When the concept of value investing was conceived in the 1930s, it simply meant purchasing stocks that sell for less than the value of the company’s tangible assets, such as property, plants and equipment. There’s more to it than simply picking up stocks that growth investors once loved but are now dubious about buying.

Successful value managers don’t buy stocks just because they’re cheap; managers have to be assured that any problems are temporary and, more important, solvable.

Two funds that follow this strategy are the $4.2-billion CI Harbour Fund, offered by CI Investments Inc. , and AGF Funds Inc. ’s $305-million AGF Canadian Real Value Fund. The managers may differ a bit on their definitions of value, but both adhere to strict guidelines that are often likely to be at odds with the market’s overall direction, while trying to trim downside risk.

A top-quartile performer more often than not over its life, CI Harbour Fund faltered slightly in 2006, returning only 15.2% relative to the S&P/TSX composite index’s 17.3%. The CI fund returned 23.5% in 2005 and 15.8% in 2004, outperforming the benchmark.

The opposite is true of AGF’s Canadian Real Value Fund. After lagging in 2004 (at 8.4%) and 2005 (12.1%), it rebounded last year, posting a first-quartile return of 17.4% despite holding only a small portion of its portfolio in energy stocks.

The numbers translate into an average annual compound return of 11.9% for the five years ended April 30 for the CI fund and a disappointing 6.5% for the AGF fund, with the former fund eclipsing the average Canadian equity fund’s return of roughly 10% but falling short of the benchmark’s 14.1% return. As a result, the CI fund receives a four-star ranking from Morningstar Canada, whereas the AGF fund is a two-star performer.

Veteran manager Gerald Cole-man, head of the Harbour funds management team at Tor-onto-based CI, joined the firm 10 years ago after a long career at United Financial Management and Mackenzie Financial Corp. Coleman takes a value-driven, bottom-up approach in evaluating companies. He looks for strong financials, competent management and consistent earnings growth. His funds are known for his often substantial cash holdings.

Right now, stocks are certainly not undervalued but more in a comfortable middle-ground position, says Coleman. He continues to back the financial sector; this year, he predicts, there may be further gains in banking stocks. The fund is slightly overweighted in materials, neutral in the interest-sensitive and oil sectors, and largely avoids telecommunications companies. Major Harbour holdings include several Canadian banks, Suncor Energy Inc., Rio Tinto Group and Alcan Inc.

Keith Graham, lead manager of the AGF fund, joined the firm three years ago, after several years of working for AIM Funds Management Inc., the Ontario Teachers’ Pension Plan Board and Fidelity Investments Canada Ltd. Since taking over the AGF fund, he has made fairly drastic changes, gradually whittling down its holdings and moving it away from the more tactical tilt of his predecessors.

Much of Graham’s valuation work involves a thorough examination of the risk/reward profile of each holding. His ideal company has a strong competitive position, financial strength, solid management and repeated returns on capital.

Once a big believer in oil and gas stocks, Graham is currently bearish on commodities, a posture he has been holding for some time. As such, the fund has been significantly underweighted in the sector in the past few years. The move had held back performance until the energy sector’s recent decline.

Graham’s biggest exposure remains financials, at 31%, with consumer stocks accounting for 22% and industrials 11%. He has very little exposure to metals and most of what he does have relates to gold.

The CI fund, holding roughly 40 stocks, regularly plants at least 40% of its assets under management in its top 10 holdings. Tracking essentially the same number of stocks, AGF’s approach is even a bit more concentrated, with its top 10 holdings accounting for about 49% of assets. Turnover in both portfolios is quite low and both funds have small holdings in Canadian income trusts.

Both managers are quite willing to hold cash, currently about 15% of AUM for each. The CI fund consistently holds a great deal of foreign content, 32% currently, and roughly half of that is in the U.S. The AGF fund’s foreign content, now roughly 24%, has a strong tilt toward the U.S. The foreign-content number is likely to jump a bit, as AGF recently amended its fund guidelines to allow Graham to invest up to 49% of fund AUM offshore.

@page_break@The change should allow the AGF fund to gain more exposure to U.S. health care and technology stocks, not currently significant elements in the portfolio. It already has solid holdings in global blue-chips such as Microsoft Corp., Cisco Systems Inc. and Johnson & Johnson Inc., all of which are delivering respectable growth but trade at remarkably low price/earnings multiples. Recent additions to the portfolio include Amgen Inc., Canadian Tire Corp. and Goldcorp Inc.

Both managers primarily invest in large-cap stocks, but the AGF fund features more mid-cap names than its rival. Both funds carry lower P/E and price/book measures than the majority of their counterparts. The CI fund’s dividend yield is slightly lower than that of the AGF fund.

Given the similarity in style and portfolio strategies, the funds present equally similar risk profiles, favouring the AGF fund with its standard deviation of 8.2 in the past five years, vs the CI fund’s 8.8. Both funds register significantly less volatile results than the benchmark and the median fund in the category.

Similarly, the funds’ relative Sharpe ratios indicate that the CI fund has been the better risk–adjusted performer in the period, eclipsing both the benchmark and the median fund. The gap between the two funds has closed sharply in the most recent three-year period.

Both funds are solid offerings. But, on balance, the nod here has to go to the CI fund, an above-average fund since its inception. For many value-leaning investors, however, the AGF fund’s revamped portfolio will be of interest.

With a 2.43% MER, the AGF fund is not cheap on an absolute basis, but it is priced competitively among its peers, says Morningstar. IE