GMP Securities analyst Stephen Boland raised target prices Tuesday on several fund company stocks, saying he expects improving management fees as investors return to higher-margin stock-oriented investments.
He increased his one-year target on AGF Management Ltd. to $20 a share from $18.25; CI Financial Corp. to $27 a share from $23.50; DundeeWealth Inc. to $18.50 a share from $15 and IGM Financial Inc. to $48 from $45.
The analyst's estimates are based on a scenario of continued market stability relative to the past 18 months, and "normalizing fund sales" as long-term fund purchases are driven by large money market fund net redemptions.
"Though we expect the trend to continue over the near term, we believe that by the second half of 2010 the majority of capital moved to money market funds during the credit crisis should have migrated back to long term funds as investor appetite for risk recovers," Mr. Boland wrote in a report. "Fund managers should see improved management fee revenue as investors return to higher-margin funds as well as higher net sales."
Mr. Boland said CI Financial is his top pick "due to its ability to consistently post strong fund performance and generate net sales," and the possibility of a fund-swamp scenario with Bank of Nova Scotia. See Fund Watch blog.
Looking at 2010 as markets stabilize, he said a company's ability to generate sales will become increasingly important - as opposed to relying on market appreciation - and he prefers companies like CI and DundeeWealth which have financial planning arms to help market its funds.
AGF and IGM also have dividend yields greater than the average of Canadian life insurers and banks, he added. "Keeping share prices constant, we expect that the dividend increases by the asset managers will outpace those of the banks in the medium term as the banks continue to face uncertainty surrounding capital ratios."
Mr. Boland said he is concerned about AGF's continued net redemptions, and believes that the unexpected departure last week of fund manager Christine Hughes (see Fund Watch blog) is "more troubling as she managed the AGF Canadian Balanced Fund which we believe is AGF's third-largest fund by assets.
"We believe that her departure could further exacerbate AGF's troubles generating net sales over the short term," he said.