The crown jewel in the $2.3-billion deal through which Toronto-based Bank of Nova Scotia will acquire the remaining chunk of DundeeWealth Inc., also of Toronto, that it did not already own is Dynamic Mutual Funds Ltd.’s fast-growing family of top-performing mutual funds. But key to the deal’s success will be retaining and motivating the talented fund managers responsible for the Dynamic funds’ impressive performance and popularity.

“The deal is a strategic acquisition for Scotiabank, as it increases its scale and provides global products for its global distribution platform,” says Esko Mickels, a fund analyst with Morningstar Canada in Toronto. “However, differing product lines, distribution channels, cultures and management styles could easily complement one another or cause trouble.”

Combining Dynamic’s $30.7 billion in assets under management with Scotia Asset Management LP’s $24.6 million in AUM creates the fifth-largest mutual fund entity in Canada, and third-largest among the banks, with a market share of about 8%. And with robust net year-to-date sales of $3.2 billion, Dynamic leads the mutual fund sector.

“Dynamic funds have experienced more than two years of consecutive monthly net sales,” says Dan Hallett, vice president and director of asset management with Oakville, Ont.-based HighView Financial Group. “That’s a remarkable achievement, considering the difficulties in financial markets during the past two years and the broader trend of slowing sales.”

The question is whether the DundeeWealth culture, which fosters independence and entrepreneurialism, can continue to thrive under bank ownership. Although Scotiabank has stated its intention to keep the two firms separate, the bank traditionally has had a conservative outlook on fund management. DundeeWealth, on the other hand, has a team of star managers, including David Taylor, Chuk Wong, Oscar Belaiche and Noah Blackstein, as well as chief investment officer Rohit Sehgal, who have had the leeway to deviate from benchmarks and make aggressive calls, and that has paid off in superior fund performance and strong sales.

“In asset management, the biggest asset is always the people,” says Peter Routledge, analyst with National Bank Financial Ltd. in Toronto. “You take a big risk if you tarnish or weaken this asset by upsetting the corporate culture.”

According to Morningstar Canada, 55% of Dynamic’s AUM has been in the top quartile year-to-date — an outstanding achievement. Although broad-based funds in the Dynamic lineup have had impressive performance, Dynamic’s fund managers also have shown superior ability in specialized niches such as small-caps, precious metals, resources, high-yield and real estate. It remains to be seen whether those managers can continue to demonstrate long-term, index-beating performance on a larger base of AUM that may be created through Scotiabank’s broader distribution.@page_break@DundeeWealth also offers other investment products, such as flow-through shares, private pools, hedge funds, portfolio solutions and closed-end funds. On some products, such as hedge funds, fund managers have been rewarded with performance-based compensation in addition to flat management fees.

“There is a strong entrepreneurial spirit and sense of independence among the Dynamic fund managers,” says Mickels. “DundeeWealth has shied away from putting a bureaucracy in place. So far, no details have been made available on any lockup agreements with managers or non-compete clauses. But if you lose the managers, you lose the reason for the strong outperformance.”

Adds Routledge: “A good way to get people to leave is to change the way in which they’re paid. Competing money-management firms are likely going after DundeeWealth managers already, looking to take advantage of any reluctance to work for a bank.”

Barbara Mason, executive vice president of wealth management for Scotiabank, says that as far as manager compensation is concerned, Scotiabank “has no plans to tamper with a good thing.”

That means portfolio managers will continue to report to David Goodman, president and CEO of DundeeWealth, who, in turn, will now report to Chris Hodgson, group head, global wealth management, at Scotiabank. Ned Good-man, DundeeWealth’s founder and major shareholder and David’s father, will continue as non-executive chairman of DundeeWealth.

Ned Goodman — who once called the Canadian banking industry “an oligopoly, cartel and monopoly” — will remain the subadvisor on Dynamic Focus+ Resource Fund.

David Goodman has expressed his positive view of the new deal in an internal memo to DundeeWealth employees, saying he feels the firm’s future growth prospects were better by partnering with a major Canadian chartered bank and by taking advantage of the its huge distribution platform. DundeeWealth is also facing cost pressures, which now can be eased by economies of scale.

Says the memo: “It is a decision that recognizes the very real industry challenges that lie ahead. The Canadian investment-management landscape is narrowing, increasingly dominated by our six largest banks and at least three insurance companies. The independent firms are going to have a more and more difficult time growing their businesses… We have been an enormous winner, but none of us can deny the significant reduction in business risk that’s offered through access to Scotiabank’s extensive domestic and international distribution system.” IE