Mutual fund families with sizable exposure to fixed-income assets tended to perform well last year, while those that favoured a conservative stance on the equities side may have had a tougher time, according to Morningstar Canada figures.

TD Asset Management Inc., manager of TD funds, had the largest proportion — 85.5% — of its long-term assets under management in the first or second performance quartiles last year. That represents a big jump from the 22.2% recorded in 2008. (All firms are Toronto-based unless otherwise noted.)

Fidelity Investments Canada ULC ranked second with 82.3%, up smartly from 36.2% in 2008; and Franklin Templeton Investments Corp. was third with 75.6%, a substantial improvement from a relatively dismal 12.7% in 2008.

Both TD and Franklin Templeton point to their ability to pick good corporate bonds when spreads are very high, allowing their funds to get big gains as spreads narrow.

“You have to be careful which corporate bonds you pick,” says Don Reed, president and CEO of Franklin Templeton. He says his firm’s “value” investment style gives it the research to do this.

Thomas Dyck, president of TD Mutual Funds, also points to TD’s ability to pick the right companies. TD is known for its fixed-income expertise and has attracted large amounts of money into its funds. TD Canadian Bond Fund had $8.5 billion in AUM as of Dec. 31, 2009; all TD bond funds combined had $16.7 billion in AUM, or 28% of TD’s total mutual fund AUM. If you add in the 42.4% in balanced funds, which benefit from good results in fixed-income, 70.4% of TD’s total fund AUM were in funds pushed up by fixed-income returns.

In contrast, Franklin Templeton had only 4.3% of long-term AUM in fixed-income funds and 45% in balanced funds. Reed says that the firm’s equities results were weaker, although still above average.

The importance of TD’s heavy weighting in fixed-income is underlined by RBC Asset Management Inc.’s experience. Jonathan Hartman, vice president of investment products with RBC Global Asset Management, says the firm also did well on fixed-income investments, but those funds accounted for only 12.5% of RBCAM’s mutual fund AUM.

However, that wasn’t enough to counteract weak results in Canadian equities, which, he says, reflects the firm’s security selection. RBCAM has 24.8% of its fund AUM in Canadian equities and 23% in Canadian balanced funds, the latter of which would have been affected by weak results on the equities side. Overall, 36.4% of RBCAM’s long-term fund assets were in the first or second quartiles in 2009, a slight improvement from the 35.6% in 2008.

In fact, equities investments were a problem for a number of other companies, helping to explain the weak results at AGF Investments Inc., BMO Investments Inc., National Bank Securities Inc. of Montreal and Brandes Investment Partners & Co. For AGF, BMO and National Bank, the reason for their comparatively poor showing last year was a conservative equities stance aimed at preserving capital by minimizing downside risk. The firms stuck with solid equities whose prices didn’t rebound as sharply as those of risky stocks. Nor did they overweight deeply cyclical sectors, such as materials.

“[This] felt like the right thing to do after the sharp drops in equities at the end of 2007 and in 2007,” says Martin Hubbes, executive vice president and chief investment officer with AGF. “We thought the onus was on us to make sure clients assets were first protected on the downside rather than reaching for the upside.”

Serge Pépin, BMO’s head of investments, echoes this: “We are defensive, worrying about protecting against the downside. Last year’s wasn’t an environment in which we would fully participate in a surge driven by deeply cyclical stocks.”

AGF had 26.3% of its long-term AUM in the first or second performance quartiles, up a sliver from 26.2% in 2008.

National Bank has “a strong focus on preserving capital and reducing the volatility of investment returns,” says Gordon Gibson, vice president of sales, strategies and communication for wealth management. He notes the firm’s funds did well in 2008, when equities were plunging, and he isn’t surprised at the 2009 results, as the company doesn’t expect to lead the pack in rising markets. National Bank had 36% of its long-term fund assets in the first or second quartiles, a hefty drop from 62.5% in 2008.

@page_break@Brandes’ story is different. The firm accepts low numbers as being inevitable periodically because of its “deep value” style, which leads it to load up on depressed stocks in bear markets. The firm also has a three- to five-year time horizon.

“With the market heading straight down, we have found a lot of opportunities,” says Matt Brundage, Brandes’ assistant vice president of product management. The company believes the opportunity presented by the market bottom in March 2009 may never be seen again.

But in the meantime, these holdings have depressed performance. Just 11.5% of Brandes’ long-term fund AUM was in funds with first- or second-quartile performance in 2009, vs 43.4% in 2008. Brandes has an overweighted investment in Japan, including pharmaceuticals, commercial banks and exporters that were trading below book values. Brandes International Equity Fund has 27% of its AUM in Japan; Brandes Global Equity, 16.5%.

Brandes has also picked up some U.S. banks at low prices and likes telecoms globally. Although telecoms are not currently in favour, these businesses generate huge free cash flow and pay large dividends, Brandes CEO Oliver Murray points out. He notes that every country has a dominant carrier.

Many fund families have had erratic returns in the past three years of huge market turmoil. But there are four families that have had pretty consistent and reasonably good performance — CI Investments Inc., Dynamic Funds Ltd., Investors Group Inc. of Winnipeg and Mackenzie Financial Corp.

CI is the most consistent, with about 60% of long-term fund AUM in the first or second quartiles in the past three calendar years. Dynamic is the most successful recently: it has had 80.4%, 52.5% and 72.5% of its long-term fund AUM in the top two quartiles in 2007, 2008 and 2009, respectively.

Executives of CI, Dynamic and Investors Group suggest that one reason for their solid performance is that they give their fund managers maximum freedom and flexibility within their mandates. That has allowed those managers to move quickly in these troubled times.

CI focuses on tempering volatility to give unitholders smooth returns so that they stay invested, says Derek Green, CI’s president. In the early 2000s, the firm made a “conscious decision” to stay away from geography- and industry-specific funds.”

Jordy Chilcott, executive vice president and head of Dynamic funds at DundeeWealth Inc. in Toronto, points first to an investment team that is extremely broad in terms of investment styles and team members’ rich and varied backgrounds in business and the industry. A second factor is a culture that is “opportunistic,” which is important in volatile markets such as those we’ve had in the past three years and which Chilcott expects again for this year. This is a good environment for Dynamic, he says: “We’re really only coming into our time.”

At Investors Group, it’s an integrated team approach, says Scott Penman, executive vice president at I.G. Investment Management Ltd. in Winnipeg, featuring continuous communication among managers, however widely separately geographically.

This increases the number of ideas managers can consider and lets them bounce their ideas off others. Penman attributes the firm’s higher performance in 2009 partly to this and believes this approach will result in stronger returns in the future.

It should be noted that there are three other companies that, despite volatile results, have averaged more than 50% of long-term fund AUM in funds in first or second quartile in each of the past three years: Fidelity In-vestments, at 67.8%; CIBC Asset Management Inc./CIBC Securities Inc., at 54.5%; and RBCAM, at 53.2%. IE