Scotiabank scores CI stake from Sun Life

By Mark Noble | October 6, 2008 | Last updated on October 6, 2008
1 min read

In one quick move, the entire wealth management industry in Canada has been transformed. Sun Life has agreed to sell its 37% stake in CI Financial Income Fund to Scotiabank.

The sale has made Scotiabank a big player in wealth management overnight and presumably gives CI the distribution network it has so long desired to compete against bank-owned fund giants RBC and TD.

Scotiabank will buy the units of CI for $22.00 a share, a 32% premium over its last closing share price. All told, the deal will net Sun Life about $2.3 billion.

The synergies between CI and Scotiabank are apparent. Scotiabank has flagged wealth management as one of its top growth areas, having lagged the other big banks in the business for a long time. It has lacked the strong fund management roster of the other banks.

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  • Peter Loach, an independent mutual fund analyst, notes that Scotiabank immediately remedies this with its acquisition of the CI stake. Loach says while Scotia has made improvements to its fund lineup, including luring a trio of star managers from RBC — John Varao, Shane Jones and John Kellett — in April of 2007 the more than 800 fund offerings from CI are better in both quality and scope.

    While the purchase is not an outright takeover of the firm, the assumption is that the CI family of funds will play a prominent role on Scotia advisors’ platform. In doing so, Loach says, this arguably solves CI’s biggest problem as the country’s largest independent mutual fund manufacturer — distribution.

    Loach says CI is one of the two best fund companies in Canada in terms of the quality of managers and breadth of product, the other being Dynamic. Where they are beaten out by larger competitors is through the sheer number of advisors that the banks and Investors Group enjoy.

    Indeed, in August, there were rumours that it was CI that was looking to purchase Scotia’s mutual fund business in exchange for CI units. This deal fell through. Ironically, Sun Life’s disapproval was a major hurdle.

    “Distribution is the name of the game,” Loach says. “CI needs the distribution.”

    Interestingly, with the deal, Scotiabank has the ability to be a consolidator of both CI and Dynamic if the right amount of stock ever goes up for sale. Like its deal to purchase an 18% stake in Dynamic’s parent company, DundeeWealth, Scotiabank has made arrangements to acquire additional securities of CI if they should come available and if Scotia wishes to buy them.

    If this were to happen, Scotiabank would vault from being a domestic underachiever in wealth management to arguably the most prolific fund provider in Canada.

    “This announcement is a significant step forward and demonstrates Scotiabank’s ongoing commitment to growing our wealth management business,” says Rick Waugh, Scotiabank’s president and CEO. “We have seen solid growth in our wealth management products and services. Through this agreement, we gain a significant stake in one of Canada’s wealth management market leaders with a long track record of superior performance.”

    What is a little more perplexing is why Sun Life decided to sell. CI has been a very valuable asset for Sun Life, serving as a de facto fund subsidiary that partners up with the insurer on its lucrative SunWise lineup of segregated funds — which includes the wildly popular guaranteed minimum withdrawal product SunWise Elite Plus.

    At first blush, analysts thought maybe Sun Life’s balance sheet was in trouble, but the company’s CEO, Donald A. Stewart, dismissed down the suggestion, saying that the proceeds from the CI sale will most likely be used to go bargain hunting in the distressed financial securities sector. The company would not state what it was looking to bid on.

    “Sun Life is well positioned to take advantage of unprecedented opportunities existing within the global financial services sector today. Unlocking CI’s value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives,” he says.

    The loss of CI does not mean Sun Life is out of the asset management business, though. The insurer says it still remains fully committed to growth in its asset management business through Sun Life Global Investments.

    Sun Life is also insistent that its partnership role with CI on the segregated funds will continue.

    “We continue to have a strong product and distribution partnership with CI,” says Steve Kee, assistant vice-president of communications for Sun Life.

    Even though it may not be exactly the deal that was rumoured back in August, CI Financial’s president and CEO, William Holland, is nonetheless welcoming his company’s new single largest stakeholder.

    “This announcement is good news for both Scotiabank and CI Financial and is a strong statement of confidence in our firm,” he says. “CI Financial has enjoyed a long relationship with Scotiabank, and this investment reflects Scotiabank’s confidence in both our business today and our long-term potential.”

    In fact, Holland said in an interview with, that CI has already negotiated a deal, to offer “white label” banking services from Scotiabank to the advisor firms it owns such as Assante.

    When asked about whether he’s concerned that Assante advisors may have issues being associated with a Big Five bank, Holland pointed to these white label services as a reason why Assante advisors are likely to be quite positive about the deal.

    “It should help align us with some very good banking products that are needed by high-end financial services representative like the ones who work with Assante,” he says.

    As for the other distribution network — Scotia advisors — Holland says there are no plans currently in place for partnerships or exclusive arrangements.

    “We have no idea what the relationship with the bank will be in terms of distribution. I have not had a chance to talk to them,” he says.

    Holland says company’s in today’s market needs to create as large and diversified a distribution network as you can.

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    Mark Noble