Fund companies regularly remind clients that long-term investing is the best path to follow, yet short-term thinking abounds and investors can be urged by the media or advisors to take action when performance lags. So, at what point should investors give up on funds that have enjoyed better days?

Let’s consider AIC Ltd. ’s $1.1-billion AIC Advantage Fund and its clone Advantage Fund II, as well as Mackenzie Financial Corp. ’s faltering $5-billion Ivy Canadian Fund.

AIC Advantage, much maligned in recent years and suffering significant net redemptions, lost 22.2% in 2002 in terms of return, when just about every other fund was down half that amount or less. The 10-year numbers are still decent, however, and it has produced positive returns recently, delivering a 16.9% gain in 2003 vs a sharp rise of 27.6% in the S&P/TSX index. Last year, it again lagged the benchmark sharply, producing a modest 5.8% gain vs the index’s 14.5% return. Year-to-date to Oct. 31, the fund is up about 5.7%.

In contrast, the giant and once top-performing Ivy Canadian fund was off a reasonable 4.7% in 2002, but then rose only 8.7% during the 2003 rebound. Last year, it added a further 8.8% return, still finding itself mired in the fourth quartile. So far this year, it’s up a modest 2.7%.

As a result, the Advantage and Ivy funds earn only two- and three-star rankings, respectively, from Morningstar Canada, suggesting that, while the Ivy fund has been the stronger performer of the two, both highly concentrated funds have lagged their peers in recent years.

Storied Michael Lee-Chin, who entered the money-management industry in 1977 as a financial advisor prior to starting AIC, has taken a long-term view toward building his own business as well as the funds he directs. Known for its buy-and-hold investment philosophy, AIC Advantage concentrates on what Lee-Chin and co-managers see as solid businesses in must-have sectors. Businesses on the AIC list must have strong brands with significant market share, high margins and steady cash flow. Consequently, much of the portfolio includes the firm’s competitors in the asset-management business.

Jerry Javasky has 18 years of experience in the financial services industry, beginning his career with United Financial Management, and joining Mackenzie Financial in 1992 to build the Ivy brand. A well-established contrarian with a penchant for building cash reserves, he was named Canadian Fund Manager of the Year in both 1998 and 2002.

Javasky takes a bottom-up view, looking for companies that can steadily expand their operations profitably with limited volatility. Discounting projected future cash flows to the present, his style is somewhat similar to that of AIC, except when it comes to sector concentration. Looking for a broader portfolio, he tends not to overload any one sector.

He also generally avoids cyclical energy or mining stocks as being too risky and, when he does invest in them, he tends to nibble. This has, in large measure, accounted for much of the fund’s recent shortfall, as energy holdings are quite low. Historically, when things are really on fire, the fund tends to fall behind, but the reverse is also true. In tough times, the fund will often tend to do relatively better compared with similar funds.

Not surprising, given their narrow focus, there are few common names among the two funds’ bigger bets. Although of similar size and shape, the two portfolios have several differences. The AIC fund seldom holds more than 15 positions, whereas the Ivy fund tracks closer to 25 to 30. Portfolio turnover is extremely low in both funds, which are among the most concentrated in the Canadian equity fund universe.

The AIC fund, for instance, has more than 92% of its assets invested in the fund’s top 10 holdings, including sizable stakes in CI Fund Management Inc. (13.4%), Amvescap Inc (12.1%) and AGF Management Ltd. (12%).

In the Ivy fund’s case, the top 10 represent roughly 63% of the fund. Major holdings include Shoppers Drug Mart Inc. (9.15%) and Canadian National Railway (6.2%).

Although many Canadian equity funds now take their foreign content past the old 30% limit, Javasky’s fund has only about 25% of assets invested outside Canada, primarily in the U.S., with roughly 5% in Britain. The AIC fund places about 30% of its money outside our borders, virtually all of it in India, Britain and Myanmar. While the AIC fund seldom holds much cash, Javasky has always been willing to move to a large cash position — as much as 30% — in volatile markets to protect assets. Currently, the fund has a 10% cash reserve and a further 5.5% holding in income trusts.

@page_break@Both funds favour large-cap stocks, although the AIC fund has a lower average market cap. Other measures are largely in line with the index and the median Canadian equity fund.

Although more diversified than the AIC fund, the Ivy fund currently is significantly underweighted in energy and financial services, and has its largest overweighted positions in consumer discretionary and industrial stocks.

True to its nature, the AIC fund has no energy holdings whatsoever, with a huge tilt toward financial services, consumer staples and information technology. The fund is categorized as a Canadian equity fund, but its extremely high concentration in financial services stocks causes it to behave more like a sector fund, Morningstar cautions.

Ivy Canadian posted a five-year standard deviation of 7.4, lower than the 12.1 of the median Canadian equity fund, while AIC Advantage registered 15.3. Risk-adjusted, Ivy’s five-year Sharpe ratio of 0.13 helps push it further ahead, although both funds’ recent returns lag their peer group by a large margin.

Both funds are reasonably priced, with their MERs placing them in the bottom 30% of their competitors. Although both have struggled during the energy boom, Ivy Canadian comes out ahead on most measures. Eschewing the sector bets of AIC, Ivy Canadian is a good portfolio diversifier as its correlation to the S&P/TSX index of 0.42 is quite low. But even its 10-year numbers place it squarely in the third quartile.

At the same time, concerns about AIC are overblown, suggests Morningstar, which remains unconcerned about the fund’s recent underperformance as a second-quartile performer in the past decade.

Although net redemptions have complicated management’s task, the AIC fund requires a long-term commitment that has historically rewarded those with the discipline to stay the course, says Morningstar. IE