Yet another reason why banks are always winners - FABRICE TAYLOR

Don Coxe loves commodities for the long run and that's what his new publicly traded fund will invest in. But the fund's prospectus makes a better case for financial institutions. Bank of Montreal, Mr. Coxe's employer and the promoter of the fund, will make a much better return on investment than investors.

The Coxe Commodity Strategy Fund, which made its debut yesterday, was a hot seller, raising the maximum $260-million. It's likely that the underwriters will exercise their overallotment rights, bringing the total gross take to just under $300-million.

Investors were obviously drawn to the commodity thesis. But they were also drawn to Mr. Coxe, the loquacious financial historian whose Basic Points publication is eagerly awaited by thousands of investors, big and small, every month.

Mr. Coxe has enjoyed a fairly good track record in recent years. He didn't predict the bull market in commodities but he embraced it early and, more important, he stuck to it. He wasn't the first to figure it out, nor the best at shifting from one commodity to the other, but he was no slouch and he had conviction, which is so rare in his world. His work and reputation has earned BMO Nesbitt Burns a lot of money and goodwill. The offering of Mr. Coxe's fund continues the trend, where money is concerned anyway.

Let's look at the numbers: Assuming the overallotment is exercised, the closed-end fund will raise $297.5-million. The investment bankers, led by BMO, will earn more than $15-million. The lawyers and auditors, etc., will earn a few hundred thousand. Net proceeds to the fund will by just over $280-million. That means that a unit sold for $10 is worth only $9.47 right out of the gate.

Those are pretty standard fees as far as equity offerings are concerned but this is an initial public offering for a closed-end fund. What's the risk to the underwriters? Nothing. All the underwriters had to do was "encourage" their sales force to sell the thing to clients. Investors had better hope Mr. Coxe and his stock pickers deliver because factoring in the IPO, management and trailer fees, the fund will have to earn almost 8 per cent in its first year just to skate investors back on side. Tough to do, especially when it will take six months to fully invest the fund.

Mr. Coxe is the fund's consultant, meaning he will advise on how to weight the fund's investment between various classes of commodities. He will also advise on stock selection, although the fund has a manager to pull the trigger on stocks. The fund can hedge currencies but has no plans to, which is surprising given Mr. Coxe's often strong views on the subject.

Having stock pickers might be a good thing, since in his writing Mr. Coxe tends to think in terms of asset classes, or subclasses, and then defer to the BMO research department for individual stocks.

The management fees will be split between the money manager (in this case Harris Investment Management, a BMO subsidiary), the administrator (another BMO subsidiary) and the consultant, Mr. Coxe, a BMO employee.

If you're not yet convinced of our bank-over-fund thesis, consider that best part of the story: The Coxe Commodity Strategy Fund has an excellent strategy on how to expand its asset base, and therefore fees, with very little effort.

The fund's securities are called "combined units," because they're actually one fund unit combined with a warrant. The warrant gives the investor the right to buy another unit in two years for $11.25, regardless of where the units are trading.

Sound good? Truth is, there's little to no advantage to the investor. Derivatives are a zero-sum proposition, so if all investors exercise their warrants, they all get diluted by the same amount. They gain nothing. The warrants will be tradable but in an efficient market that doesn't change anything. Not exercising, on the other hand, might hurt you.

So why include warrants? Because it makes it highly likely that the fund will grow if, in three years, the units are trading above $11.25. And since the underwriters will help themselves to 25 cents per warrant exercised, they'll make a few more million from that exercise. Plus, of course, the management and trailer fees will be applied to a bigger base. More money for the banks.

Mr. Coxe, in case you're wondering, can't invest in this fund because he's a U.S. resident. But if he could, why would he? He's better off earning his fees, salary, bonus and stock options from BMO. Like I said, it's a much better return on investment.

Coxe fund offers great returns for (BMO) investors

$million other than per unit figures
Gross proceeds to the fund $297.50
Agents' fees $15.30
Expenses of issue $0.60
Net proceeds to the fund $281.60
Net/unit $9.47
Selling price $10.00
Opening deficit 5.30%


Annualized trailer fees $1.10
Annualized management expense $4.40
Year one gain required to restore value $21.40
In percentage terms 7.60%


Fees earned by banks/dealers on warrant exercise $7.40
Incremental annualized MER/trailer fees if warrants exercised $6.50

Assumes over-allotment is exercised