Last year wasn’t easy for mutual fund portfolio managers. Stock markets were volatile amid concerns about the European sovereign-debt crisis, and whether the U.S. would continue to grow and China would avoid a serious slowdown.
On average, Canadian mutual funds’ return declined by 5.3% for the year ended Dec. 31, 2011, according to data from Toronto-based Morningstar Canada. Emerging-markets equity funds dropped by 19.7%, Canadian equity funds fell by 10.7% and European equity funds were down by 8.9%. Only U.S. equity funds fared relatively well, down by only 0.4%. Meanwhile, Canadian fixed-income funds were up by 7%.
Nonetheless, some mutual fund families managed to post top-drawer investment performance in 2011. Fund families with conservative investment strategies and those that follow the “value” investing style tended to perform relatively well, while fund families with a “growth” focus fared relatively poorly.
Leading the pack in fund family performance was Calgary-based Mawer Investment Management Ltd.,
which had 100% of its long-term assets under management in the first or second performance quartiles for the year ended Dec. 31. Mawer was followed by Brandes Investment Partners & Co. and Sentry Investments Inc., with 88.8% and 88.1% of long-term AUM, respectively, in the top two quartiles. (All companies are based in Toronto unless otherwise noted.)
Mawer’s portfolio managers sit in the conservative investing camp. Says Jamie Hyndman, Mawer’s director of marketing: “[It’s] typical for us to do extremely well in difficult markets and lag in strong ‘up’ markets.” Mawer, he adds, focuses on “very high-quality investments and only buys when the price is attractive.”
Other funds that tend to follow a conservative approach include those sponsored by TD Asset Management Inc., RBC Global Asset Management Inc. and BMO Invest-ments Inc. Each had between 58% and 64% of long-term AUM performing above average.
Value-style funds generally did relatively well, thanks to good appreciation in stocks picked up in the previous three years at low valuations. They also benefited from being — as usual — underweighted in energy and materials, sectors that don’t normally appeal to value portfolio managers because these sectors are exposed to volatile commodities prices.
At Invesco Canada Ltd., 60.9% of long-term AUM in its value-oriented, Trimark-branded funds was in the top two performance quartiles; however, just 33% of AUM in the firm’s more growth-oriented, Invesco-branded funds was in the top two quartiles. Among other reasons, several Invesco funds had significant holdings in Research In Motion Ltd. last year, which dragged down fund performance, says Jamie Kingston, Invesco’s senior vice president for product management and development.
The big turnaround was at deep-value manager Brandes, whose funds had been in the cellar for most of the previous four years — in 2010, only 28.7% of long-term AUM was in the top two quartiles; in 2009, just 11.5%. Brandes president and CEO Oliver Murray cites pharmaceutical stocks Pfizer Inc. and Sanofi SA as contributors to the Brandes funds’ excellent performance. (In an interesting note, Brandes has been adding to its oil and gas exposure over the past three years, in the belief that oil has much more attractive fundamentals now than in the past.)
Sentry doesn’t fall into either the growth or the value manager camps. Chief investment officer Dennis Mitchell says the company has a unique style that is based on the fact that the best-performing companies over the past 25 or so years have been those that consistently grow dividends.
As dividends can’t grow without expanding cash flow, says Mitchell, Sentinel’s portfolio managers buy only stocks with “stable and growing free cash flow.” This can include companies that don’t pay dividends, although not often. “If companies don’t pay dividends,” he says, “they may make poor acquisitions. [Having to pay] dividends makes management teams more disciplined and focused.”
At the other end of the performance spectrum were a number of fund families with less than 20% of long-term AUM in the top two performance quartiles. One hard-hit growth manager was Acuity Funds Ltd., which was acquired by AGF Management Ltd. on Feb. 1, 2011. Only 6.3% of Acuity funds’ long-term AUM was in the above-average performance categories, a stark contrast to 78.5% in 2010, 52.7% in 2009 and 62.9% in 2008.
Martin Hubbes, AGF’s CIO and executive vice president for investments, wasn’t surprised: “Acuity has tremendous ‘up capture’ in rising markets,” but struggles in difficult markets.
The AGF-branded funds have been performing weakly since 2007. The amount of long-term AUM in the top two performance quartiles hovered around 26%-28% in 2008-10 and improved somewhat to 32% last year.
Hubbes found 2011 “very difficult and frustrating” because strategies that worked well at the beginning of the year didn’t work well in the second half. Furthermore, markets were driven by politics and central banks rather than economic fundamentals, making predictions difficult.
AGF has hired a senior vice president to run its North Ameri-can research team, to “beef up” its analytics; as well, AGF’s Dublin office is fine-tuning its portfolio construction to increase the potential for risk-adjusted returns.
RBC also has been working on its analytics. The firm uses multi-discipline screens, including fundamental, technical and quantitative analysis. “Our quantitative screen was kicked on its ear in 2009 and much of 2010,” says CIO Dan Chornous. “We rewrote the model and the metrics are much stronger.” The problem, he adds, was that the beginning of bull markets normally are led by small-cap, lower-quality stocks for about three months. But in 2009, that period lasted much longer.
BMO made some fund manager changes and also tried to “sensitize” its portfolio managers to their peer groups, according to Serge Pépin, head of investments. The idea isn’t to copy others but to see if there are things that these peers are doing that would fit into BMO managers’ mandates and improve fund performance. IE