Advisors and their clients who have remained loyal to Burlington, Ont.-based AIC Ltd. during seven long years of mutual fund redemptions have received a fresh injection of hope from Toronto-based Manulife Financial Corp.’s purchase of AIC’s retail operations. The agreement will see the insurance giant take over management of all AIC funds in Canada, although AIC will continue to act as a subadvisor on key AIC funds.

Under the Manulife umbrella, the AIC funds will be part of a bigger and more diversified fund lineup, giving clients a broader fund family to choose from, should they wish to make switches. In addition, the AIC funds will benefit from Manulife’s distribution strength, which could increase sales and end a famine that has seen net redemptions cripple AIC and contribute to its precipitous decline in assets under management to $3.8 billion — a shadow of the $15.4 billion in 2002, when the firm was in its glory days.

Hanging onto these assets will be a priority for Manulife, which has not disclosed the price it has paid to acquire AIC from its parent company, Portland Holdings Inc., although Manulife has revealed the price will be paid in Manulife shares. (Portland is privately held, and controlled by multibillionaire entrepreneur Michael Lee-Chin.)

“It’s a coin flip as to whether or not the redemptions will slow down under Manulife,” says Philip Lee, senior fund analyst with Toronto-based Morningstar Canada. “AIC’s funds, over the years, have tended to focus on a couple of narrow sectors, and when investors want to rotate out of those sectors, there has been no place to go. With Manulife, there is a broader suite of products to switch into, and a better chance of hanging on to assets.”

The AIC transaction, which is expected to close on Sept. 25, will boost Manulife’s mutual fund assets by 38% to $13.7 billion.

“Asset management is a scale game,” says John Aiken, an analyst with Dundee Securities Corp. in Toronto. “The AIC purchase creates a larger fund family at Manulife, and that results in economies of scale and reduces the pressure on fees and costs.”

If Manulife is able to increase sales in AIC funds and stem the tide of redemptions, that will be a relief to the funds’ portfolio managers, who have been forced to sell off securities in recent years.

“At AIC, the high level of redemptions has necessitated liquidation of securities in the portfolios and caused havoc on the performance side, as managers have tended to sell the more liquid names,” Aiken says. “Portfolio stability would be good for unitholders.”

This is the second time Manulife has made a significant business purchase from Lee-Chin. In 2007, Manulife bought Berkshire-TWC Financial Group Inc., a full-service dealer affiliated with AIC under the Portland umbrella. Berkshire-TWC has since been amalgamated into Manulife’s national group of companies, which includes a mutual fund dealer, an investment dealer and an insurance agency. The AIC funds purchased by Manulife will be distributed through all of these channels.

“Client benefits include a focused investment style, Manulife’s operational, investment and distribution strength, plus the ease of transferring within a broader range of funds,” says Tom Nunn, assistant vice president of communications with Manulife. “Advisors will benefit from those elements as well, plus the additional service and business-building ideas offered through our award-winning client services team and expanded wholesaling team.”

AIC Investment Services Inc. will be a subadvisor to five of AIC’s largest portfolios, including AIC Advantage and Advantage II funds, AIC American Advantage Fund, AIC Global Advantage Fund, AIC Diversified Canada Fund and AIC Canadian Focused Fund. Segregated and corporate-class versions of these funds will be included. As an investment-advisory firm, AIC will also be free to pursue non-conflicting institutional and high net-worth clients’ business, although it is expected to continue under a new name.

Altogether, AIC has sold 133 mutual funds, including multiple versions of some funds. It’s possible that some of these will be merged with Manulife funds or reoriented in some way, says Christian Charest, an associate editor with Morningstar Canada: “There are a lot of very small funds in the [AIC] lineup that have suffered from poor performance and have not been gathering assets. I’m not sure they will all continue under Manulife ownership. What usually gives a fund staying power is performance — and that has been abysmal in some [AIC] funds.”

@page_break@AIC and Manulife have not disclosed the terms of the subadvisor arrangement or its duration. Aiken says a two-year commitment is typical.

“Advisors can have confidence that Manulife will be looking at fund performance over time and will decide whether to retain AIC or not,” says fund analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “Time will tell if AIC survives as a stand-alone money-management firm or not.”

Hallett adds that AIC has suffered from several years of disappointing investment performance, exacerbated by steep losses during this past year’s market crash. Fund portfolios were heavily weighted in financial services stocks, which were hit particularly hard, although they have recovered significantly.

“There has been a high turnover,” says Hallett, “and not enough depth of money-management experience at AIC.”

AIC was launched in 1985 and was acquired by Lee-Chin in 1987. It grew rapidly as it rode the growth in the wealth-management industry. AIC focused its portfolios on publicly traded financial services firms such as banks, insurance companies and mutual fund firms.

Committed to buying superior companies and holding for the long term, AIC made some serious mistakes in the selection of specific stocks and misjudged the potential of some companies, which ultimately dragged down its portfolios. AIC also avoided hot areas that had boosted the market at various times, including income trusts, resources stocks and small-cap stocks. With a philosophy of “Buy, Hold and Prosper,” AIC stuck doggedly to its concentrated investment approach and refused to become what Lee-Chin called a broadly diversified “mutual fund supermarket.”

It’s too soon to say whether Manulife will maintain AIC’s slogan, Nunn says. It’s also premature to say what will happen to the third-party managers who now manage some AIC funds. IE