By James Langton

(April 5 – 12:15 ET) – Merrill Lynch is cutting its opinion for C.I. Fund Management Inc., citing a revised earnings forecast for the firm and a slower sales environment overall.

The brokerage firm is dropping its intermediate-term opinion on C.I. to Neutral from Accumulate, but it’s keeping a long term Buy on the fund company. “On the basis of our revised forecast and recent mutual fund performance pain, we feel near-term upside is limited for C.I. shares. In light of recent moves in the mutual fund asset base, and a slower sales environment for the industry, we have changed our intermediate-term investment opinion to Neutral from Accumulate,” said Merrill vice president Cameron Webster in a report.

“We continue to carry a long term Buy opinion on C.I. shares and focus long term investor attention on the company’s recent share buyback activity and its track record for identifying and taking advantage of sales trends in the industry as key long-term positives for the stock,” Webster added.

Merrill has dropped its projections for C.I.’s operating results on revised asset and net sales forecasts. It notes that the wild markets knocked almost $2 billion off the mutual fund asset base in the recent quarter, most of it in February. Merrill says that average mutual fund assets shrunk 5.9% in the quarter, and assets have slipped another 3.5% in March.

“On a 12-month forward basis, we anticipate approximately 10% sales growth to be supported by a moderate 5.3% performance result. Our recalibrated fiscal year forecast calls for net sales of $2.3 billion in 2002 (down from $4.2 billion), implying a 35% downdraft from estimated 2001 levels. We now anticipate mutual fund assets will end 2002 at $26.9 billion, a 26% revision to our prior $33.9 billion estimate.”

Merrill notes that yesterday’s nine-month results from C.I. were positively impacted by a 4.5¢ a share after-tax gain on the sale of Mackenzie Financial shares it accumulated as part of its failed hostile takeover bid. It also picked up 2.5¢ as a tax-related gain. Dropping these unusual items out, EPS came in line at 7¢ a share.

“C.I.’s mutual fund asset base and street estimates are playing a bit of a cat and mouse game lately. In our opinion, the cat has yet to catch the mouse and we suggest C.I. shares will show limited upside in the near term as equity markets attempt to find a direction.” Merrill notes that its fundamental valuation suggests C.I. shares are worth between $11.50 and $12.25.

That said, Merrill continues to see C.I. as a long-term Buy, observing that it appears set to continue aggressively buying back its stock. “Investors willing to take a longer view with this stock may find current levels an interesting Buy point as the company has recently purchased over 2.8 million shares in the open market and have signalled this will continue in the near term.”