Clarington corp. is looking to greater penetration of the advisor network for its future growth, says Terrence Stone, chairman and founder of the Toronto-based fund company.

Clarington, parent company of mutual fund firm ClaringtonFunds Inc. , went public in March with 6.2 million common shares that netted the firm $32 million. Now Stone and his management team, president Adrian Brouwers and Sal Tino, executive vice president and CFO, are intent on building assets under management. As of August 31, Clarington had AUM of $4.3 billion. Although Stone is reluctant to set targets, he says,
“It is easier to go from $4 billion in AUM to $8 billion than from zero to $4 billion.”

Increased distribution through the advisor channel is key to growth in AUM. About 12,000 of the approximately 40,000 mutual fund-licensed advisors in Canada have sold Clarington funds and 17,000 in total have been contacted. The company has added wholesalers, up to 24 from 21 a year ago, and each wholesaler has an inside sales assistant. As Clarington’s advisor relationships increase, it will add more wholesalers in order to “maintain [its] high level of services,” says Stone. “This is a relationship business.” Clarington has the capacity for a “much larger asset base without significant additional staffing.”

More assets should boost the company’s bottom line. In the nine months ended June 30, 2005, revenue, excluding distribution fees, was $65.8 million, vs $56.8 million for the same period a year earlier. But the nine-month period ended in June 2005 also saw a $3.8 million net loss, vs earnings of $1.7 million in the same period a year before.

The reason for the loss was a change in the way Clarington finances its deferred sales commissions liability. Previously, it had outsourced the liability to a third party that collected the redemption fees as well as a percentage of the funds’ net asset value. As of Jan. 1, Clarington converted $80.8-million of that liability to debt, which will be amortized over three years, says Tino. Then, in March, $30 million of the proceeds of its IPO was applied to the debt. As of June 30, Clarington had debt related to DSCs of $58.6 million, which includes new DSCs.

Clarington believes an adjusted EBITDA figure, which excludes distribution fees, provides a more appropriate measure of how the company is doing. That figure was $26.5 million in the nine-month period ended in June 2005 vs $24.8 million for the same period a year earlier

However, the share price has sunk — to around $8 from the $13 offering price. “We believe the stock price is undervalued relative to our competitors,” says Tino. To help rectify this, the company has filed a normal course issuer bid to purchase up to 5.2% — or 690,000 shares — of its 13.2 million shares outstanding over the next year.

Of the 6.2 million shares offered in the IPO, 2.7 million were from treasury and 3.5 million was a secondary offering by 57 employees, officers and directors. Of the shares outstanding, Stone holds 11.5%, Tino 2.9% and Brouwers 2.7%.

Clarington prides itself on its ability to pick excellent investment managers and find innovative products.

It pioneered monthly cash distribution funds, launching Canadian Income Fund in 1996, Diversified Income Fund in 2003 and U.S. Dividend Fund in 2004.

Its latest product line is Target Click mutual funds, which will give investors the highest monthend NAV achieved or the opening NAV, whatever is greater, on maturity. The “click” feature means the maturity guarantee is reset each month if the monthend NAV is a new high.

The Target Click funds are global asset-allocation, open-ended funds with maturities of five, 10, 15 and 20 years. The maturity guarantee makes them similar to segregated funds, but there is no death benefit and so they are not insurance products. The funds are “life cycle” funds. That is, unitholders pick a maturity date that is close to a key event in their lives, such as retirement or children entering university. However, they can be an appropriate component of any portfolio.

The Target Click funds are managed by ABN AMRO Asset Management Canada Ltd., whose parent, Netherlands-based ABN AMRO Bank NV, guarantees payment at maturity. The equity portion of assets, which provides growth in the early years,
declines as the maturity date draws nearer, thereby providing the stability needed to meet the guarantee in the later years. A benefit of the shift to more fixed-income, which is less expensive to manage, is that the management expense ratio comes down over time. For example, the MER in the 20-year fund is 2.85% in the first five years, 2.60% in Years 6 to 10, 2.55% in Years 11 to 15, 1.90% in Years 16 to 19 and 1.25% in the last year.

@page_break@MERs are above average, says Eric Frape, vice president of product development. That reflects both the smaller average size of the funds and the size of the firm. There are economies of scale that the company isn’t big enough yet to capture. MERs have come down over the years, though, and will be reduced further whenever possible.

Clarington also has two closed-end funds that trade on the Toronto Stock Exchange.
This is an area that Clarington plans to expand. “We intend to be a serious player,” says Stone.

Clarington is always on the lookout for new ideas. As an outsourcer of investment management, it has the advantage of being in contact with many managers around the world, and hears lots of ideas. “A small company should be able to react faster than a large one,” says Stone. “There’s less bureaucracy and we can make a decision very quickly when opportunities arise.”

The company’s 19 investment mandates include 14 Canadian, two U.S. and three global funds. About 67% of AUM is with Halifax-based Seamark Asset Management Ltd. , one of Clarington’s original money managers. With a “growth at a reasonable price” style, Seamark manages eight mandates — seven Canadian and one global.
Seamark’s performance has been weak in the past couple of years but Clarington views this as a temporary situation.

Eight other investment managers are used, including KBSH Capital Management Inc. in Toronto (14.6% of AUM and three mandates), OppenheimerFunds Inc. in New York (6.4% and one mandate), Calgary-based QVGD Investors Inc. (5.8% and two mandates) and Navellier & Associates Inc. in Reno, Nev. (1.4% and one mandate).

Clarington has no preferences in investment style. “Clients and advisors determine what we sell,” says Stone. The company offers a variety of styles but these are not
comprehensive.

Clarington thinks style diversification is important but doesn’t expect to be the only fund family investors hold. Thus, it will only add new styles if it finds an investment manager whose long-term record impresses.

And Clarington is not mesmerized by short-term returns; it focuses on long-term results.
Of the nine mandates with five-year histories — excluding money market funds — seven have been in the first or second quartile at least 90% of the time on a five-year rolling-return basis as of June 30. The exceptions are Canadian Dividend Fund, managed by Seamark, and Navellier U.S. All-Cap Fund.

Clarington expects more volatility in shorter-term returns. “On one-year returns, we are not concerned with only 50% in the first or second quartile because it implies that we’ve developed a diversified product line,” says Stone. “Different managers perform differently during different periods of the market cycle.”

However, mainly because of Seamark’s weak performance recently, only four of Clarington’s 15 investment mandates, excluding short-term and money market funds, had above-average short-term performance for the year ended Aug. 31.

“We are disappointed with Seamark’s recent performance. But we believe this is mainly a result of [its] approach being out of sync with the market,” says Stone. “We are optimistic this will change and that Seamark’s performance will revert to its longer-term trend of [being in the] first or second quartile. However, on any of our funds, we would take action and replace a manager if [its] longer-term results showed persistent underperformance.”

Navelier’s performance has turned around. Its average annual three-year performance is in the first quartile. The five-year period’s results are still hindered by weak performance in 2000 and 2001, due to the tech sector’s collapse. Navelier has a very aggressive, growth-oriented investment style. IE