Toronto-based aim Funds Management Inc. is taking a turn sitting in the house of net redemptions. The company, which manages $45 billion in assets, has been suffering a monthly redemption streak since last August, culminating during the RRSP season in $396 million in net sell-offs in January and $289 million in February, primarily in a few big funds under the Trimark brand.

The leak has not seriously dented the company’s substantial assets, but it is nevertheless a problem that comes with the territory when you are doing business with investors who often can’t resist the urge to chase the latest hot returns.

“In light of the underperformance of a few of our major funds relative to market indices, some people are making the decision to leave,” says Patrick Farmer, AIM’s executive vice president and chief investment officer. “Humans tend to be attracted to the big numbers, and they are interested in what is done exceptionally well lately. But we believe there is risk in that kind of behaviour.”

The Canadian industry experience has shown it is not unusual for a major fund company to experience prolonged periods of slow sales, particularly when markets are cooking in a sector in which its funds lack exposure, such as income trusts, energy stocks or emerging markets. A market decline in an area that previously attracted a lot of assets can also set net redemptions in motion.

For a variety of reasons, several of the majors have endured their time in redemption purgatory, including Altamira Investment Services Inc., AIC Ltd., AGF Management Ltd. and Fidelity Investments Canada Ltd. Once negative currents set in, it can take a few years to reverse the trend or for market sentiment to shift in a favourable direction.

“The rule of thumb is redemptions last 24 months,” says Peter Loach, vice president and managing director of investment fund research with BMO Nesbitt Burns Inc. in Toronto. “The problem is often tied to an investment style cycle. Inevitably, different styles move in and out of favour. When a fund goes first-quartile, people start piling in; it’s human nature and it’s tough to fight. But, three or four years ago, nobody was buying the resources stocks that subsequently became the centre of attention and have created today’s strong returns. The retail client chases performance and usually does the wrong thing.”

It may be coincidence, but it’s not just the retail client that’s leaving the AIM Trimark fold. CI Financial Inc. pulled $368.6 million in assets sub-advised by AIM Trimark at the end of March, changing the underlying mutual funds for four Clarica Portfolio segregated funds from AIM Trimark mutual funds to funds managed within the CI fold. For example, Clarica SF Trimark Canadian Equity, which previously was invested in Trimark Canadian Fund, will now invest in CI Signature Select Canadian Fund and be renamed Clarica SF CI Canadian Signature Fund, which is managed by Eric Bushell, senior vice president, portfolio manager and chief investment officer of Signature Advisors, an arm of CI. The changes will result in a reduction in management fees for the segregated funds, and the savings are being passed on to the fundholders.

“We are continually reviewing our portfolio-management lineup, and performance is part of that review,” says Peter Anderson, president and CEO, CI Investments Inc. “This was an opportunity to provide unitholders with portfolio management that was equivalent or better, but at a lower cost. This change in management will result in savings of 40 to 50 basis points, which will be passed on to unitholders.”

Farmer says AIM Trimark’s redemptions are primarily hitting the global and Canadian equity funds that carry the Trimark name, including Trimark Fund, Trimark Select Growth, Trimark Canadian and Trimark Canadian Endeavour.

Those funds employ a strict value style of stock-picking, and much of the relative underperformance can be attributed to being out of resources stocks for the past year. With the S&P/TSX composite index heavily weighted in resources, and the $1.9-billion Trimark Canadian Endeavour Fund, for example, having a zero resources weighting since last June, that fund hasn’t been able to keep up to the market index nor peer funds that have stayed longer at the lively resources party. Trimark Canadian Endeavour Fund showed a 0.6% gain for the year ended Feb. 28, 2006, while the S&P/TSX total returns composite gained 23.1%.

@page_break@That’s not to say fund manager and AIM vice president Geoff MacDonald has never liked energy stocks. In 1999, when technology stocks were flying and Trimark-branded funds were enduring another period of underperformance and redemptions, MacDonald and other managers took advantage of resources stocks’ bargain prices. MacDonald’s fund was triple-weighted in energy stocks, with 18% of his portfolio in energy stocks compared with the benchmark’s 6%.

“The fund benefited from the energy exposure for a number of years, and it is logical to trim positions after large gains have been made,” Farmer says. “In June 2005, Geoff perceived better risk/return opportunities elsewhere for generating returns over the next three, five or 10 years. With the Trimark funds, we tend to be early in and early out. The reason is preservation of capital.”

The larger, $1.3-billion Trimark Canadian Fund SC, which shares the conservative value philosophy, posted an 8.5% gain in the year ended Feb. 28. On the international side, the $5.6-billion Trimark Select Growth Fund rose 2.5%, lagging its benchmark, the MSCI global index, which rose 6.7% in Canadian-dollar terms. Farmer says that difference alone is not responsible for all the redemptions in the global fund; it’s also a case of investors shunning international funds for the heated action in domestic funds. Trimark funds with a global mandate tend not to invest in resources companies, as they typically do not meet Trimark’s stringent value standards.

“We like to buy good businesses with the ability to generate cash flow throughout the full economic cycle and for which there are barriers to entry in the business that would protect that cash flow,” Farmer says. “Energy companies are cyclical, they are not able to grow cash flow over a full cycle and the barriers to entry are limited in the commodity space. There can be a time to buy these companies, but it’s not a place where we hunt. We like a business for which we can figure out what’s driving earnings rather than trying to forecast commodity prices.”

Farmer doesn’t dispute the rising global demand for resources commodities, as major economies such as India and China become bigger players on the world stage. But, he says, if everyone is recognizing the same trends, the price of participating companies gets bid up and the risk/reward equation is no longer favourable for investors to buy or hold the stocks.

“Future returns are based on buying at a low price. And if the price is too high, there is a negative impact on returns,” he says. “We believe we can find better opportunities elsewhere. Preserving capital means taking money off the table from time to time.”

Trimark funds also lagged the market when technology was sizzling during 1999 and 2000, and the fund company endured a few years of painful monthly redemptions. The situation turned around after the technology boom imploded, and the undervalued resources companies and other stocks that Trimark had accumulated in its portfolios rose to higher valuations in the next several years. During the Trimark funds’ last slump, the company had a narrower product lineup and was more vulnerable to its style being out of favour. Since AIM’s takeover of Trimark Financial Corp. in 2000, the AIM Trimark family includes funds under both the AIM and Trimark brand names, giving investors broader choice.

The wide choice of products, however, has not been enough to keep Trimark funds in positive sales territory. IE