John arnold, chief in-vestment officer and managing director of Dublin-based investment firm AGF International Advisors Co., vows that he and his team will boost the sagging performance of AGF International Value Fund, the flagship of parent AGF Funds Inc. of Toronto.

AGFIA took over the fund and its “class” version in September from their former manager, Chicago-based Harris Associates LP.

AGFIA also manages a handful of other AGF funds from Dublin, including AGF World Balanced, AGF European Growth Class and AGF U.S. Value Class.

“Our team of 10 professionals has 143 years of combined investment experience, and every fund we’ve taken over has shown improved performance,” says Arnold, a 35-year industry veteran. “We don’t have a problem adding value.”

AGF International Value has fallen on hard times since 2002, when San Francisco-based Brandes Investment Partners LP suddenly quit as manager of it and AGF International Stock Class, in order to set up a Canadian office.

AGFIA, an AGF subsidiary, subsequently took over the reins of AGF International Stock Class. But, looking to diversify among fund managers, AGF conducted a rigorous search for a new manager for the larger and more popular AGF International Value. Ultimately, the reins were handed over with much fanfare to Harris, which, like Brandes, had a reputation as a top value-oriented money manager.

However, the past four years have not been kind to the fund. Advisors and their clients have complained about AGF International Value’s performance, and fund assets have slipped to $3.3 billion, less than half of the $7.4 billion that were handed over to Harris. For the three years ended Aug. 31, the fund had an average annual compound return of 4%, less than half that of its peers.

Meanwhile, AGF International Stock Class, managed by Arnold’s team, reaped a superior average annual compound return of 16.4% in the same period.

BOTTOM-UP STYLE

AGFIA uses a strict bottom-up investment philosophy that Ar-nold refers to as seeking “outrageous value.” He scours the globe for companies that meet his “30/30/30” criteria. To qualify for inclusion in AGFIA’s portfolios, a company must have a price/earnings ratio that’s 30% below the market average; a dividend yield 30% higher than the market average; and a current trading price 30% lower than the stock’s peak. Every year, his team meets personally with management teams in 800 companies of interest.

“The [AGFIA] team members are not afraid to make significant bets against benchmark indices, and it has usually worked in their favour,” says Dan Hallett president of Windsor, Ont.-based Dan Hallett & Associates Inc. “They do a whole lot of hands-on due diligence — and not just high finance. They’re out there talking to all kinds of people and visiting facilities.”

Arnold says AGF International Value will soon have a portfolio that will resemble a combination of AGF International Stock Class and AGF U.S. Value Class. AGF International Value has a geographical mandate to have 30% of its assets in the U.S., 50% in Europe and 20% in Asia. He and his team are busy selling off about 45 of the 50 holdings they inherited and, with a goal of 80 companies, they will be putting 75 new names into the portfolio.

“When we do a transition, we do it gently. And the only way anyone knows we’ve come on board is that performance improves,” Arnold says. “We know the worth of a share and won’t sell at a stupid price. We also know the price we want to pay for the shares we’ll buy. Time is our friend. It’s not our job to punish clients but to operate in their best interests.”

Arnold estimates it should take three to six months to shape the portfolio to his tastes, but admits he only just sold the last two unwanted names in AGF International Stock Class that he inherited four years ago.

“We’re patient and we sell when a stock hits our target,” he says.

He says one of the hardest parts of a portfolio manager’s job is saying “no” to enticing stocks. But he thinks it’s far more efficient to take the time to make decisions and make fewer of them. Once stocks are bought by AGFIA, the average hold is typically eight years. Coincidentally, there hasn’t been a manager leave the firm in eight years, either.

@page_break@AVOID MISTAKES

“The most important thing is to avoid mistakes, and we don’t make casual decisions,” Arnold says. “If we really like a company, we’re going to hold a significant amount of it. There are very few great opportunities in this world. And when we find one, we act on it.”

Arnold will hold up to 10% of a fund’s assets in any one company, but doesn’t usually go that high. Typically, he’ll have a couple of holdings accounting for 8% or so of assets, and a handful of others for about 5%. The top 10 holdings tend to be 50% of a portfolio, he says. Nor is he afraid to be overweighted in sectors. For example, he could have as much as 60% of assets in the financial sector, which is about double the sector’s weighting on an average global market basis.

“Some managers try to reduce risk by having 120 stocks in the portfolio,” he says. “We do it by having confidence in the companies we hold. That comes from having an extensive relationship with management.”

Arnold likes to visit companies around the world in person, and is on the road about seven months of the year, while other members of his team are on a “three-month treadmill.” And Arnold never stops talking to management. At Royal & Sun Alliance Insurance Group PLC, the largest holding in his various portfolios, he met with management six times in 2005 and four times so far this year. He doesn’t rely on annual reports or company auditors, and believes strongly that doing his own research is sometimes the only way to spot financial problems or crooked management.

Arnold says 30% of the companies in his portfolios have been the beneficiaries of merger and acquisition activity. For example, Arcelor SA of Luxembourg, Europe’s largest steel company, was recently bought by Mittal Steel Co. of London; Germany’s largest bank, HVB Group, was bought by Italian bank Unicredito Italiano.

Arnold gravitates toward established dividend-paying companies with market caps of at least $500 million, and the average market cap of his holdings is $25 billion. IE