Fundamentals and innovation make for strange bedfellows. But for Montreal-based NatCan Investment Management Inc., the combination is proving complimentary, not conflicting.

NatCan, a subsidiary of National Bank of Canada, is counting on its disciplined, long-term investment approach, investment in the latest technologies and a fastidious emphasis on compliance to fuel its growth.

NatCan has $26 billion in assets under management, with 40% of AUM originating on the institutional side. On the retail side, NatCan manages some 90 mutual funds in a subadvisory role, including the two largest of National Bank’s five mutual fund families, Altamira and National Bank Securities.

In addition to NatCan’s Montreal headquarters, the firm has offices in Quebec City and Toronto. So far, it has been “very, very focused in Quebec,” says Pascal Duquette, NatCan’s president and CEO. But like its parent, NatCan is looking for opportunities to build on its strengths and expand its market.

On the one hand, NatCan is a very traditional money manager. Stock selection is based on fundamental analysis; capital preservation and long-term returns are its principal mandates. The firm, however, is putting its fundamental philosophy into practice by using innovative and cutting-edge technologies.

“Execution is the key to success,” Duquette says. “It is easy to have a strategy, [but] it’s really damned difficult to put one in place.”

With slower market momentum, NatCan has dedicated resources to strengthening its own infrastructure. “We have made a significant investment,” Duquette says. “We spent around $3 million in systems to make sure we are top-notch in the business.”

With state-of-the-art compliance, database-management and trade-order management systems, the firm has made transparency a key feature of its practices.

Thanks to the sophisticated new systems, NatCan has been compliant with global investment performance standards — an international standard for presenting portfolio performance created by the CFA Institute — since June 30. GIPS is a rigorous set of data-tracking standards for investment-management firms, with the purpose of minimizing biases based on survivorship, varying time periods and representative accounts. Its governing body, the Investment Performance Council under the auspices of the CFA Institute, requires five years of investment-performance history for all discretionary portfolios. Duquette says those exacting standards will prove a competitive advantage in an increasingly demanding regulatory environment.

GIPS compliance is voluntary, but it is becoming standard practice in the U.S. Because GIPS requires heavy investment in data-tracking systems, it remains relatively rare in the Canadian marketplace. The standards allow an investor to compare GIPS-compliant firms as “apples to apples,” regardless of what country the firms are in. GIPS emphasizes disclosure and ethical issues.

That is why Duquette sees the technological upgrades as potentially profitable. “Regulation is beginning to become incredibly harsh in the industry,” he says.

The Autorité des marchés financiers, the securities regulator in Quebec, is becoming increasingly demanding in the aftermath of securities swindles in that province. While there has been praise for the AMF’s aggressive prosecution of the architects of scams — such as Vincent Lacroix, former president and CEO of the Norbourg group of companies, who is serving an unprecedented prison sentence — the AMF has been criticized for letting these scandals occur at all.

“There is demand for fund managers to be more Catholic than the Pope,” Duquette says. “We did not want to wait for regulators to ask for it.”

There are further benefits. In some cases, NatCan is in a position to do the back-office tracking for other funds, and that practice has become a profit centre. The upgrade in technology also allows NatCan to take a traditional palette of strategies and turn them into an array of products.

To illustrate, Duquette cites the examples of U.S. retail giants Wal-Mart Stores Inc. and Whole Foods Market Inc. Consumers can go to Wal-Mart for 99% of household needs, but they don’t expect to go to Whole Foods for all their needs but for a few select items. NatCan has a specialized, Whole Foods-like boutique tradition, but would like to move toward the Wal-Mart role, providing three-quarters of the range of products investors need.

NatCan covers the standard fixed-income, Canadian equities, foreign equities and small-cap equities fields. Thanks to recent technological upgrades, the firm’s tracking systems allow it to adjust the risk tolerance on a strategy, effectively broadening the spectrum of investment products available to investors.

@page_break@For Canadian large-caps, NatCan has three teams with three styles: growth, contrarian and capital protection. “Even within this, by changing the tracking errors, we can take one and put it on steroids or on redux,” Duquette says. “So, one strategy can become three, four or five products to adapt to the client’s needs.”

In addition to NatCan’s traditional strategies, the firm has three alternative investment options: the conservative Global Focused Fund, Arbitrage Short Term Bond Fund and Absolute Return Fund. The focus is on long-term returns. “They are not hedge funds per se,” says Duquette.

NatCan has a solid track record, and discipline plays a key role. Indeed, over the past 10 years, 60% of the mutual funds managed by NatCan have performed above their categories’ median, although growth has been a little slower over the past few years. But NatCan is staying the course. “Long-term is our DNA,” says Duquette.

While market trends have seen growth in the materials and energy sectors recently, the NatCan team is staying disciplined. “We are not willing to be taken in by a risk-taking attitude,” Duquette says. “We are very strict with our styles.”

He acknowledges National Bank’s support. “It’s great to have a shareholder that has deep pockets,” he says, “and does not have short arms.”

National Bank has been equally generous with expertise. Until recently, Duquette was NatCan’s president, CEO, chief compliance officer and chief investment officer. Now he doesn’t have to wear so many hats. Michel Falk, who was CIO at National Bank Financial Ltd., has joined NatCan to take over as CIO.

And while NatCan benefits from the banking network as a distributing channel for its products, National Bank is equally well served by having a top-notch wealth manager under its roof. Its only requirement is that NatCan grow profitably. Good wealth management will make inroads for the Quebec firm, whether in English Canada or further abroad. IE