Investors Group is Canada's largest mutual fund company and has approximately $107 billion of mutual fund assets under management. Assets under management are primarily created, marketed, managed & administered in house.  This total ownership of all facets of the fund business is rigidly controlled.  As a result, gross margins are among the highest in the North American asset management industry, at almost 60% of net revenues.

The $107 billion Canadian of AUM calculated by IGM on Jan 1st, 2007, on the other hand, is truly a recurring, revenue generating, mutual fund asset. An estimated 90% of IGM's 2006 revenues came from recurring fee income, based on mutual fund assets.  This is a record amount for any mutual fund manager throughout North America.  I therefore consider the the AUM calculation at IGM, to be the most conservative of all large cap peers. 

IGM is priced at a very low forward EBITDA ratio, based upon forecast revenue, in 2007. 

Estimates suggest that IGM will generate $1.4 billion (Can.) of EBITDA in 2007.  Based upon the asset growth recently experienced, this amount may be conservative. 

IGM's balance sheet is strong, and understates its assets.

The firm has a growing cash position.  IGM also holds approximately 37,787,388  shares of Great West LifeCo (GWO).  This is considered to be a permanent investment, and as such is not "marked to market".  The GWO shares sit on on the books of IGM with a carried value of approximately $536 million Canadian.  The current market value of IGM's holdings in GWO  is roughly $1.228 billion (Can). 

Conservative mutual fund asset managers may regain the asset "upper hand" vs cyclical managers in 2007.

IGM's funds have relatively lower exposure to the oil/gas and mining sectors than many managers.  Performance at IGM funds has been historically been somewhat lower than peers as a result. Many base metal prices are down sharply in the last three months.  With oil prices down by almost 35%  from their six month peak, copper prices down by 33% and zinc prices down by 13%, much of the "hot money" flowing into mutual funds may be ending. 

The upcoming first two quarters of 2007 may mark the first period in almost 4 years; in which most oil/gas and many mining firms should post declining quarter over quarter financial profits.  This may spell a dramatic shift in the playing field among asset managers.  Going forward, IGM's stable of funds could post comparatively stronger results vs many peers.

IGM funds have insignificant exposure to the income trust sector of the market. 

On January 1st 2007, income trusts represented approximately 3% of the aggregate mutual fund assets under administration.   Any reduction in income trust holdings by Canadians over the next several years, should be largely immaterial to IGM funds.

A more than doubling of assets under management is possible, through a proposed acquisition.

IGM's parent Power Corp., seems determined to enter the United States with a bang.  A potential purchase of Putnam Corp is being discussed.  The purchase price could be in the range of $4 billion U.S.  IGM currently has a cash balance in excess of $1 billion U.S.   If IGM becomes the vehicle which winds up owning Putnam, a successful purchase could more than double mutual fund assets under management. There would be $2.8 billion of effective leverage to the balance sheet.

Putnam is a fallen angel. 

The firm manages about $118 billion U.S. of mutual funds, much of which is actively managed. A further $64 billion of institutional monies is also managed by Putnam.  I estimate that Putnam could generate revenues of up to $1.4 billion U.S in 2007. Operating margins should rebound sharply in 2007.   New ownership may go a long way towards helping Putnam regain the lustre its funds once enjoyed. 

A combined Putnam/IGM would immediately be vaulted into the top 10 mutual fund managers in North America.  The firm would have an forecast (2007 year end est.) EBITDA of up to $17.7 billion (Can) and could generate 2007 EBITDA of almost $1.9 billion (Can).    This would represent a merged firm forecast EV/EBITDA of 9.3X for 2007.

Payoff of Putnam could occur from the IGM/Putnam combined forecast operating cash flow, in about 3 years. 

Seldom does one have an opportunity to double the size of any firm and have it paid off with combined cash flow, in such a short forecast period.  The purchase would vault IGM from a giant in the Canadian industry, to a giant in the North American industry. 

If one believes that a move from cyclicals to more conservative products lies ahead for 2007, IGM appears to be well positioned. 

Without Putnam, IGM sells for just 8.9X my estimated EV/EBITDA, and looks to be an excellent value.  A Putnam purchase would add modestly to the financial leverage, but would increase IGM's attractiveness as a core holding for portfolio managers worldwide.  IGM has an excellent history of implementing cost controls.  This could result in the Putnam purchase becoming accretive to the bottom line by early 2008.  .

Conclusion:  Absent the ownership of Putnam, IGM should maintain its prominent position in Canada as a conservative core holding among asset managers.  A focus upon the less risky sectors of the investment market spectrum may serve it quite well for 2007.  When combined with Putnam, the firm appears to be undervalued in relation to other peers by as much as 50%.  While there would still be many larger firms in the asset management industry, few would be as large in the actively managed fund business. 

It would be imprudent to suggest that the valuation gap between IGM and US peers will be eliminated overnight (or in fact ever).  However, to forecast a reduction in the magnitude of this differential seems quite logical to assume, based upon IGM gaining a significant US presence. 

I own IGM in anticipation of a transaction with Putnam.  Provided the announced purchase price of Putnam is less than $4.2 billion U.S., I will buy shares of any company in the Power Financial stable, that becomes the effective owner.  Logically, this should be IGM, but could also include Great West Life or Power Corp. itself.  The 3.5% current dividend of IGM is solid.