interest rate direction and sector analysis.

Because Saxon keeps to value investing, there are times when its funds don’t do as well as others. For example, it didn’t hold Nortel Networks Corp. at the height of the technology boom; as a result, Saxon lost a few mandates. But, Smith says, this kind of setback is a temporary blip in a long-term strategy. “Our investment community looks to the long term and doesn’t concern itself with short-term results that may expose investors to long-term risk,” he says.

Saxon’s investment team is small, although it has expanded in the past few years. There are five equity managers, assisted by five analysts and a securities trader, and three fixed-income managers assisted by one analyst. All portfolio managers received shares just before the IPO. There is also a stock-option plan and a restricted share unit ownership plan for all members of the investment department and senior management.

Only two portfolio managers are involved in foreign equities — Tattersall and Carmen Veloso, who joined Saxon in April 2004 from AIM Funds Management Ltd.

Saxon hired Suzanne Pennington, formerly of Sceptre Investment Counsel Ltd. and Synergy Asset Management Inc., in April of this year to work with Howson on Canadian equity. Steven Locke joined the fixed-income team in 2003.

So what is the secret of Saxon’s strong performance? It helps that its approach is buy-and-hold, but, Smith says, the answer to good performance lies in the proper use of technology, voracious reading, visits to companies, a reasonable amount of cynicism and keeping to the value approach. IE