There was a time when John Templeton and the much younger Peter Cundill were the doyens of global investing in this country, happily leading Canadian investors away from our meagre 3% slice of world markets. But that was before corporate mergers, increased competition and an 85¢-dollar took a bit of the shine off their individual brands. Are these venerable names still able to deliver the goods?

The $5.55-billion Templeton Growth Fund, now a Franklin Templeton Investments Corp.
offering, has fallen on hard times. Despite its status as one of the largest funds in the country, it earns only a three-star risk-adjusted ranking from Morningstar Canada.
Compare this with the five-star-ranked $2.95-billion Mackenzie Cundill Value Fund, another veteran that is now operating under the aegis of Mackenzie Financial Corp.
While both funds have enjoyed storied reputations for decades, only one has been able to excel in recent years.

Mackenzie Cundill Value has been a big winner for Mackenzie and was named global equity fund of the year at the 2004 Canadian Investment Awards. The fund has been consistently in the top quartile over numerous reporting periods, an achievement very few funds can claim. Despite the headwind of a rising Canadian dollar, the fund registered a 10.2% average annual compound return for the five years ended July 31, 2005, placing it in the top tier of global equity funds. In 2003, the fund produced a stellar 34.6% annual return up against the MSCI global benchmark’s 9.4%. And 2004 was an equally strong year, with the fund delivering a 11.9% return, virtually doubling the benchmark. Year-to-date, the fund is up 4%.

Despite massive redemptions over the past few years, Templeton Growth is still one of the largest foreign funds in Canada. It, too, has produced positive returns in two of the past three years (14% in 2003; 8% in 2004) posting an average annual compound return of just 1% for the past five years, though, eclipsing the index slightly but falling well short of the Cundill fund. Year-to-date, the fund is up about 4.3%.

Peter Cundill and his team have managed Mackenzie Cundill value fund since its inception. Over more than 30 years, Cundill’s philosophy and conviction have never changed; he is a deep value manager who is often quoted as looking to “buy a dollar for 50 cents.” Liquidation value of a company is the key measure he looks for, holding deeply discounted stocks for longer than most managers.

It has now been about four years since George Morgan took over Templeton Growth, making him one of only four managers the fund has had over the past half century. Based in Nassau, Bahamas, Morgan joined the Templeton group in 1995. Prior to this, he worked with Barclays McConnell and Associates, and Sun Life Investment Management.

Morgan typically works from a buy list of some 150 names. These are companies that, for one reason or another, are out of favour. Their status is determined by forecasting earnings to develop a forward-adjusted price/earnings ratio. The time horizon for these forecasts is generally five years, historically resulting in low turnover — although turnover generally increases in funds suffering from steady redemptions.

Despite their common discipline, the level of position diversification in these two funds is quite different.

The popularity of the Mackenzie brand means the Cundill fund has to contend with a steady inflow of cash, despite few locations in which to invest. Cundill has always been willing to build up cash, however, holding roughly 30% right now. Morgan, whose life has been complicated by redemptions, currently has some 9% of the portfolio in cash.

When he came on board, Morgan began slashing the number of stocks the Templeton fund holds. It currently holds about 90 names, less than half the number it held three years ago. He generally plants up to 25% of assets in the top 10 holdings, with broad sector diversification but no currency hedging.

Cundill’s approach is much less diversified, with only 30-odd holdings currently. The fund’s top 10 stocks account for about 35% of its assets. There are no formal limits in terms of geographic exposure for the fund, so the mix is often quite at odds with the average fund in the category. To avoid the currency risk, exposure is almost always hedged back to the Canadian dollar.

@page_break@With this in mind, it’s not too surprising to see that 35% of the fund is invested in Japan.
In fact, Japan and Asia together account for close to half the fund, with 11% invested in
the U.S. and some smaller holdings in Europe.

At only 27%, the Templeton fund is substantially underweight in U.S. equities, although this number has climbed in the recent past. Europe accounts for 44%, with Asia and Japan accounting for another 19%. Both funds have small holdings in Canadian equities.

Both funds carry lower price-to-earnings than many of their counterparts. However, price-to-book measures and dividend yields illustrate some of the differences between the two, with the Cundill fund generally favouring more mid-cap stocks than Templeton.

Given the similarities in style, one might expect these funds to present similar risk profiles. But they don’t, and the comparison has favoured the Cundill vehicle in recent years. With a standard deviation of 15.9, the Templeton fund’s volatility has slowly increased, although Morgan has backed off on the cyclical sectors most recently. The Cundill fund’s 11.7 rating over the past five years is sharply lower than both the index and its peer group.

Similarly, the funds’ relative Sharpe ratios of -0.08 (Templeton) and 0.62 (Cundill) indicate the latter fund has been far and away the better risk-adjusted performer over the five-year period, widely outperforming the benchmark and the average fund.

A superior track record, along with a recognizable brand and the same manager at the helm throughout (although long-time co-manager Tim McElvaine has left), suggest the Cundill fund is an excellent choice for value investors.

The Templeton fund has certainly stood the test of time but the number of departing investors is a real concern to analysts. “Although it is difficult to see how redemptions can continue at this pace for much longer, any further acceleration of redemptions could negatively affect fund performance,” Morningstar cautions in a recent report. IE