You wouldn’t think that 2010 would have been a good one for value-style managers of mutual funds. Stock markets traded in a narrow range, without a significant difference between good-quality and poor-quality stocks. Market returns were driven by a relatively small number of companies, and many of those were in the resources sector or were small- or mid-cap firms.
But that didn’t stop some value managers from posting excellent investment performance. Franklin Templeton Investments Corp. , whose funds are mostly of the value style, had 82.5% of its long-term assets under management in funds in the first or second performance quartiles for the year ended Dec. 31, 2010, compared with 75.6% in 2009, according to Morningstar Canada data. (Companies are based in Toronto unless otherwise noted.)
That achievement was second only to Dynamic Funds Ltd.’ s 84.5% of long-term AUM in the top two quartiles, up from 66.7% in 2009. Dynamic’s value funds outperformed, with 86.2% of their AUM in above-average performing funds vs 77.2% for other equity and balanced funds. Jordy Chilcott, Dynamic’s executive vice president, says the firm’s active management and its culture of encouraging fund managers to go with their beliefs is responsible for Dynamic’s ongoing strong results.
A couple of other factors also helped both fund firms. Both were overweighted in energy — a sector that value managers tend to underweight — and Franklin Templeton’s funds also were overweighted in Asia (excluding Japan).
In contrast, funds sponsored by Invesco Trimark Ltd. and Brandes Investment Partners & Co. continued their weak performances. Invesco had 31.2% of its long-term AUM in the top quartiles in 2010, down slightly from 33.2% in 2009; 28.7% of Brandes’ long-term AUM was in top two quartiles, an improvement from the dismal 11.5% recorded in 2009. But both firms’ funds had performed better in 2008, particularly Trimark’s (78.6%), when markets didn’t punish high-quality companies as much as low-quality ones as the credit crisis unfolded, and when these firms’ limited exposure to resources was a positive attribute.
“We look for strong companies with good management and good valuations,” says Graham Anderson, chief investment officer with Trimark, “so it’s not surprising we underperform in very narrow markets.”
Oliver Murray, Brandes’ presi-dent and CEO, says markets are starting to recognize the mispricing of quality companies, which he believes will lead to much better performance of Brandes’ funds in 2011.
At the bottom of the investment performance list was Winnipeg-based Investors Group Inc. However, Scott Penman, executive vice president and CIO of I.G. Investment Management Ltd. Investors Group’s investment-management arm, says Investors Group funds are designed to produce good returns over longer periods of three or more years — and that performance over these periods remain good.@page_break@Penman views what he considers the temporary weakness in 2010 as the result of a number of Investors Group’s large funds being compared with funds that have much different mandates. For instance, the $13.5-billion Investors Dividend Fund is primarily invested in financial services (60% of AUM as of Dec. 31). But 60 of the 67 funds it is compared with had less than 40% of AUM in that sector and, thus, more in sectors that performed better.
Comparability within categories was also an issue for TD Mutual Funds. Both the $5.1-billion TD Income Advantage Fund and the $4.8-billion TD Monthly Income Fund slipped to the third performance quartile. This pushed down the percentage of TD funds’ total long-term AUM in above-average performing funds to 35.1% from 85.5% in 2009.
Bruce Cooper, vice chairman of TD Asset Management Inc. , notes that both TD funds tend to be at the low end of the allowable equity held for the category in which they are ranked, which in 2010 meant they didn’t have as much return from equities as those with which they are compared.
At Lévis, Que.-based Desjardins Group, the focus is on the “managed solutions” that use its funds; when Desjardins compares its “solutions” with others that have a similar asset mix and risk exposure, performance is above average, says Steven Zanolin, Desjardins product specialist in Montreal.
CI Investments Inc. had a different experience. Returns for its Signature and, in particular, its Harbour funds were dampened because these funds had reduced their exposure to bonds and increased cash as their managers had believed that the 30-year bond bull market was at an end, says CI president Derek Green. These funds also had a lot of exposure to foreign equities, which didn’t perform as well as the S&P/TSX composite index.
Other strong performers in 2010 include Acuity Investment Management Inc., Canadian Imperial Bank of Commerce‘s two fund arms and RBC Global Asset Management Inc.
Acuity’s asset-allocation strategy worked well last year, says Stephen Crawford, the firm’s senior vice president and national sales manager. Acuity funds were overweighted in corporate bonds, high-yield fixed-income and in equities in general; they had disproportionate exposure to cyclical sectors that benefit from global economic recovery — materials, energy, industrials, technology and consumer discretionary.
In CIBC’s case, the firm has been working for four years or so on “improving fund performance and keeping it there,” says, Steve Geist, president of CIBC Asset Management.
Daniel Chornous, CIO at RBC GAM, says some of the firm’s biggest funds, which don’t follow a particular investment style and invest mostly in large-caps, moved to above-average performance in 2010 as the narrow markets widened somewhat. RBCAM had suffered in 2009 when, as Chornous says, “stocks were being treated as a common basket of risk, and the market didn’t care whether a company was a quality one or not.” IE