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Bill Holland, Chairman of the Board of CI Financial, poses for a picture their offices, in Toronto, Tuesday July 23, 2019.Mark Blinch/The Globe and Mail

The call was controversial, and she knew it. Presenting at an investment conference last fall attended by some of the biggest names in North American finance, fund manager Kim Shannon devoted her 20-minute presentation to praising, of all companies, CI Financial Corp.

In an earlier time, Ms. Shannon had been one of CI’s stars: She was crowned Canadian fund manager of the year in 2005 for her work on the CI Canadian Investment Fund. But she had a very public falling out with CI’s top brass after she moved to a rival firm; by the time she spoke on stage at Arcadian Court in Toronto last fall, the frosty relationship had lasted for more than a decade.

Yet, Ms. Shannon is a bargain hunter who typically lines her portfolios with the shares of companies that many other investors hate (and are therefore cheap). That describes CI, the largest Canadian mutual-fund company not owned by a big bank. Since May, 2014, CI’s stock has plummeted 45 per cent, and after some share buybacks, what was once a $10-billion company now has a stock-market value of $4.8-billion.

Not long ago, mutual funds were the way millions of middle-class investors got access to professional stock selection – and CI dominated. For years, it was considered the best managed and fastest moving of the large Canadian fund companies.

But the traditional fund business, which typically charges 2 per cent a year in fees on equity portfolios, is now in a fight for relevance. Low-cost exchange-traded funds (ETFs) have developed a robust following. Robo-advisers have made some clients question the value of human advice. This new competition and pressure from regulators have forced money managers to cut fees to try to prevent investors from moving their money.

In Canada, there is an extra degree of difficulty. Independent fund managers such as CI, AGF Management Ltd. and Mackenzie Financial (which is a unit of IGM Financial Corp.) used to rule, but the Big Six banks have been elbowing their way deep into the business of wealth management through acquisitions and by using their branches to hawk their own funds.

Despite those factors, Ms. Shannon sees opportunity in CI: a company with strong cash flow, manageable debt and a large customer base, and $130-billion in assets under management. “They were, and still are, an incredible sales machine,” she said in an interview last month.

The question is whether that’s enough anymore.

CI has fallen into net redemptions, which means investors are pulling more money from its funds each quarter than they are putting in. In the fund industry, once that cycle starts, it is tough to break.

CI’s top executives say they are victims of an industry revolution beyond their control. The man who has been the face of the company for decades, chairman Bill Holland, says investor perceptions of mutual fund companies have changed radically. “It’s still an unbelievable business. But the people who look at it, hate it. They do.”

Some observers beyond the company’s inner circle tell a different tale, suggesting CI has lacked a clear strategy. This was the one independent fund company with the scale to invest for the future and the heft to take on the banks, but now it’s struggling. “We’ve been fairly articulate in what we’re trying to accomplish here,” CI chief executive Peter Anderson says. And yet, he knows the message isn’t getting through to investors. “It’s clear people aren’t hearing it.”

Mr. Holland was the brains behind CI’s once-explosive growth, and he is so revered internally that they call him ‘Chief.’ At 60 years old, he is still intense and brash, his mind darting to five different places when answering a question. He’s also the rare example of an executive who can’t help but say how he really feels.

Barely a minute into an interview with Mr. Holland and Mr. Anderson, the Chief is already exasperated. CI had $656-million in free cash flow last year, but the market treats the company like it’s radioactive. The stock trades at a mere 8.5 times earnings. “We make more than the weed industry,” Mr. Holland says, yet cannabis companies such as Cronos Group Inc. with no profits have higher market capitalizations.

It’s as if everyone’s forgotten who’s running the show, and what they have accomplished.

Formerly known as Universal Savings, and later Canadian International, the company built an early reputation for offering investors exposure to foreign markets, at a time when many Canadian investors held only domestic funds and assets. Mr. Holland joined in 1989, at the beginning of what was a golden decade for the industry.

CI had a certain edge: Its sales and marketing arm, run by Mr. Holland, was unparalleled. It was a time when the rules were looser, which meant CI’s wholesalers – the employees who sold its funds to investment advisers – could entice clients with lavish gifts and getaways. “All you talked about was, ‘How do I qualify for the trip?’ ” Mr. Holland says of the mindset many investment advisers had in that day. CI would offer all-expenses paid excursions to Florida and guests would be put up in a spot known as the CI Safehouse. Like Vegas, what happened there, stayed there.

CI also displayed a knack for finding, and marketing, star fund managers. Retail investors trusted big names with good track records, and CI was happy to promote them – people such as Ms. Shannon and Gerry Coleman, who managed the CI Harbour Fund.

Once Mr. Holland became CEO in 1999, he became bent on bulking up through deals. His playbook was to acquire rivals for their assets, then slash the duplicated costs. A year into his tenure, he launched a gutsy, but ultimately unsuccessful, hostile takeover bid for archrival Mackenzie, hoping to make CI the largest fund company in Canada.

Mr. Holland never quite reeled in a trophy asset, but a series of sizable acquisitions included purchasing Sun Life Financial’s mutual fund assets – the insurer became CI’s largest shareholder in return – and the Canadian unit of Assante Corp. The latter caused a stir because Assante ran its own network of financial advisers – meaning that CI was putting itself in competition with the people at other firms who bought its funds.

Yet, it worked. “Without a doubt, the best decision we made years ago was to buy this business,” Mr. Anderson says. By 2006, on the eve of the global financial crisis, CI was the largest of all independents and had amassed $55-billion in assets under management – second only to Royal Bank of Canada.

Like everyone else, CI suffered through the Great Recession. But its pain was short-lived, while many rival independent firms never recovered. Michael Lee-Chin, a boy wonder from the 1990s bull market, sold his company, AIC Ltd., to Manulife Financial Corp. for a small fraction of its former value in 2009. AGF and Mackenzie both fell into unstoppable spirals of net redemptions.

What saved CI? The company always kept a diverse fund lineup, with a healthy share of conservatively managed value funds. In 2013, after the commodity supercycle had crashed, CI had more top-rated funds than anyone else in the Canadian mutual fund industry.

CI’s management also preached fiscal prudence. Mr. Holland handed the CEO role to one of his deputies, Steve MacPhail, in 2010, and the new boss was obsessed with expenses. (A friend once described Mr. MacPhail as “the last guy to take Uber if there’s surge pricing.”) That discipline, coupled with strong returns, sent CI’s shares soaring to a record high of $36.79 in May, 2014.

One week later, CI got a gut punch. Bank of Nova Scotia had been its largest shareholder since 2008, after it acquired Sun Life’s 37-per-cent stake, and many people assumed Scotiabank would buy the rest of the company some day. But the opposite happened. A new CEO, Brian Porter, decided to unload the stake by selling the shares to public investors. Scotiabank also pulled $3-billion worth of client money it had placed in CI funds.

But it wasn’t until 2016 when things really started to go badly. A tax change by the Trudeau government became a big problem for CI.

Historically, investors were allowed to move money between investments known as “corporate class funds” without incurring taxable gains. Ottawa came to see this as a tax loophole. Its policy change, buried deep within the 2016 federal budget, hit roughly $120-billion of industry assets under management (AUM), or 10 per cent of all mutual-fund assets in Canada. CI arguably got the worst of it, because corporate class funds made up about 50 per cent of its retail assets, according to Mr. Holland. Wealthier clients in its Assante and Stonegate channels used these funds to minimize taxes once their contributions to registered investment portfolios had been maxed out.

At the time, Mr. Anderson was only a few weeks into his tenure as CEO, having taken over from Mr. MacPhail. The day the changes were unveiled, he was mid-air on flight. “It was the first time I ever used WiFi on a plane,” he says. Reading through the budget, colourful language erupted from his mouth.

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Peter Anderson, Chief Executive Officer of CI Financial, poses for a picture in their offices in Toronto, Tuesday July 2, 2019.Mark Blinch/The Globe and Mail

It was around this time that Mr. Holland started to see the revolution that was beginning to overtake the wealth-management industry.

Bank-owned brokerage firms began firing investment advisers and pushing some middle-class investors to their bank branches instead – where, conveniently, the banks market their own funds. Robo-advisory firms such as Wealthsimple Inc. and Nest Wealth Asset Management Inc. were also developing a following, particularly with millennials.

ETFs were also catching on in Canada. Mutual-fund companies held their own for many years; people are creatures of habit, and they had been trained to buy mutual funds for three decades. Even today, the Canadian ETF industry has 35 providers managing approximately $178.6-billion in assets, but that’s still only a sliver of the $1.47-trillion invested in mutual funds domestically.

But that gap is shrinking. In 2018, ETFs in Canada had $19.8-billion in net sales, while mutual funds saw $2.7-billion in net outflows, according to Strategic Insight. Halfway through 2019, ETFs are on pace to outsell mutual funds again.

“The real change, I would say, has been in the last year,” Mr. Holland says. “The [mutual-fund] industry is in net redemptions most months.”

What’s changed? Crucially, the cost difference is glaring. ETF behemoths such as BlackRock Inc. and Vanguard Group Inc. spread their internal costs over their trillions in assets. In turn, they can slash fund fees to a tenth of a percentage point, just 0.1 per cent annually, or less. Canadian funds, meanwhile, have been slow to evolve. In mid-2018, the average five-year decline in management expense ratios (MERs) for Canada’s 100 largest mutual funds was only 0.05 of a percentage point. The most expensive version of CI’s second-largest fund, the Signature Income and Growth Fund, costs investors 2.41 per cent annually.

The competition is breeding all sorts of experimentation. A year ago, global mutual-fund giant Fidelity Investments, which has a large Canadian arm, launched the world’s first ever no-fee index fund. Banks are also getting into ETFs more aggressively. In January, Royal Bank of Canada and BlackRock joined forces to sell them, creating a partnership between Canada’s largest bank and the world’s largest asset-management firm. The two are developing and marketing ETFs under the brand RBC iShares.

Amid all this change, the knock on CI is that it was too slow to evolve. On some level, it is understandable: CI kept pulling in money for many years while rival independents wobbled. “They didn’t have to fix what wasn’t broken," says Scott Chan, a financial-services analyst at Canaccord Genuity.

Some critics say it’s more complicated than that. One theory is that management always expected to sell the company to Scotiabank, and when that possibility died, they had to scramble. Others blame Mr. MacPhail, arguing he was so focused on expenses that he forgot to invest for the future.

Mr. Anderson isn’t having any of it. CI, he points out, was one of the first big money managers to acquire an ETF provider, scooping up First Asset Capital Corp. in 2015 when it had $3-billion in assets under management. He also says CI was one of the first to launch “liquid alternatives" funds, which provide downside protection in falling markets by offering hedge fund or private-equity strategies within a mutual-fund account.

Mr. Anderson does concede that CI missed the boat on funds for alternative investments, a widely popular asset class that allows high-net-worth investors to buy slices of infrastructure and real estate projects.

Other say there were problems with how CI grew. As the company did acquisition after acquisition, including the 2017 purchase of Sentry Investments for $807-million, its fund lineup became unwieldy. “When you do that,” says Dan Hallett, an independent analyst who’s covered the industry for decades, “what you really get at a high level is poor performance, because you can’t possibly have 150 outstanding, top notch products.” In turn, investors began pulling their money – hence the net redemptions.

The most stinging critique of CI today is that management has not articulated a clear and coherent strategy for the way forward. “I hear it every day,“ Mr. Holland says.

That doesn’t mean he agrees. He and Mr. Anderson say their vision is to transform CI from a fund company to a wealth manager – one with everything from a fund manufacturing arm that creates new products to financial advisers to a digital footprint. In other words, to make CI look more like a bank.

Investors increasingly reward money mangers that own their distribution channels, so CI wants to double its assets in its Assante and Stonegate networks. (At the moment, 830 Assante advisers manage $45-billion in client assets.) “To get to that size, we’re probably going to have to continue to look for potential acquisitions,” Mr. Anderson says.

CI is also bulking up its digital operations, having recently acquired a majority stake in robo-adviser Wealthbar Financial Services Inc. It also purchased BBS Securities Inc., which specializes in digital back-office functions to help streamline operations. In June CI named Darie Urbanky, who has a background in tech and operations, as its new president, signalling the importance of these businesses going forward.

The wild card is whether CI will be any good at any of this. This is a company best known for being a serial acquirer and for its sales team. In Canada, there isn’t much left to purchase, and the sales culture has changed, with regulators cracking down on anything resembling bribes to advisers. “When you think about the old, hard-selling days – they’re just gone,” Mr. Holland says. “We couldn’t even take people to the basketball games in the playoffs," he adds of the Raptors’ run this spring. Sports tickets are against the rules.

It also isn’t clear who will be in charge of the next chapter. In April, CI announced that Mr. Anderson will retire next year. “The key talking point on the name right now is the search for a new CEO,” says CIBC World Markets analyst Paul Holden. “Until then, it feels like we are in a state of limbo.”

Because there is so much uncertainty, it has to be asked: Why not sell CI to a larger financial institution, namely a bank or an insurer? “Gaining access to distribution, whether domestically or internationally, just makes a lot of sense for their businesses,” Mr. Holden says.

Of course, that would require a buyer, and the big unknown is who would want a fund company facing net redemptions. But on Bay Street the best two guesses at potential acquirers, or partners, are Bank of Nova Scotia and Sun Life, largely because of the historical relationships.

Of these, Scotiabank is the tougher sell, at least right now. The bank recently purchased three separate companies in the span of one year, for a total cost of nearly $7-billion, and CEO Mr. Porter has said he is focused on integrating these businesses before splurging again.

Sun Life is a little more realistic. The life-insurance business is struggling to adapt in the digital age, so the company is already building out a wealth-management business to offset slower growth. But the major wrinkle here is that CI is a big company to swallow, with a market value of about $5-billion. Any acquirer would have to pay a premium over and above that.

Asked about CI’s relationship with Sun Life, Mr. Holland and Mr. Anderson start gushing with praise for the insurer. There’s no formal relationship right now, but CI’s open to ideas. “Who knows what the relationship between CI and Sun Life could be, will be, should be,” Mr. Holland says. They sound hopeful – or at least wishful – that something, even just a distribution partnership, could come together.

The only option Mr. Holland openly shoots down is a private-equity buyout. “We’re always getting looked at,” he acknowledges. “We hit every value screen.” But he says it’s hard to make the math work. Mr. Holland thinks CI would have to be acquired for $31 a share – “and then they have to lever it,” he says, meaning adding a lot of debt.

For now, the far better option in Mr. Holland’s mind is to buy back CI’s stock at cut-rate prices. The company slashed its dividend a year ago to devote more cash to stock repurchases, all in the name of boosting earnings per share. “We’re very rapidly privatizing the company,” he says.

It is the ultimate value-investing move, and it’s partly what attracted Ms. Shannon to the stock. “They had such a valid reason for cutting the dividend,“ she explains. The problem is, there aren’t many people who feel the same – at least not yet. “Historically, we’ve trained investors that when you’ve cut your dividend, it usually means you’re in financial difficulty,” she says.

CI is not. This is the company that emerged stronger when previous frothy plays, such as the dot-com bubble, died off. Who says ETFs and robo-advisers really won’t struggle in the long run? They haven’t even been recession-tested yet. “The death of the mutual-fund business is very overrated,” Mr. Holland says.

The risk in thinking this way is that what’s transpiring now is likely more than a correction – it is a revolution, and retail investors are forming new patterns of behaviour. Cable companies once prayed that cord-cutters would come back, too.

CI could start aggressively cutting its fund fees, but then it is competing against global giants – one of which has teamed up with Canada’s biggest bank. CI’s best hope, then, may be to give investors reason to seek out its funds again – that is, to deliver good returns. Stellar performance could turn the tide on net redemptions, and stemming these could change the market narrative.

The trouble with this plan is that isn’t so easy to do – at least not in these conditions. This bull market has lasted a decade, and it’s been next to impossible for money managers to beat broad indexes over a long time period. Even Warren Buffett, one of the most brilliant investors of a generation, has struggled in his equity portfolios lately to beat index funds that cost 0.1 per cent a year, or less.

The entire mutual-fund industry suffers from a perception problem. Ms. Shannon is a member of the U.S. Institute, a think tank for asset managers, and there’s a consensus that incumbents haven’t done enough to market themselves. “We’ve talked about how, collectively, we haven’t come together to defend active management in any cohesive way," she says.

But Mr. Holland can’t help but take it personally. This was his baby, so the cold shoulder from investors hurts. “Nobody cares about the asset-management business," he says.

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