Brandes to
launch funds directly
Just two
short weeks ago, San Diego-based Brandes Investment Partners LLP announced (http://www.newswire.ca/releases/March2002/26/c4380.html)
that it intends to launch its own family of mutual funds. Brandes has garnered
a large and loyal following amongst financial advisors and investors, alike,
due to their outstanding performance on such funds as AGF International Value
and AGF International Stock Class. Both advisors and investors are now
wondering what to do.
A fund
company by the name of 20/20 Funds Inc. had a fund called 20/20 U.S. Growth. It
was historically a sub-par performer. In 1994, 20/20 gave the fund a facelift
by changing the scope of the fund, from U.S. to global stock, and by appointing
a new manager. The management firm that took over in the fall of that year was
a firm that was relatively unknown to retail investors – Brandes. Within a
year, 20/20 was acquired by AGF Management Ltd.
Over the
past seven years, AGF has put a lot of effort into marketing the Brandes
philosophy and style. That story was an easy sell, of course, thanks to the
very strong performance ever since Brandes took over that original 20/20 fund,
now known as AGF International Value.
Now that
the funds managed by Brandes have been AGF’s top sellers for nearly two years,
Brandes announced its plans to terminate its long-standing relationship with
AGF and launch its own family of mutual funds. In effect, they will compete
directly with the firm that made them a household name in the Canadian retail
market.
Given the
uncertainty investors have faced over the past couple of years, the timing for
Brandes couldn’t have been better (due to its steady value style), and for AGF
it couldn’t have been worse since Brandes-managed funds are what have kept
their business growing.
Fund
manager mobility is a fact of life. I categorize fund manager changes into two
types: uneventful or major. Uneventful
changes aren’t expected to have any adverse impact on investors. Major changes
usually will entail a change of recommendation on the involved mutual funds –
either for better or worse. The announcement by Brandes is about as big as it
gets. While we don’t yet know who Brandes’ replacement will be, a glimpse into
history should show that not all changes are bad – even if they appear to be at
first.
When
Spectrum Investments went by the name of United Financial, Gerry Coleman and
Jerry Javasky managed its Canadian Equity fund. In late 1992, after many years
at the helm, Gerry and Jerry left to work for Mackenzie to launch the Ivy
family of funds. Many thought this was a huge blow to United. However, a
relatively unknown manager by the name of Catherine “Kiki” Delaney was brought
in to take charge of the fund. If we look at the performance of Spectrum
Canadian Equity vs. Ivy Canadian from October 1992 to May 1999, we find that
the new manager (Kiki) outperformed her predecessors by nearly two percentage
points annually. If we continue to track those same managers to the present,
we’ll find that gap has narrowed.
Kiki then
left Spectrum in May 1999 to manage the newly created Trimark Enterprise fund.
In this case, Spectrum appointed affiliate McLean Budden to fill Kiki’s shoes
and few, if any, investors followed Kiki to her new fund. However, investors
who remained loyal to Spectrum have earned a respectable return in excess of 9
per cent per year, but that’s more than a full percentage point each year less
than Kiki’s loyal followers.
(Gerry
Coleman now leads CI Harbour funds; while his former partner, Jerry Javasky,
continues to lead Mackenzie’s Ivy team.)
If nothing
else, this brief glimpse into history should show that there is no general rule
when it comes to such situations. It’s tough enough to guess whether it’s
better to stay put or follow a departing manager. That job gets much tougher
when we don’t even know who’s taking the place of the departing manager – as is
the case with AGF and Brandes.
In short,
my advice to advisors and investors in any mutual fund managed by Brandes is to
simply sit tight. Don’t make any rash moves until we find out who AGF gets to
replace Brandes.
Some may be
afraid to stick around for fear of a “redemption run” on the affected funds.
Looking at similar situations at AIC, Altamira and Trimark in the past
indicates that no more than about 20 to 25 per cent of the fund’s assets will
leave AGF – but that’s a worst-case scenario. My gut tells me that the amount
of money that leaves AGF at the end of the day (as a result of Brandes’
departure) will be in the 10 to 15 per cent range – hardly anything to fear.
Once an
announcement has been made, I will report back with my assessment. In the
meantime, I am urging investors and advisors to be patient.
Dan Hallett, B.Comm., CFP, CFA is Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, and Manitoba.