The Nortel Rule for funds

“If you’re a Canadian equity
manager, every dollar that Nortel
gains takes another little piece
out of your heart. And yesterday,
Nortel gained $3.55 to close at
$114.35. For fund managers, the
problem is provincial securities
regulations that cap holdings in
any one stock at 10 per cent of
assets, based on the purchase price
of the shares. This is a sensible
rule, meant to ensure that funds
diversify their holdings, rather
than betting the house on one or
two stocks.

“But the cap means no fund
manager can match the TSE 300’s
weighting in Nortel. So at times
like this, when Nortel is flying,
the majority of fund managers are
going to underperform both the
benchmark and rivals who run
passive funds that simply replicate
the performance of the index.

“Through the end of November,
the median Canadian equity fund was
up 10.9 per cent, well below the
17.5 per cent return on the TSE
300. Among the 20 largest Canadian
equity funds, only two have beaten
the TSE 300 so far this year —
Altamira Equity and
Investor’s Summa.

“The question now is: should the
rules be changed?

“In recent weeks, major mutual
fund companies and the Investment
Funds Institute of Canada have
approached regulators such as the
Ontario Securities Commission and
started informal conversations
about how the cap can be adjusted
to recognize the Nortel situation.
Among the factors spurring them
on are new regulatory requirements
that will force fund companies to
compare their offerings to a
benchmark in a prospectus. Is it
fair to compare money managers to a
TSE 300 index they can’t hope to
match?

“To date, no one has come
forward with a creative solution
that allows active fund managers
to hold more than 10 per cent in
one stock while meeting the
regulator’s concerns about
keeping portfolios diverse.
However, this issue moves higher
and higher on every mutual fund
manager’s list of priorities as
Nortel continues its march upward.

The playing field needs to be
levelled.

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