A Maverick Mutual-Fund Firm Is No. 1
By ELEANOR LAISE
Dynamic Funds knows how to make a good first impression.
The Toronto-based mutual-fund family last year started offering shares of six funds to U.S. investors for the first time—and two quickly rose to the top of the charts.
Dynamic U.S. Growth Fund is the best-performing U.S. diversified stock fund this year through Dec. 29 excluding leveraged funds, according to investment-research firm Morningstar Inc. And Dynamic Gold & Precious Metals Fund is the top-performing mutual fund of any kind this year, delivering a 71% return.
.Yet the success comes at a time of upheaval. Bank of Nova Scotia announced late last month that it would acquire the 82% of Dynamic parent DundeeWealth Inc. that it doesn't already own. The deal, expected to close in January, raises questions about the future of the funds—including whether they will be able to retain their star managers.
Though the Dynamic Funds are new to the U.S., they have built a strong long-term track record in Canada, where they started in 1957 as a small Montreal investment club. DundeeWealth now has total mutual-fund assets of C$33.8 billion ($33.8 billion U.S.), almost all of which is in Dynamic funds. Combined with Scotiabank, the firm would become Canada's fifth-largest mutual-fund company, with roughly C$55 billion in mutual-fund assets.
Of 30 Dynamic funds tracked by Morningstar Canada with 10-year track records through the end of November, 20 have landed in their category's top quartile over that period. (In the U.S., two more of the original six Dynamic funds are also in the top quartile for 2010.)
With its strong independent, entrepreneurial streak, DundeeWealth doesn't seem the most obvious fit for a bank, analysts say. Ned Goodman—who controls DundeeWealth's largest shareholder, Dundee Corp., and is the father of Chief Executive David Goodman—sought to keep the firm independent through the financial crisis. The firm announced in early 2008 that it was terminating consideration of certain "unsolicited expressions of interest" from would-be suitors.
But the acquisition by Scotiabank, which had already acquired an 18% stake in 2007, now has the backing of both Goodmans. The deal "gives us an opportunity to take our small expansion plans up to a whole new level," said David Goodman, who joined the firm in 1994.
Dynamic Funds give their managers plenty of leeway to make big bets on specific stocks or sectors, and that willingness to wander far from market benchmarks has been a big contributor to their success, analysts say. "I don't really follow the index," said Noah Blackstein, manager of Dynamic U.S. Growth. The fund is up 52% this year through Wednesday, versus a roughly 17% total return for the Russell 1000 Growth Index.
.The tiny U.S. Growth fund held nearly 60% of assets in the information technology sector as of Sept. 30, nearly double the Russell 1000 Growth index's weighting, and about 9% of assets in top holding Apple Inc. Technology "is in a new secular bull market driven by a whole host of factors," including the growth of the Internet as a platform for distributing movies, music and other content, Mr. Blackstein said. The U.S. fund has accumulated about $14 million in new money during the fourth quarter, more than doubling its size, and recently purchased shares of telecom software-provider Broadsoft Inc.
Like U.S. Growth fund, the Gold & Precious Metal fund, run by Robert Cohen, holds concentrated stock positions—not the physical commodities—and owned just 38 stocks as of Sept. 30. Most are based outside the U.S., including big winners like Australia's Papillon Resources Ltd., which has gained 945% this year, and Burkina Faso-based Ampella Mining Ltd, up 427%
The question is whether Dynamic's managers will be free to express such strong convictions in the future. With Scotiabank acquiring the funds, "there's always some fear the culture could change," said Esko Mickels, who tracks the funds for Morningstar Canada. One concern is whether a bank owner might impose additional risk controls and try to rein in funds wandering far from their benchmarks, he said.
In a Nov. 22 news release, Scotiabank President and CEO Rick Waugh expressed confidence in the pairing. The bank declined to comment for this article.
What attracted Scotiabank to DundeeWealth "is the entrepreneurial culture we've fostered," the younger Mr. Goodman said. "I expect us to continue along the path we've started."
Mr. Goodman, who has agreed to stay on as head of DundeeWealth, said that manager retention shouldn't be a problem. The company will continue to offer managers "the best opportunity in the world to ply their craft," he said.
Mr. Blackstein also said he has no plans to leave. Under Scotiabank's ownership, "we'll keep doing what we're doing," he said.
Fund shareholders could benefit from the deal if Scotiabank's global reach allows Dynamic funds to gather substantial assets and reduce fund expenses. DundeeWealth is looking to work with Scotiabank "to gather assets outside Canada and bring the Dynamic brand to countries where we don't operate," Mr. Goodman said.
As for Mr. Blackstein, he is staying focused on the longer term. "I try to outperform on a rolling three- and five-year basis," he said. "I'm happy with years like this, but I doubt I'll be able to do it again."
—Ben Levisohn contributed to this article.
Write to Eleanor Laise at firstname.lastname@example.org