Mutual funds at the big banks turned in good to excellent performances in 2005, while some of the usual industry stars plummeted to the ground.

Toronto-based BMO Investments Inc. leads the 2005 performance parade, with 93.8% of mutual fund assets under management in the first and second quartiles as of Dec. 31, 2005, according to data from Morningstar Canada. RBC Asset Management and TD Asset Management Inc. , both based in Toronto, had 81.1% and 79.9%, respectively, in the top two quartiles. AUM for the three fund manufacturers were up a staggering $20.4 billion from a year earlier, an increase of 22.1%.

Fidelity Investments Canada Ltd. of Toronto was the only independent that matched the performance of the three banks, with 88.1% of AUM in the first or second quartiles. Fidelity’s AUM were up only 4.3%, or $1.1 billion.

Meanwhile, several previous top-notch performers had a tough year. Brandes Investment Partners & Co. of Toronto saw the proportion of its AUM in the top two quartiles sink to zero from 88.8% at yearend 2004. And just 28.2% of assets of Vancouver-based Phillips Hager & North Investment Management Ltd. were in the top two quartiles at yearend, vs 90.4% a year earlier.

But neither Brandes nor PH&N are fazed by weak results in 2005. The companies say the soft numbers are a normal part of the investment cycle. They say that they’ve been buying good stocks that are out of favour at a big discount. They maintain the strategy will pay off in the long run.

Nor is Mackenzie Financial Services Inc. of Toronto disturbed by its long period of weakness. Slumping results for the past three years haven’t led to net redemptions because investors and advisors recognize that its long-term record is excellent, says president David Feather.

Fund performance at Scotia Securities Inc. and CIBC Securities Inc. , both of Toronto, was well above average, with 61.5% and 59.3% of AUM, respectively, in the top two quartiles. Their combined AUM were up $4.1 billion, or 14.7%.

Six other independents turned in good performances. Guardian Group of Funds Ltd., Dynamic Mutual Funds Ltd. and CI Investments Inc. , all of Toronto, have been consistently strong during the past three years, and all had double-digit increases in AUM.

Investors Group Inc. of Winnipeg increased the proportion of its AUM in the first two quartiles to 55.8% from 41.5% in 2004 and 29.9% in 2003. With its captive sales force, it didn’t suffer big redemptions in the earlier years and had a 17.1% increase in AUM in 2005.

The other two — Altamira Investment Services Inc. and AGF Funds Inc. , both of Toronto — are still in net redemptions. This isn’t a surprise for Altamira because its performance was weak in both 2003 and 2004. AGF, however, has had good performance throughout.

AGF’s problems started in 2002, with the loss of San Diego-based Brandes Investment Partners LP as the manager of the huge AGF International Value Fund; Brandes had decided to launch its own family of Canadian mutual funds. AGF has had difficulty persuading advisors that Brandes’ replacement, Chicago-based Harris Associates LP, is as good a fund manager. This was partly because International Value has since been in the third or fourth quartile, but it also reveals poor relationships with advisors.

For the past year and a half, AGF has focused on reconnecting with advisors. Randy Ambrosie, executive vice president of sales and marketing, says it’s paying off. He says the level of net redemptions has been declining and the firm is on track to have net sales in April.

Altamira had weak performances in 2003 and 2004. Now that its three-year records are posting above-average returns, chief investment strategist Ian Dillon says, the stage is set for net sales. He credits the turnaround to Montreal-based National Bank of Canada’s takeover of Altamira, which changed the firm’s focus to core mandates and less volatility.

Burlington, Ont.-based AIC Ltd. could turn around this year. Performance has already improved, with 35.2% of AUM in the top two quartiles in 2005, vs 9.6% in 2004 and 6.5% in 2003. John Miller, AIC’s executive vice president, points out that AIC Advantage and AIC Advantage II, with a combined $2.1 billion in AUM (making up 26% of the firm’s mutual fund assets), had first-quartile performances for both three and six months ended Dec. 31. The markets are recognizing that the financially strong dividend-paying companies AIC holds are undervalued, he says.

@page_break@Miller points out that below- average performance in Canadian equities last year could still mean good returns. The median Canadian equity fund returned 17.1%, while Advantage posted a 14.8% return and Advantage II posted 14.1%.

AIC is still in net redemptions, but redemptions have been falling, hitting $131 million in December from a peak of $352 million in February 2004. The company has beefed up its sales team and is increasing contacts with advisors.

Many firms that didn’t do as well as their peers in 2005 are value investors that were light on energy holdings. This includes AIC, Brandes and PH&N. Brandes thought there was better value elsewhere and admits it missed the boat. AIC and PH&N say resources don’t meet their standards for good companies that perform well over a cycle.

Toronto-based AIM Funds Management Inc. has a similar style. The company’s global funds had no exposure to energy last year. With a much smaller universe of companies from which to pick, its Canadian equity funds sometimes hold energy stocks, although not for a full cycle. Canadian managers bought energy in 1999, when the price of oil was just US$10 a barrel, but sold all or most in mid-2005 because they considered the valuations too high. It was time to take profits, says Patrick Farmer, AIM Trimark’s chief investment officer.

As it turned out, those managers were premature. And that’s partly why the percentage of their AUM in funds with above-average performance fell to 12.5% for 2005.

Toronto-based Franklin Templeton Investments Corp. , on the other hand, holds energy stocks. Its funds were doing well until the fourth quarter, when markets turned sour on companies it held, says president Don Reed. As a result, its AUM in the first or second quartiles fell to 35.9% for 2005, vs 84.1% in 2004.

Timing can also affect results. AIM Trimark’s Farmer points to U.S. pigment and chemical maker Englehard Corp., which had disappointed managers by not moving in 2005. Then, its share price jumped more than 30% early in the new year on news of a hostile takeover bid by Germany-based BASF AG. Had the bid occurred before Christmas, 2005 results would have been better for the funds holding Englehard stock.

The category to which particular funds are assigned by firms such as Morningstar can also affect relative fund performance. Take National Bank Securities Inc. of Montreal, which had only 25% of AUM with above-average performance last year, 7% in 2004 and 33.7% in 2003.

National Bank Secure Diversified Fund, with $103.6 million in AUM as of Dec. 31, is classified as a Canadian bond fund even though its average term to maturity is only 2.5 years. That means it’s being compared with funds with long bonds. If it was considered a short-term bond fund — NBS has asked Morningstar to reclassify it as such — it would have been a second-quartile performer in 2005 instead of fourth, says Martin Lavigne, senior vice president of sales and products at NBS, is National Bank Dividend Fund, which holds 35% in preferred stocks and is compared with funds with a mix of dividend growth stocks and income trusts, and so is usually a fourth- quartile performer. This is NBS’s biggest fund, with $946.1 million in AUM, or 17.8% of its total mutual fund AUM.

Ideally, the dividend fund should be compared with similar funds. But until that happens, Lavigne says, the firm accepts the below-average performance ratings and explains what’s behind them. NBS points out to advisors that the fund delivers on its mandate to be low-risk, focused on preservation of capital and provide an income stream.

This seems to work, Lavigne says; the fund is selling very well. IE



Segregated fund performance will be discussed in the Mid-February issue.