Phillips Hager &
North Investment Manage-ment Ltd. has undergone a changing of the guard. The highly regarded Vancouver-based firm’s founding executives have now completely given way to the second generation of managers.

With 41-year-old president John Montalbano taking the top executive post early last year and several subsequent key appointments — including Hanif Mamdani as chief investment officer — PH&N is now being led by a new team of men and women who are primed to build on the firm’s solid reputation and assets under management of more than $60 billion.

But don’t expect radical changes in PH&N’s approach to investment management. For the most part, the firm is staying with the tried-and-true strategies that have worked so well for its partners and clients over the past 43 years, making it one of Canada’s largest privately owned money managers.

“The company’s first generation has handed over the reins to a second generation, but the people running the firm today have been with PH&N for some time,” Montalbano says.

Born in Yellowknife and raised in Vancouver, Montalbano graduated from the University of British Columbia with a bachelor of commerce and earned a Leslie Wong Fellowship from the UBC Portfolio Management Society.

He joined PH&N in 1987 and, over time, took on increasing leadership responsibilities in a variety of areas, including institutional special-equity and balanced accounts.

For 10 of those years, he worked shoulder to shoulder with one of the company’s founders, Art Phillips, who from 1973 to 1976 served as mayor of Vancouver and is married to the current B.C. minister of finance and former CBC chairwoman, Carole Taylor.

“Phillips taught me a lot about the firm’s culture in those years and gave me great insight into what made him so successful,” Montalbano recalls. “Now I’m in a position to share that insight.”

But the young president is quick to turn the attention elsewhere. “One thing I’m very uncomfortable with is the focus on myself,” he says. “Given my long history here and clear understanding of the PH&N culture, the partners entrusted me with this role. But any one of a number of others could have become president.”

In other words, a team approach is very important at PH&N. “As president, I’m entrusted by our board, which is elected annually by the shareholders, to execute their decisions,” he says.

That’s one reason Montalbano and the board dropped the “chief executive officer” title from his job description last year. With a strong team of middle managers put in place by Tom Bradley, who was Montalbano’s predecessor, the traditional CEO wasn’t necessary.

There are 285 employees in PH&N’s five offices in Vancouver, Victoria, Calgary, Toronto and Montreal. The firm’s ownership is shared among 44 active and 13 retired investment professionals.

However, some of the executive changes at PH&N have also been driven by a desire to manage change of the firm’s investment platform, which serves more than 480 institutional clients and more than 70,000 private-client/mutual fund investors across Canada.

“These changes were made to ensure we remain not only competitive but that we remain as the manager of choice within the industry for the next 40 years,” Montalbano says.

PH&N has built its solid reputation for value-added management slowly and steadily in both the Canadian equities and fixed-income sectors for private clients, non-profit organizations and institutional investors, the last of which are primarily pension plans.

“But one key issue we had to deal with from the get-go when I became president was that we were struggling on the foreign equities side,” Montalbano says.

That shortcoming led to two key moves. The first was establishing an affiliation with Sky Investment Counsel Inc. and its president and CEO, Jennifer Witterick, to handle PH&N’s international equity research and portfolio management.

“Sharing a desk with Art Phillips, one of the things I learned was that you can’t necessarily train great money managers. They either have it or they don’t — and Jenny is a value-based investor who clearly has it,” Montalbano says.

The second step was acquiring Toronto-based BonaVista Asset Management Ltd. in July 2005, which has allowed PH&N to restructure its U.S. equity research resources. Montalbano says BonaVista had an outstanding record in U.S. equities, driven by Carl Lytollis, who consistently outperformed the Standard & Poor’s 500 composite index and who subsequently became vice president and head of U.S. equity research at PH&N.

@page_break@“While we were studying Bona-Vista’s U.S. performance, we discovered it also had an exceptional track record in Canadian equities,” Montalbano says. “So, rather than effectively breaking up its team, we decided to bring BonaVista into PH&N as one piece.”

Montalbano adds that building PH&N’s foreign equities side would have happened even if the federal government had not changed RRSP foreign-content rules.

This empowered foreign equities side is simply another piece of heavy artillery in the PH&N arsenal that, since the company’s founding in 1964 by Phillips, Bob Hager and Rudy North, has earned it investors’ high esteem — to the point at which it does not have to advertise.

And not advertising is one way the company keeps its MERs low. Sixteen of PH&N’s 21 rated funds have fees that are 50% or lower than the category average.

“Low fees remain an important element in what we do. And there is a lot of room between ourselves and our competition in this regard,” Montalbano says.

Not paying commissions is another way to keep fees down. Montalbano also says the firm negotiates the best deals possible on administration, accounting and other services that are usually outsourced. “But low fees don’t guarantee success,” he says. “You have to have a strong value proposition and strong performance as well.”

There are a number of other components that have contributed to PH&N’s success over the years, which will continue to play a strategic role. The company has built its reputation for trust among investors and will continue to operate as an independent.

“Our strong ethics is another factor for success,” Montalbano says. “And we are known as an investment firm, not a distribution company. People see us, first and foremost, as trying to get the investment-management side of the equation correct rather than where the next sale is coming from. This makes us different.”

Also, PH&N staff are not allowed to own individual securities. Consequently, staff invest alongside their clients so there is no conflict of interest.

Now that the foreign equity side has been overhauled, the company will continue to build on its long-term record for consistent returns.

“PH&N has never been sexy, but our returns have always been very consistent,” Montalbano says. “We’re more a tortoise than a hare, and believe slow and steady wins the race. We’ve often been criticized for this. But if you take a look at the five-, seven- or 10-year track records of many of our funds, you’ll see they’re in the top 50% and sometimes in the top 25%.

“I know some investors love chasing performance,” he adds. “But we think that while part of our job is managing returns, the other part is managing risk.”

In fact, according to Morningstar Canada’s latest figures, PH&N now has the highest percentage of its funds rated at Morningstar’s five-star level than any other fund company. Five of PH&N’s funds have the top five-star rating.

These numbers have been noticed by the industry. The company has more than $1.2 billion of its AUM invested through more than 7,200 brokers and planners, for example.

“A lot of fee-based advisors use us, and that’s a part of our business we want to grow,” Montalbano says. “We are a non-typical story to take to their clients, and we provide their clients with a lot of investment stability. And our low fees and performance propositions are good ones to place before clients.”

Last year, PH&N formed a dedicated “advisors support team,” which was designed to educate, inform and assist fee-based advisors. Says Montalbano: “A big part of our business plan is to help advisors serve their clients.” IE