Sun Life Financial Inc. today announced the sale of its 37% interest in CI Financial Income Fund to Bank of Nova Scotia for $2.3 billion in cash.

“This announcement is a significant step forward and demonstrates Scotiabank’s ongoing commitment to growing our wealth management business,” said Rick Waugh, Scotiabank president and CEO, in a release.

“Through this agreement we gain a significant stake in one of Canada’s wealth management market leaders with a long track record of superior performance,” he added.

Bill Holland, CEO, CI Financial Income Fund, added, “Our partnership with Sun Life has been highly successful in delivering tremendous growth for both Sun Life and CI, and we look forward to our ongoing strong product and distribution partnership. We welcome Scotiabank as a new partner and look forward to working with them on new opportunities for growth.”

CI is Canada’s number three mutual fund company by assets under management. In September, CI reported that it led the market with $152 million in net sales.

Scotiabank’s mutual fund subsidiary, Scotia Securities Inc., has had positive net long-term sales for the past 30 months and last month led bank-owned companies in net sales, according to preliminary data from the Investment Funds Institute of Canada.

“Today’s announcement, combined with Scotiabank’s investment in DundeeWealth, further cements the bank’s strong position in the mutual fund industry,” the bank said.

Sun Life took an initial 30% stake in CI in July 2002.

“Unlocking CI’s value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives.” Donald Stewart, CEO, Sun Life Financial stated.

Sun Life Financial, which had over $400 billion of assets under management as at June 30, 2008, said it “remains committed to pursuing its growth strategy in asset management.”

Following the completion of the deal Scotiabank will have control over 37.6% of the outstanding units of CI. The transaction, which is subject to the satisfaction or waiver of customary closing conditions, including the receipt of all applicable regulatory approvals, is expected to close in the fourth quarter.

Analysts seek answers on timing of CI sale

Indicative of the fear surrounding the financial sector these days, analysts took a very skeptical stance on the conference call with Sun Life regarding today’s sale.

While the company is positioning the $2.3 billion deal as a move to bolster its war chest for possible acquisitions, analysts demanded assurances that the company didn’t do the deal to shore up its capital position. Sun Life CEO Stewart, insisted that this was not the case, that rather it is adding firepower for possible expansion opportunities both in the U.S. and around the world.

The company declined to be specific about possible acquisition opportunities, or other potential uses for its capital. However, Stewart said that it would emphasize strategic fit in any deal.

The issue for analysts appears to be the timing of the transaction. The fact that it comes at a time when markets are very worried about financial sector solvency, and skeptical of company claims, worried them. Indeed, it was announced earlier today that Hartford Financial Services needed to raise capital.

Sun Life CFO Rick McKenney stressed that the firm has a “strong” capital position, and that this deal will just bolster that position.

Also, analysts expressed concern about the fact that the sale of its stake in CI was not accompanied, or preceded by an acquisition. Stewart maintained that there are plenty of opportunities out there, but that they don’t necessarily arrive in a “neat and orderly fashion”.

However, that explanation didn’t seem to mollify analysts who maintained that a deal with Scotiabank likely wasn’t going away, so they questioned why Sun Life would do the sale before it had a purchase to announce.

IE