CI may trim and expand Synergy lineup

CI Fund Managements takeover of Synergy Mutual Funds last week secured CEO and founder Joe Canavan as president of Assante in what was really a three-part deal. What else did CI get?

Little noticed, CI got another Bill to complement Legg Mason’s Bill Miller, who has beaten the S&P 500 12 years running. Skylon Capital, which CI also bought, has a sub-advisory relationship on two of its structured products with PIMCO, run by superstar bond manager Bill Gross.

Certainly, CI didn’t buy Synergy and Skylon for the assets. For one thing, CI was already the seventh-largest fund company, with assets, after its acquisition of Spectrum and Clarica Diversico last year, of $28 billion. Synergy adds another $1.4 billion, while Skylon has $665 million in labour-fund and structured-product assets.

That’s a far cry from when AGF bought Global Strategy’s $6 billion in assets, or CI itself bought BPI’s $6 billion. Still, with Assante, CI did get $7 billion in assets spread among the Artisan and Optima funds, some of which have CI as sub-advisors.

Independent mutual fund analyst Dan Hallet points out that one reason for the deal may be that all three acquisitions have had solid net sales, while CI, like most of the major mutual fund companies, has been in net redemptions for much of the year.

Tapping structured products

But with Skylon, CI also gets access to the structured-product market. "Skylon’s impressive suite of products is an excellent complement to CI’s existing retail-focused lineup," said CI president Bill Holland in a statement on Thursday, August 21. In a conference call the next day, he expanded on the decision behind the purchase.

"Clearly there’s going to be more structured products [from CI]. That is one of the biggest competitors we have right now," he said, adding, "When we looked at that, we said we can no longer just idly sit by and watch this business being done. We have the capacity and resources to enter this business. We just wanted to attach ourselves to a winner in this business and that’s Skylon."

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CI already has two structured products, notes whose return above the principal amount depends on the performance of underlying funds run by Kim Shannon and Bill Sterling.

Hallett notes that structured products have been very popular among brokers, but not planners, who are not licensed to sell them. However, many have had disappointing returns.

Wealth of managers

On the mutual fund side, CI now finds itself with a wealth of managers, even as it is still winnowing out managers inherited from its purchase of Spectrum and Clarica-Diversico.

In other fund company purchases, mutual fund companies have taken two routes. When AGF bought Global Strategy, it released all managers but two. Mackenzie Financial also removed the Maxxum managers when it was assigned the unit by Investors Group. By contrast, Templeton left Bissett as a separate unit, as did AIM with the Trimark Group.

CI has offered a third route. It has transformed itself from a company dependent on external managers, with a heavy focus on emerging markets — in the early 1990s its sub-advisors were BEA, later bought by Credit Suisse Asset Management, TCW Asia and J. Zechner Associates — to one where most of the fund management is now internal. In the process, many managers have come and gone and some have come again, such as BEA’s William Priest.

In the late 1990s, CI added external advisors, including Thomas Hansberger and Jonathan Baird. It also began bringing assets in house, first with Gerry Coleman and his Harbour funds in 1997, and then with the creation of the Signature group. By the time it bought BPI, CI had invested in partnerships with some of its managers who had worked for external advisors, first with CI Global Advisors, then, in 2000, Altrinsic Advisors, who took over many of the Hansberger funds, and then Webb Capital. BPI Global Asset Management was already owned by BPI Financial.

Funds that have been acquired since the BPI purchase have mostly either gone in-house – most of the BPI funds have since come under the Signature Group — or been assigned to an affiliated investment advisor. The funds managed by BPI Global Asset Management remained as a separate group.

Most of the Spectrum funds were merged with existing CI funds, though CI kept Shannon, through an affiliate Sionna Investment Managers to manage Canada’s oldest mutual fund, the Canadian Investment Fund. Tactonics was transferred to Webb Capital Management.

Still, CI has substantial relationships with some external advisors, including Nandu Narayanan at Trident Investment Management, who has taken over management of European, Pacific and emerging market funds, and Steinberg Priest & Sloane Capital Management to run U.S. value and small-cap funds. On the small-cap side, CI has also added John Sartz of Viking Capital and Ted Whitehead from MFC Global Investment Management. It inherited a relationship with Howson Tattersall from Spectrum.

As a result of these changes, the number of external managers from the Spectrum-Clarica deal has been whittled away, with Mulivhill, Sun Life subsidiary McLean Budden and NatCan ternminated. The role of MFS Institutional Advisors, another Sun Life subsidiary, has also been considerably reduced.

Synergy’s fate

"Synergy is an excellent fit with CI and we plan to offer a Synergy family of funds as part of our lineup," Holland said in a statement. Still, Synergy has some strong funds and some weak ones, including a number with less than $10 million in assets. In Friday’s conference call, Holland said, "I think we’ll bulk up Synergy — the funds that are doing well and selling well and are popular I think we’ll put a lot of resources behind them," adding that "the smaller ones that aren’t terribly meaningful will probably merge into bigger CI funds."

With the Synergy acquisition, however, CI is duplicating some of its current offerings. "I’m not sure it fills any niches that CI didn’t already have, though I think David Picton is really respected," notes mutual fund analyst Steve Kangas. "The value manager they don’t really need. Tom Marsico they probably don’t need." Marisco is a former Janus manager who now manages money out of Denver.

Industry observers can’t agree on what managers will remain. Conceding that there will be fund mergers, BMO Nesbitt Burns analyst Peter Loach says. "I think that Synergy brings a couple of funds to the CI stable that round out their product offering within various sectors. Primarily, I think Picton, who has the strongest Canadian Momentum fund, definitely rounds out CI. CI has a lot of mutual funds and while they are distinct by style, it’s not as pronounced as Synergy." Loach is also a big fan of Tom Marsico.

"I think it’s pretty clear that their intention is not to do much of anything for a little while," adds Hallett. "Obviously, they’re going to have to make some decisions."

The size of a fund may not be the deciding factor, because some, Hallett says, have performed very well. "The one that comes to mind is the Canadian value class, which is almost a bit of a secret because the assets are so small but the performance numbers have been pretty darn good," he explains. But that leaves overlaps: Kim Shannon and Suzanne Pennington as value managers, Derek Webb and David Picton as momentum managers, and John Hock and Thornburg Asset Management as value managers, and finally BPI and Tom Marisco as growth managers.

They’re all good managers, Hallett says. The key may be in what funds are crucial to Synergy’s own "style-pure" investment process.

"They’ve got a pretty strong team at Synergy," he notes. "Synergy, at least the in-house people, make extensive use of risk management techniques. That really drives how the portfolio is put together. Whether value, momentum or what have you, they do their bottom-up stock picking and then they use Barra’s risk management software and that drives which stocks are more heavily weighted than the others."

What a manager’s process is can be seen in a recent fund manager switch. Portfolios can differ even among managers who follow the same discipline, depending on their investment decision-making process, as investors who remained with AGF’s International Value Fund are aware. The incoming manager, Oakmark, replaced most of Brandes’s holdings, even though both are highly regarded value managers.

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The CI buying spree has certainly got people talking. What changes do you foresee within Assante and Synergy? Share your thoughts with your fellow advisors in the Talvest Town Hall on Advisor.ca.

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(08/26/03)