With income trust funds ever more in the limelight, Canadian equity funds run the risk of being left behind. Several of AIM Funds Management Inc.’s Canadian funds have been hobbled by so-so results and, at AGF Funds Inc., retail investment dollars have been pouring out the door for more than three years now. Can two old stalwarts from these families deliver the goods once again?

AGF’s $2.1-billion AGF Canadian Stock Fund had a nice run during the technology boom but more recently has dropped off relative to its peer group. It slid 14% in 2002, before rising 22.2% in 2003 and a further 12.2% last year — lagging both the average fund and the TSX/S&P composite index for that period. So far this year, as of August 31, the fund is up sharply, notching a 12.6% second-quartile gain.

A slightly smaller alternative is the $1.35-billion AIM Trimark Canadian Fund. A top-quartile performer in 2001, it has also lagged in recent years. It slid 10.1% in 2002, bouncing back with a 21.4% rise in 2003 and a 9.4% jump in 2004. Year-to-date, the fund is up a modest 6.3%, trailing both the index and the average fund.

Both funds earn mid-range three-star rankings from Morningstar Canada, suggesting each has had trouble separating itself from the pack in recent years, although each fund has had its strong periods in the past.

Martin Hubbes, newly appointed chief investment officer at AGF Management Ltd. , got his start in Europe. Armed with a master’s degree in biochemistry and an MBA from the University of Toronto, he initially ran AGF’s office there, returning to Canada
10 years ago to look after several funds here.

Hubbes describes his investment style as growth at a reasonable price. He looks for companies with powerful brand names and patents, whose revenue, earnings and cash flow are growing and whose expansion plans are more likely to be financed internally.
Selected companies must have the heft to take on international firms and develop
globally, he maintains.

AIM Trimark lead manager Ian Hardacre worked for both the Hong Kong Bank of Canada and Bank of Nova Scotia prior to joining Ontario Teachers’ Pension Plan as an analyst. He joined Trimark in 1997, first as an analyst and, more recently, as manager of this and other AIM Trimark funds.

Hardacre uses a bottom-up strategy, buying solid growth companies at value prices.
Discounted cash flow is a key measure, with only companies that exhibit strong franchises, rising margins and solid, free cash flows making the list.

Although Canadian equity funds now can take their foreign content past the 30% limit, neither of these funds have adjusted their mix significantly. The AIM Trimark fund has approximately 24% of its assets invested outside Canada, virtually all of it across the border. With the rise of the Canadian dollar, this has been a drag on performance. By comparison, the AGF fund has only 6% of assets in the U.S., with a further 11% in Europe. U.S. holdings, specifically health care, have been much larger in the past, dulling performance. Neither fund holds much in cash or income trusts.

Both managers have about 36% of the funds’ assets in their top 10 holdings. The AIM Trimark fund seldom holds more than 60 positions, whereas AGF Canadian Stock tracks closer to twice that. Both can be described as low-turnover options.

Both funds favour large-cap stocks, although the AGF fund has a slightly higher
average market cap. Other portfolio measures are largely in line with the index and the average fund in their category.

While the two funds do have several large holdings in common, their mix is quite different. Recently Hardacre was sharply underweighted in energy stocks, which account for a scant 6% of the portfolio vs 26% for the benchmark. Hardacre is, however, considerably overweighted in consumer stocks, as well as Barrick Gold Corp.

The AGF offering is slightly heavier in financials, with a significantly larger tilt toward energy and a below-market weighting in information technology. Hubbes’s major holdings here include most of the major banks as well as Encana Corp. and Power Corp. of Canada.

The AIM Trimark fund is the least index-like of the pair, with a five-year R-squared measure of 58 (the closer to 100, the higher the correlation with the index), vs 90 for the AGF fund. Hardacre has clearly been more willing to deviate from the benchmark than many of his peers, as evidenced by his slant away from oil and gas.

@page_break@These two funds exhibit somewhat similar risk profiles. AIM Trimark Canadian posted a five-year standard deviation of 10.9, significantly lower than the 14.8 posted by the index, while AGF Canadian Stock registered 11.4. While the AIM Trimark fund has had lower volatility than nearly 75% of its competitors, it has never experienced a negative return over any three-year period, according to Morningstar data. As well, the fund has had half as many losing 12-month periods as the benchmark, sliding an average of 9% vs 14% for the index. Risk-adjusted, AIM Trimark Canadian’s five-year Sharpe ratio of 0.38 helps push it ahead of the AGF fund’s 0.03.

The nod here has to go to the AIM Trimark offering. Recent numbers notwithstanding, it has been an above-average fund over the past 10 years. Then there is the boost provided by its remarkably low management expense ratio of 1.64. Excluding low-margin affinity offerings, there are only five cheaper funds within this category,
Morningstar reports. IE