Sometimes it takes an outsider to suggest the radical ideas that shake the status quo.
On the same day that mutual fund company AGF Management Ltd. released its latest quarterly earnings, prompting analysts to revisit their short-term target prices, fund manager Rob Wessel of Hamilton Capital went public with a bold idea: sell the whole firm. And soon.
"It is our opinion that management should take a realistic view of the firm's future prospects and sell it to maximize the remaining shareholder value," Mr. Wessel wrote in a note posted to Hamilton's website. He also recommended acting with some urgency, suggesting AGF should sell itself this year. "To do otherwise is to expose its shareholders to the risk of ongoing franchise erosion."
Hamilton has no position in AGF, so the firm doesn't benefit one way or the other. But the fund manager specializes in global financial institutions, and Mr. Wessel was once an equity research analyst on Bay Street, covering the big Big Six lenders. This perch allowed him to see the way in which banks plotted to dominate wealth management.
Canada's mutual fund market was once controlled by independent firms that were as big, if not bigger, than the banks' platforms. The most reputable names included Mackenzie Financial Corp., Michael Lee-Chin's AIC Ltd. and AGF. But something started to change at the start of this century. The banks that were once slow to build their wealth franchises suddenly saw potential.
Their growth since has been astonishing. In 2000, banks controlled 23 per cent of all Canadian long-term mutual fund assets, with independents controlling 64 per cent. By the end of 2015, the banks had more than doubled their market share to nearly 50 per cent.
The banks have an enormous advantage: distribution through their branch networks. They have also been building – and buying – fund manufacturing businesses. In many cases, they now control which funds are created and where they are sold.
The root of Mr. Wessel's recommendation is that these structural changes are too hard to overcome. "[AGF] is simply too small to offset its scale disadvantages, including a lack of significant proprietary/captive distribution," he wrote.
"At the same time, the firm is too large to generate fund outperformance sufficiently robust to offset these competitive disadvantages." A small, nimble firm with a handful of funds may attract attention for strong performance on a few portfolios. The bigger a fund company is, the more likely its average performance will resemble the industry average.
The combination of these two factors is largely why Michael Lee-Chin's new wealth management venture offers portfolios with investments in private companies and private assets. The goal is to differentiate himself from the banks and work a niche.
AGF is also enduring an onslaught of new competition. The number of exchange-traded fund providers is growing wildly – even Hamilton wants to get in on the action. At least 22 new products are expected to launch in the first quarter. At the same time, Canadian regulators are requiring better disclosure of fees – and AGF has some of the highest in the industry.
Appreciating that it's in a pickle, AGF installed a new president and chief investment officer a year and a half ago. Kevin McCreadie is hyper-focused on performance, strongly believing that solid, stable returns will help win clients back. On this front there's been progress.
Before he arrived, AGF had many funds tied to resources, and their returns capitulated when commodity prices started tanking. That's changed. In the recent quarterly report AGF reported 58 of its assets under management had returns above the industry median, up from 34 per cent in 2014.
But Mr. Wessel's overarching point is that a solid turnaround strategy may not be enough. "AGF has lots of great portfolio managers/products. However, the firm's competitive position and its lack of distribution power/scale make it extraordinarily difficult for the firm to create shareholder value."