Own the fund company

Using a sample of three, Paul Holden, a financial-services analyst with CIBC World Markets, has proved the benefits of owning stocks of publicly listed mutual fund management companies — provided the investor bought prudently.

In a paper released Friday, Holden focused on the investment perform

ance of AGF Management Ltd., CI

Financial Corp. and IGM Financial Inc. since 2003. He studies the trio of managers because he wanted to determine the merits of owning shares of a fund manager — whose “earnings are directly driven by the equity and fixed income markets” — relative to owning a cost-effective exchange-traded fund.

In other words, his task was to assess what value a publicly traded asset manager — operating in a business characterized by high margins, large returns on equity and considerable free cash flow — brings to an investor.

It turns out, a fair bit, provided the investor bought CI Financial. “CIX has outperformed the market over the long term, demonstrative of long-term value creation,” concluded Holden. But IGM “has performed similar to the TSX across most time periods (with a small lag), but with higher variability.”

Holden says CI’s magic sauce is long-term growth given that it is the only asset manager “to have grown its assets under management (AUM) at a pace that is significantly better than the appreciation of the TSX since 2003.” For CI, AUM over the period is up by 219 per cent — more than three times the 69 per cent gain for the TSX.

Growth in earnings per share is another factor that helps explain CI’s outperformance relative to the TSX: at CI the growth rate is 16.6 per cent; at the TSX it’s 5.5 per cent. (At IGM, earnings-per-share growth is less than 5.5 per cent.)

But the real driving factor is net sales, or inflows less redemptions. (Net sales add to the base of existing assets.) Since 2008, CI has added $16 billion in net sales whereas IGM has experienced $22 billion in net redemptions. At AGF net outflows have also been $22 billion.

CI’s performance means that it’s tended to trade at a premium relative to the TSX. It’s now at a discount. Given its track record, Holden said, it is a “pretty compelling investment opportunity to us.”

Before Fortis there was IPL

It turns out that before two East Coast utilities — Fortis Inc. in late 2013 and

EmeraInc. earlier this week — raised capital via offerings of convertible debentures sold via instalments, a Calgary-based company used the same structure two decades earlier.

Accordingly Interprovincial Pipe Line System Inc. (now Enbridge

Inc.) must receive the credit for being the first to unveil such a method of financing. As with Fortis and Emera, IPL used the capital to help with the funding of an acquisition, in its case The Consumers Gas Co.

It was back in March 1994 that IPL raised $500 million. The debentures, which had a term of just under one year, were to be paid for by instalments: $375 initially and the balance of $625 by March 1, 1995.

And as with the offering by Fortis and Emera, holders in IPL’s were required to pay for the second instalment — otherwise they would not receive the convertible debenture. The debentures paid 3.75 per cent: given that dividends were not paid on the second instalment the effective yield on the first instalment was 10 per cent.