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This marriage of mutual fund companies should work

The takeover of an independent fund company by a big bank can make investors nervous, but this one should work, says a leading advisory.

Takeovers can be unsettling. If a store that you like is taken over by a big chain, will it change beyond recognition? Will you get the same choice? Will you get the same service? Will you even see the same people when you walk in?

Unfortunately, your chances of being disappointed are pretty high. Maybe Mr. Big doesn’t understand what made the store successful in the first place and wrecks the chemistry of the place. Or he just wanted the location and could care less about the character of the store. Or he’s just out to smother the competition.

So what’s the prospectus for a takeover that happened this month in the world of Canadian mutual funds? One of the country’s most respected independent companies was taken over by one of Canada’s biggest banks.

All of a sudden, the clients of Philips, Hager & North Investment Ltd. were looking over their shoulders at the big Royal Bank of Canada (TSX-RY) bearing down on their funds.

Fear not, says one of the leading authorities in the country, the Canadian Mutual Fund Adviser. Things should be OK with this change in ownership.

The most successful equity fund

There are several reasons why Philips Hager & North has developed a more-than-usually faithful clientele. The first, of course, is performance. This advisory has three PH&N funds on its list of the 40 Best Mutual Funds in Canada, and they’ve been there for a while.

The Philips, Hager & North Dividend Income Fund is the top performer, and not just in its own class. A recent survey identified it as the most successful equity fund in Canada over the past 20 years, with a compound annualized return of 13 per cent.

Another long-time resident of the advisory’s list is Philips Hager & North Canadian Equity Fund, whose 20-year average is a little lower than the Dividend Income Fund, but still in double digits, at just over 10 per cent. And its five-year average is an admirable 15.36 per cent.

Philips Hager & North Community Values Canadian Equity Fund doesn’t have the long pedigree of the other two. It’s only been around for five years, but its return over that time has been 14.71 per cent. It also has the distinction of being the only ethical fund on this advisory’s top 40 list.

But even these figures don’t fully account for the partiality a number of investors have for this fund company.

The team culture

The general outlook at PH&N goes a long way toward explaining the loyalty of its clients. Its has “developed a reputation for putting its clients’ interests first since its establishment in 1964,” says the advisory.

“As one of Canada’s oldest and largest independent investment management firms, PH&N has developed a team-oriented approach among its portfolio advisers that has helped create a unique culture which its clients and employees value.”

This culture includes low fees (but a high initial investment threshold, at $5,000) and some strong returns like the ones detailed above.

It also involves the absence of superstars: you won’t find a PH&N fund manager featured in the media, or anywhere else for that matter. The anonymous management team gets the billing for every one of the company’s funds.

You also won’t find TV commercials or giant billboards trumpeting the virtues of these funds. The company doesn’t pump a lot of money into advertising.

Same-old is good

“It’s understandable, then, if long-time clients are nervous about PH&N’s prospects under the new owners,” says the Canadian Mutual Fund Adviser. It cites the AIM Trimark organization as an example of what could go wrong.

Like PH&N, Trimark had its own distinct culture among portfolio advisers before AIM Funds acquired it in 2000. “Since then AIM has lost several of Trimark’s star managers, who have found it difficult to adjust to a different, more bureaucratic culture.”

Yet the advisory doesn’t think this will happen in the RBC-PH&N marriage. The senior management at PH&N has made assurances that the same portfolio advisers will remain in place, running the same funds for the same fees — and with the same investment philosophy. “What’s more,” says the advisory, “we think it’s in RBC’s best interest to ensure that these features of PH&N remain the same.” In this case, same-old is all to the good.

Increased clout

Clients will be alert to any turmoil under the new regime in the months ahead, says the advisory. That makes it helpful that PH&N shareholders receive 27 million common RBC shares, with a portion deferred until three years after the deal is closed. That should keep most of the staff in place. And most of PH&N’s senior management has signed five-year non-compete agreements.

“Another factor that bodes well for the transaction is that Royal is one of the best fund operators among the Canadian banks,” adds the advisory. “And that’s one reason why PH&N feels comfortable teaming up with it.”

In fact, the increased clout that comes from joining up with a giant is something PH&N was looking for. Increasingly, size appears to matter in the investment industry. PH&N was no mom-and-pop shop, but the extra reach, especially on a global scale, will be very helpful.

“The merger with RBC should give it expertise in areas where it has come up short in the past, particularly foreign investing,” concludes the Canadian Mutual Fund Adviser. “All told, we think the union should be a positive one for both firms.”

So the promise is that the clientele can get the same service from the same people. They may even get some great new products. Certainly change is inevitable and often good — but can too much change ruin a good thing? In the end, only the bottom line will tell.