Rebound potential seen in Gluskin Sheff share price

After decades of catering to some of Canada's richest clients, Gluskin Sheff and Associates Inc. now finds its shares in an unusual place: the bargain bin.

The Toronto-based money manager has seen its stock price slide to its lowest point in more than two years as investment losses and client redemptions trimmed its assets under management by 13 per cent from a record high in March.

Some observers now believe the shares are positioned for a rebound if the firm can recapture the touch that made it one of Canada's more successful asset managers since its founding in 1984 by Ira Gluskin and Gerald Sheff.

"Gluskin Sheff's shares are attractively valued with a potential catalyst if net redemption trends improve," Geoffrey Kwan and Sean Adamick, analysts at Royal Bank of Canada, said in a recent research note.

The bullish case assumes that Gluskin Sheff can stem withdrawals and once again trade at a price-to-earnings ratio similar to similar asset management firms. At its current level of earnings, that would result in a 60 per cent gain in share price.

The company, which serves clients with at least $3-million in investable assets, has an enviable reputation among well-heeled investors. Its U.S. and Canadian equity funds have outperformed market indexes over the past two decades and its clients include movers and shakers such as Peter Munk and Isadore Sharp. "They're an excellent firm, there's no question about that," said Earl Bederman, who heads Toronto-based Investor Economics, a financial-services research and consulting company.

But recent months have not been kind to Gluskin Sheff. Four consecutive quarters of client withdrawals plus $413-million in losses on investments last quarter drove down assets under management at Sept. 30 to $5.3 billion, the least in two years. On Wednesday, the stock sank to its lowest price since May, 2009.

Most fund managers had negative returns during the third quarter as markets plunged worldwide amid concerns about U.S. debt, an economic slowdown and a Greek default. In the first nine months of this year, Gluskin Sheff outperformed market benchmarks, but its assets under management shrank more than its peer group's.

The firm says clients are merely trimming their investments, not deserting the firm.

"The vast majority of our redemptions are from continuing clients, not from people who have terminated their relationships with us," Jeremy Freedman, Gluskin Sheff's president and chief executive officer, said in his first media interview since assuming the posts in July, 2010.

Mr. Freedman acknowledges that the firm's less-than-bullish tone may have hurt its appeal. Its chief strategist, David Rosenberg, a top-rated economist and a columnist for The Globe and Mail, has consistently warned of troubles brewing in the U.S. economy. The firm has also taken pains to caution clients on the risks it sees in today's markets.

"That's not exactly a message to our clients, 'Get out your pocket books and put everything you've got into the market,'" Mr. Freedman said. "There's no doubt that our overall tone of message … doesn't help our sales."

The cautious tone may also have helped to drag down the share price. "But we're not in the business of trying to promote the stock of Gluskin Sheff; we're in the business of looking after our clients," he adds.

He believes that if the firm does a good job for its clients, its assets under management will come back, and so will its share price.

While the stock has lagged far behind its peers in 2011, it has outperformed most of them since the May, 2006 listing. Dividends, meanwhile, have risen every year. And before the latest string of client redemptions, Gluskin Sheff had seven straight quarters of net deposits.

"There's no money manager out there that is not going to stumble at various points in time in terms of their performance," said Mr. Bederman. For Gluskin Sheff, "When they hit it, they hit it big."