Mutual funds rarely age gracefully. Many can be on the top of the heap one year, then become bloated and hard to manage just a few years later. Luckily, this doesn’t happen to all of them.

Consider the giant $5.1-billion CI Canadian Investment Fund, a 73-year-old offering that CI Mutual Funds Inc. inherited when it acquired Sun Life Financial Inc. ’s fund operations a few years ago. Overall, the fund has held its own in up markets and sharply outperformed in down markets compared with its peers, an attribute that leads fund-rating firm Morningstar Canada to brand it “one of the elite in the Canadian equity category.”

Let’s compare it with the solid-performing but otherwise static $861-million AIM Canadian Premier Fund, sponsored by AIM Funds Management Inc.

The CI fund, a value-style fund in an environment that has favoured growth managers, has enjoyed first-quartile performance over the past five years, including a breakeven year in 2002, when the index dropped 12.5%. The result is an average annual compound return of 12.8% for the five years ended Aug. 31, including a 5.8% boost so far this year.

The AIM fund, which has suffered steady redemptions, has rebounded sharply after being decimated by the technology-driven meltdown, posting first-quartile annual returns of 17.8% in 2004 and 29.3% in 2005, for a five-year average annual compound return of 11.5% — also a first-quartile performance. Year-to-date, the fund is up 7.2%.

As a result, both funds receive above-average Morningstar rankings of five and four stars, respectively, suggesting the CI fund’s risk-adjusted performance has been superior. After all, manager Kim Shannon was named Fund Manager of the Year at the 2005 Canadian Investment Awards gala.

Shannon has managed the CI fund since 1996, initially at Mercury Asset Management and now under her own banner, Sionna Investment Managers Inc.

She takes a bottom-up value approach to stock selection. Looking for companies trading at statistically cheap prices, the fund’s picks are winnowed down using book value, historical return on equity and relative price/earnings ratios. Her stock-picking methodology has three components: a valuation measure; an earnings measure; and a relative trading measure.

After a career with the Swedish Navy, Clas Olsson joined AIM in 1994 as an international portfolio analyst and took responsibility for Canadian Premier in 1997. He manages several other mandates at the firm.

A growth manager with a bottom-up strategy, Olsson looks for two types of growth stocks. The first consists primarily of pure earnings momentum stocks that are growing faster than the market and have positive earnings revisions and surprises. The second category consists of core growth stocks that can grow steadily even in a recessionary environment. He places great emphasis on the quality of earnings, selling stocks in the face of earnings deterioration in the company or sector.

Despite the different takes on evaluation and only a few common holdings, the level of position diversification between the two funds is somewhat similar, although this has not been so in the past.

Holding about 85 to 90 stocks, the AIM fund plants almost a third of its assets in the fund’s top 10 holdings. The CI fund’s approach is more diversified, holding 124 stocks, but the fund’s top 10 stocks account for 47% of assets.

Although Olsson is willing to make larger-scale adjustments in sector selection, both managers maintain low turnover. This is reflected in their tax-efficiency ratings — 100 for the AIM fund and 99 for the CI fund.

Typically, neither manager is anxious to hold cash, which recently was about 10.8% of assets for the CI fund and half that for the AIM fund.

Olsson is much more willing to maximize foreign content, which was recently 27.3% of assets, primarily in international stocks, which are unhedged. Shannon, on the other hand, stays much closer to home, with only 10.5% foreign content, a historically low figure. The balance of holdings for both is in Canadian equities, although the CI fund also has a 4% weighting in income trusts; AIM has 1.9%.

One constant for Shannon has been her sector-neutral approach. At the time of writing, the fund was modestly underweighted in the energy and materials sector, with a tilt toward financial services.

By contrast, Olsson has been willing to make concentrated bets. At the height of the high-tech bubble, almost half the portfolio was in technology stocks. Management has since introduced broader diversification. Olsson is now focusing on the industrial, financial and consumer sectors.

@page_break@Both managers primarily invest in large-cap stocks, although Olsson has recently been investing in smaller caps. The CI fund’s conventional valuation ratios are similar to those of other Canadian larger-cap funds. But because Shannon believes dividends are key to risk management, she runs the fund with a dividend yield slightly higher than the market index.

With the AIM fund’s greater emphasis on higher growth, its P/E ratio is lower than that of most of its peers and the S&P/TSX composite index, as is its average market cap.

Given the differences in style and portfolio strategies, you’d expect these funds to have different risk profiles. The difference is quite significant, favouring the CI fund by a substantial margin. It is the only fund that registers less volatile results than the median fund in the Canadian equity fund category.

These two funds’ relative Sharpe ratios indicate the CI fund has been the better risk-adjusted performer over the period, although both funds outperformed their benchmark.

Shannon has seen 10 straight years of positive annual calendar returns since taking over the CI fund — a claim few managers can make. Add in a 2.28% MER, lower than almost 75% of its peers, and it’s not hard to see why the CI fund has grown dramatically.

The AIM’ funds rebound is also noteworthy, and it would be a nice offset to the CI fund. IE