Mackenzie converts closed fund

It's a brave new world for owners of the Canadian Shield Fund, a closed-end fund set up by Mackenzie Financial Corp. in late 2009. Thanks to a recent conversion, the fund is now an open-ended mutual fund with a familiar new name: Mackenzie Universal Canadian Shield Fund.

As a result of the switch, the fund's three different types of owners -those who bought in the initial public offering, those who bought warrants and then exercised them for shares and those who bought units in the secondary market -have an investment that offers daily liquidity. But the investment won't be listed and to the extent that the owners want out, the fund will shrink in size.

While the fund, which raised $127.75-million in its IPO with Mackenzie kicking in another $5-million and an extra $62-million from a warrant offering last April, is not the first to undergo such a conversion, the news is significant because it is the first of the new-generation Mackenzie funds to make such a switch. And there is no surprise the switch -done without shareholder approval -was made. It was all spelled out in the prospectus filed in late 2009 when Mackenzie returned to the world of structured products.

Mackenzie re-entered the fray when it retained Roger Mortimer, the chief investment officer at Parador Asset Management, and gave him the mandate to generate "riskadjusted absolute returns," an objective embraced by many hedge funds. Mortimer was well known to Canadian retail investors, having been a manager of some mutual funds within the Aim Trimark group.

The Mortimer fund, which at the time of launch had neither a fixed term nor a policy on distributions, wasn't meant for the faint-hearted. The manager was seeking securities "with capital preservation and capital growth attributes" -not the easiest combination to attain. And Parador, which had at least 50% of its investments in Canada, was active: For the year ended March 31, 2011, the fund's so-called portfolio turnover rate -a measure of how actively the manager manages the portfolio -was 510.66%. The legendary value manager Warren Buffett would not have been impressed.

As befitting a hedge fund-like product, Mortimer was entitled to a performance fee provided certain conditions were met. In effect, Mackenzie received a performance fee from the fund and, in turn, paid part of that fee to Mortimer. For the year ended March 31, Mackenzie received $4.1million in performance fees. It's not clear how much Mortimer received.

Just because performance fees were paid doesn't necessarily mean unitholders did well. For instance, over the period the closed-end version was around, the total return was 2.32% -or 1.47% on an average annual basis. All those gains came from price appreciation as the fund didn't make any distributions. The gains would have been even better had the fund traded at its net asset value. But, as with most closed-end funds, the Mortimer fund tended to trade at a discount. Over the period the average discount was 4.14.%.

While many closed-end funds don't convert, those that do end up in one of two structures: an open-ended mutual fund or an exchange-traded fund. But some market participants aren't major believers. The reason: The agents' fees and new-issue expenses on a closed-end funds are high. On this deal underwriting fees were $6.7million while issue expenses were $750,000 -all paid for by the fund.

bcritchley@nationalpost.com