Toronto-based agf Management Ltd. is in the process of transforming itself into a global investment-management firm by aggressively growing its private and institutional money-management businesses.

The strategy is aimed at leveraging AGF’s investment-management expertise — it has investment-management teams in Toronto, Dublin and Singapore — and providing some insulation when weak equity markets hurt mutual fund sales.

Chairman and CEO Blake Goldring says he can see the two businesses growing to 50% of total assets under management over the next few years. Add in aggressive growth for AGF Trust and a client-centric strategy for the parent’s core mutual fund business and the company is well on its way to reaching its goal.

Its private and institutional money-management businesses have already experienced good growth. As of July 31, the two businesses accounted for 37%, or $14.3 billion, of total AUM, compared with 18%, or $5.1 billion, as of Nov. 30, 2003. The Dublin and Singapore investment-management subsidiaries, which are seeking international institutional mandates, have landed $2.6 billion in assets, mainly government pension plans, in the past 12 months. Add in the money AGF manages for various wrap programs, and institutional AUM have reached $8 billion.

AGF has already boosted its global investment expertise, adding more analysts to give it the necessary depth-of-sector coverage in the U.S. It has also increased and enhanced communication among its investment-management teams in Toronto, Dublin and Singapore and its private-client arms.

Acquisitions are a major part of the story. AGF has purchased three firms, all with private-client businesses; one, Cypress Capital Management Ltd. , also has investment-management expertise in income trusts. Goldring says AGF is particularly interested in firms with investment-management expertise but is also looking for good private-client businesses. Private clients currently account for about $6 billion of total AUM.

Most of AGF’s new private clients come from referrals from lawyers and accountants. Goldring doesn’t think building the private-client business is a potential source of conflict with the financial advisors who sell their funds and wrap products. “We respect the interests of our key constituency, the IAs,” he says.

To some extent, the firm has seen this strategy pay off. In the three years ended Nov. 30, 2005, when the firm was fighting mutual fund redemptions, the $6.8-billion increase in private and institutional AUM more than offset the $1-billion decline in mutual fund AUM over the same period.

On the mutual fund front, Goldring believes AGF is well on its way to reclaiming its position as one of the three or four top independent mutual fund companies. The company has pursued a client-centric strategy that has strengthened and deepened its relationships with advisors. It has also added to its lineup products that investors want, such as income and portfolio funds. This has stemmed the tide of redemptions that has plagued AGF in the past few years. Indeed, the firm had net sales in four of the seven months of 2006, despite weak sales industry-wide.

Goldring says AGF has completed most of its work, although it wants to continue to improve its relationships with advisors. It is also undertaking another product review to ensure that it is offering what investors want and not wasting resources on funds that aren’t in demand.

AGF is also aggressively growing AGF Trust; the trust firm had $1.7 billion in consumer mortgages and investment and RRSP loans as of May 31, vs $204 million as of Nov. 30, 2001. AGF Trust contributed $18.6 million to its parent’s $134.2 million in operating earnings from continuing operations in the six months ended May 31, the first half of fiscal 2006. AGF Trust is also introducing new products; home-equity loans are currently in the pilot phase.

Loans are available to facilitate purchases of AGF funds, but AGF Trust also provides generic or white-label loans for distribution firms. The latter is currently a small part of the business but is expected to grow. AGF Trust already has agreements to supply loans to many distribution firms.

Neither the parent company nor AGF Trust have ambitions to be a bank. Goldring sees no need to go through the complicated process of getting a bank charter. AGF Trust prefers to focus on loans, which is a very scalable business. The only requirement is capital and there are a variety of ways to raise it, including selling GICs and securitizing loans. Goldring can see AGF Trust growing to 10 times its current size in the next five to 10 years.

@page_break@In the first half of fiscal 2006, the parent company reported net income of $45.8 million after unusual or non-recurring items, up from $43.5 million in the same period the year before, but less than the $70.9 million peak in the same period four years earlier. Revenue was $343.4 million for the six months, vs $292.7 million. Cash flow after net change in non-cash working balances for the six-month period was $31 million, vs $83.2 million. There was no long-term debt as it was paid off with the proceeds from AGF’s sale in December of Unisen Holdings Inc., its third-party administrative services subsidiary.

Control of the company is in the hands of the Goldring family, which owns 80% of the 57,600 Class A voting shares. The widely held 89 million Class B non-voting shares were trading at about $20 a share in mid-August.

Goldring believes the dual share structure has served the company and the non-voting shareholders well by allowing AGF to sacrifice short-term profitability in order to invest for the long term. The result has been healthy growth in shareholder value and dividends — and a stability that he believes makes acquisition easier. “We are the first port of call for investment-counselling firms looking for succession options,” he says.

AGF has looked at the income trust model. But, says Goldring: “It doesn’t really suit us.” That’s partly because AGF is in growth mode and needs to reinvest profits to fund its strategy. But it’s also because Goldring is not entirely convinced that income trusts are a good model for the fund industry. About every seven years, equity markets correct very sharply, which could play havoc with an income trust’s distributions. Furthermore, the decision by Ontario to follow Ottawa in increasing the dividend tax credit removes a major incentive to becoming an income trust.

Here’s a look at AGF’s operations in more detail:

> Mutual Funds. Gross sales were $2.7 billion as of July 31, $1.1 billion more than for the same period a year earlier. Gross redemptions fell dramatically, to $2.7 billion from $3.9 billion; indeed, in the first six months, redemptions were at their lowest level since 2001.

AGF had net sales in February and March, at the tail end of the RRSP season. The ratio of net sales to redemptions hovered around zero in April through June, reflecting industry-wide weakness. However, July saw $53.7 million in net sales, which Goldring believes indicates an upward trend, given only a slight rebound in equity markets that month.

The turnaround was engineered by Randy Ambrosie, hired in 2004 as executive vice president of sales and marketing. He transformed the sales and marketing arm, which included many new hires, into a client-centric team that increased both the quality and frequency of its contacts with advisors. More training for the sales and marketing team was also provided. Ambrosie was promoted to president of AGF Funds Inc. on June 30.

Investment performance has remained good. Even with the struggles of the large AGF International Value Fund, whose performance sank to below average in 2004 and has remained there, 50% of long-term assets were in funds with above-average returns in 2004, 62% in 2005 and 52% in the six months ended June 30 this year.

Nevertheless, AGF has made changes in investment management, as well. It appointed portfolio manager Martin Hubbes as chief investment officer in June 2005. He replaces Bob Farquharson, who remains as a portfolio manager and AGF’s vice chairman. New portfolio managers have been hired and others have left.

New funds were also introduced to fill holes in areas in which investor demand is strong, notably income and portfolio funds. In some cases, this has involved changing the mandate of existing funds. For example, AGF hired high-profile money manager Keith Graham in 2003 to turn AGF Canadian Value Fund and AGF Canadian Tactical Asset Allocation Fund into AGF Canadian Real Value Fund ($248 million in AUM as of June 30) and Canadian Real Value Balanced Fund ($1.3 billion), respectively.

In January 2005, AGF hired Tony Genua to manage the flagship AGF American Growth Class Fund, as well as AGF Global Technology Class, AGF Special U.S. Class and AGF Global Health Sciences Class. With $533 million in AUM, American Growth was still posting below-average performance numbers as of mid-year.

Two new income funds — AGF Monthly High Income Fund and AGF Diversified Dividend Income Fund, both managed by Cypress — were introduced in January 2005 and have attracted $46 million.

In 2005, AGF also purchased $276 million in mutual fund assets from ING Investment Management Inc. , including ING Canadian Dividend Income Fund, which has been renamed AGF Dividend Income Fund but which ING continues to manage. The fund had $613 million in AUM as of June 30, vs $154 million when AGF bought it.

AGF launched portfolio funds in November 2005 under the AGF Elements brand. The funds had $705 million in AUM as of July 31. The Harmony wrap program also continues to do well, with $1.8 billion in AUM as of June 30.

So far, AGF is sticking with Chicago-based Harris Associates LP as the manager of AGF Inter-national Value Fund. Harris is a good company with a good track record and, Goldring says, “We back our managers.” AGF is, however, closely monitoring the situation. International Value is still AGF’s largest fund, with almost $4 billion in AUM.

AGF froze management expense ratios when it sold Unisen.

> Private-Client and Institutional Businesses. AGF has used acquisitions to push its private-client business to a substantial $6 billion in AUM as of May 31. Besides Cypress, AGF also bought Ottawa-based P.J. Doherty & Associates Co. Ltd. in 2004 and had picked up Montreal-based Magna Vista Investment Management in 2000. Cypress has done the best of the three by far, almost doubling AUM to $3.9 billion from $2 billion since being acquired. Doherty has added about $400 million in AUM to reach $1.2 billion, and Magna Vista is just holding its own. Growth at Magna Vista has been held back by the defection of one its founders.

AGF is in the process of hiring a new head for its private-client business. Goldring adds that there will be some exciting new initiatives in the fall.

The institutional side mainly had been providing investment management for AGF’s and other companies’ wrap programs. But in the past year, AGF has won $2.6 billion in outside mandates, mainly foreign government pension plans. The Dublin office has brought in most of this, but Singapore has also attracted some assets. Goldring says there is phenomenal potential in this area, given AGF’s investment expertise and performance and its ability to serve clients properly.

AGF also has become involved with structured products. It’s the manager for the $400-million closed-end Oil Sands Sector Fund, offered in March by Markland Street Asset Management Inc. in Toronto. Goldring says AGF expects to offer more of these types of products.

> AGF Trust started with alternative mortgages in 1987 and grew slowly until the early years of this decade, when its parent realized the trust operation had great potential to provide important services to advisors through consumer loans. As of May 31, RRSP and investment loans are larger than mortgages ($994 million, vs $705 million). With home-equity loans in the pilot phase, the company plans to launch other products in the next few years.

> British Investments. AGF holds 30% of investment-management and private-client firm NCL Smith & Williamson and wholly owns financial services software provider Investmaster Group Ltd.

Smith & Williamson, which has $16.5 billion in AUM, has hired an advisor to explore initial public offering opportunities.

AGF is considering what to do with Investmaster, which has a book value of $5 million. The holding made sense when AGF owned Unisen, Goldring says, but now there are no synergies. IE