After four strong years, Toronto-based Sceptre Investment Counsel Ltd. still has an ambitious agenda. It is stepping up its efforts to develop the private-client side of its operations and wants to expand the retail distribution of its family of seven mutual funds by adding partners.

Nor does it intend to slacken the pace on the institutional side of its business. Sceptre manages the pensions and other savings plans of institutions, ranging from private and public corporations to governments and universities to unions and charities.

With $9.1 billion in assets under management, Richard Knowles, president and CEO of Sceptre, expects both the retail, including private client, and institutional sides of the business to grow at about the same pace, keeping the contributions of each to company revenue at around 50%. “This maintains diversity and provides a stable revenue base,” he says.

Knowles, who has been steering the 52-year old firm since 2000, believes the optimal level of AUM is $15 billion to $20 billion. He adds, however, that the company doesn’t need that much to deliver shareholder value. As of Aug. 31, 2007, Sceptre’s 12-month trailing return on equity was 27.4%. The quarterly dividend was increased to 12¢ a share from 9¢.

Sceptre’s current expansion of the private-client side of its business got a big leg up at the end of 2006 when it acquired the private-client business of Toronto-based Legg Mason Canada, a subsidiary of Baltimore-based Legg Mason Inc. That added about $600 million in AUM, five portfolio managers and offices in Montreal, Waterloo, Ont., and Vancouver.

This almost doubled the size of its private-client business, but Knowles says that Sceptre wants to double that again, to at least $2 billion in AUM. He is also specific about the type of acquisitions the firm is looking for: their AUM should be at least $500 million; their investment style should be compatible with Sceptre’s; and management should be committed to staying with the business.

“We don’t want companies in which the principals are looking for an exit strategy,” Knowles says. “Rather, we want to help the company grow faster than it could alone because we can provide an independent investment environment, more products and services and the infrastructure to deal with the increasingly complex regulatory and compliance requirements.”

Sceptre is also looking for geographical diversity, particularly in the three western provinces, where the commodities boom is fuelling economic and income growth. The firm has no offices in Alberta or Saskatchewan and only a Legg Mason location in Vancouver.

Other strategies in the retail-client area include expanding its funds’ access to the brokerage and mutual fund dealer channels through participation in wrap programs. Knowles says the firm is talking to a number of organizations in the advice channel that are interested in partnering with Sceptre. Possibilities include becoming subadvisors on mutual funds or packaging Sceptre mutual funds to be sold as retirement or pension products.

Sceptre has also had some success in entering the lucrative market for account platforms designed for clients with defined-contribution pension plans. But the amount of assets involved is not yet significant. Knowles adds, however, that over time, this sector could become “very important.”

Sceptre is also open to acquisitions on the institutional side of the business, Knowles says, although expansion in that area is not a priority. What is crucial, he adds, is that the structure and focus of any acquired assets are a good fit with the investment style that Sceptre uses for its existing Canadian equities.

“If a truly value or truly growth company that had institutional assets came up for sale, I don’t know why that wouldn’t work,” he says. “We wouldn’t just buy assets for their own sake.”

The essence of Sceptre’s investment style is what Knowles describes as “core.” Sceptre uses a proprietary ranking system that can be tilted toward growth or value, depending on which approach is expected to do best in the prevailing conditions. It’s a strategy that seems to work: the Sceptre large-cap, small-cap and balanced institutional pools all are ranked in the first quartile for the four years ended Oct. 31.

Sceptre invests in public equity and fixed-income markets around the world. Part of its foreign equity business is contracted out to New York-based AllianceBernstein Institutional Invest-ment Management, a global money manager and part of AllianceBernstein Holding LP. Since AllianceBernstein started managing part of Sceptre’s institutional foreign equity in 2004, it has produced first-quartile performance.

@page_break@Unlike a number of other firms, Sceptre was not side-swiped by the asset-backed commercial paper mess because its money-market fund does not participate in third-party securitizations or have any exposure to the U.S. subprime market, collateralized debt obligations or derivatives. Any ABCP it has is backed by major Canadian banks.

For the nine months ended Aug. 31, net income was $4.7 million, up from $3.8 million for the same period a year prior on revenue of $27.7 million, vs $20.1 million a year ago. Cash flow after net change in non-cash working balances was $9.8 million vs $3.3 million a year ago. There is no long-term debt.

The company’s 14 million shares are widely held, with no one owning more than 10%, although current employees and the founding shareholders together own about 30%. A share was trading around $10 in early January. That’s down from a spike of more than $13 a share in May and June.

The rapid rise in the price from $8 a share in 2006 was prompted by significant improvements in profitability. The drop came when Allan Jacobs, the high-profile small-cap manager, left the firm at the end of June to join a hedge fund.

A Nov. 9 report from Montreal-based National Bank Financial Ltd. notes that net sales have “significantly declined” since Jacobs’ departure, but it also points out that redemptions “have not been significant.” However, the NBF report notes that Jacobs’ departure was “significant enough for some consultants to place the [institutional] Canadian equity product on watch.”

The NBF report says that typically, consultants wait for three to six months “before they re-evaluate the situation to ensure that they are satisfied that there has not been a large impact on the firm’s ability to manage the mandate.” The report also states that the performance of that product continued to be good more than three months after Jacobs’ departure. Two existing members of the Sceptre investment team took over the small-cap mandates and have been very successful, says Knowles, noting that since the end of June, the small-cap institutional pool has beaten the TSX small-cap pool by a wide margin.

NBF has a “sector weighting” on Sceptre, with a 12-month target price of $11 share. It says the company has done a good job of distancing itself from the reputational issues that arose in 2003 when Boston-based Putnam Investments, which was managing Sceptre’s foreign equity, was caught in the U.S. mutual fund scandals. It calls the company’s culture “focused on ethical conduct, strong management practice and sound business principles.”

Here’s a closer look at Sceptre’s businesses:

> Private Client. Sceptre has a minimum threshold of $1 million for private clients and requires $2 million for customized segregated accounts. Fees are 1.25% to 1.3% of assets for client accounts with less than $2 million and are negotiated for those with higher amounts. The current $1.2 billion in AUM is up substantially from $200 million three years ago. A big chunk of that growth came with the Legg Mason deal.

Growth prospects in private client AUM are excellent: they are projected to grow by about 15% a year for the next 10 years, says Knowles. But even that won’t push Sceptre’s private-client business to the targeted $2 billion, which explains the company’s efforts to make more acquisitions. Growth in this area tends to be incremental, given that it frequently arises through referrals and word of mouth.

> Mutual Funds. “The mutual fund investor is back,” says Knowles. In 2004, retail investors were shying away because they thought fees were too high and returns too low. The big run-up in the Canadian market since then has changed their minds and the consensus is that the industry will expand by about 10% annually over the next 10 years. Sceptre’s mutual fund AUM increased to $1.4 billion as of Dec. 31, compared to $455 million in Nov. 30, 2004.

Performance is always key to mutual fund success and Sceptre’s has been good. Sceptre Canadian Equity, Sceptre Equity Growth and Sceptre Income & Growth funds have all ranked in the first or second quartiles in at least three of the last four years

Sceptre High Income Fund was previously Sceptre Income Trust Fund. The fund’s mandate was expanded to include investments in high dividend-paying stocks and preferred shares. Sceptre Income & Growth Fund is the new name for Sceptre Balanced Growth Fund. A monthly pay option has been added to both these funds.

Sceptre Global Equity, according to Morningstar Canada data, moved up only to the third quartile this year from fourth in 2006 but, Knowles says, this is because of the wide range of global funds to which it is compared. The fund has beaten its benchmark, the Morgan Stanley World index in the three years ended Oct. 31.

The Sceptre Bond Fund fell to fourth quartile this year from second in 2004-06 and first in 2003. But this is an area in which the difference between the returns of first and fourth quartile funds isn’t large. The company plans to add an international equity fund after the upcoming RRSP season to complement Sceptre Global Equity Fund.

> Institutional. The bulk of this business is pension funds but there are also significant corporate and endowment mandates. Industry growth is expected to be only 6% to 8% a year over the next 10 years but Sceptre believes it can do a good deal better given its strong performance record.

The company plans to introduce an institutional product in 2008. “This will utilize Sceptre’s proprietary ranking system,” Knowles says, “to select both long and short investments in an enhanced strategy fund.” IE