Harris
capable of filling big shoes
Several
weeks ago (http://www.sterlingmutuals.com/Telus_Brandes_05apr2002.htm),
I wrote about San Diego-based Brandes Investment Partners L.P. and their
decision to step down from managing mutual funds for AGF Funds Inc. to set up a
competing firm. AGF immediately launched an extensive search for a management
firm capable of filling Brandes’ big shoes. This week, the big announcement was
made and I must admit that I was pleasantly surprised.
AGF poured
a lot of marketing energy into pumping the Brandes name, philosophy, and rock
solid style. Marketing power plus great returns resulted in lots of new money
invested in AGF’s funds. Many times during the past eighteen months, it was the
only reason AGF was receiving new money on a net basis, as a firm. So the
temptation to grab a big name manager with lots of marketing appeal was huge.
When AGF
began its search, it also hinted strongly at the likelihood of appointing more
than one manager to the AGF International Value (and its RSP clone) to reduce
their “dependence” on any one management firm. However, they didn’t get a big
name and only one management firm was appointed to lead their flagship global
fund.
Harris
Associates L.P.
AGF named
Harris Associates L.P. of Chicago (no connection to Bank of Montreal’s
Chicago-based Harris Bank subsidiary) as the new manager on the AGF
International Value and its RSP clone. Harris (http://www.harrisassoc.com) has been in
business for about a quarter-century, but is not well known in Canada.
They manage
money for wealthy individuals and other institutions, like charities,
foundations, and pension plans. They also offer their expertise to smaller U.S.
investors through a no-load family of mutual funds baring the name Oakmark (http://www.oakmark.com).
My first impression is that AGF has made a fine selection. Recall that 20/20 Funds Inc. (now AGF) originally found Brandes back in 1994 when it was a relative unknown in the Canadian industry. I think they've done a good job of finding a manager that nicely embodies the value philosophy to which unitholders of the AGF Int'l Value have grown accustomed.
(Recall that a ‘value’ stock-picking style focuses on buying stocks at bargain basement prices – doing all possible not to overpay.)
While no two firms manage money in identical fashion, the research I've done so far indicates that unitholders who remain with AGF International Value should be well rewarded with a similarly "stingy" value style.
While Harris and Brandes each value stocks using somewhat different methodologies, each tends to hold a fairly concentrated portfolio; each has a deep team of analysts to support portfolio managers; and neither is afraid to follow bad news to find an investment opportunity. That said, there are definite differences, but I’d guess they’re not different enough for most people to notice.
I am comforted by the fact that AGF resisted the urge to spread the money too thinly (among two or three managers) or to get a big name with greater marketing value than Harris. Their move indicates a greater concern for doing the best thing for investors rather than pleasing their marketing department. Ironically, choosing a smaller firm may have given them more leverage to include exclusivity and non-competition clauses in the management agreement - which should squash any fears of a repeat of a “Brandes-type bomb” in the future.
In scanning the list of stocks in both manager's portfolios, they're very different - only 1 in common. (That’s based on a comparison of Oakmark Global as of September 30, 2001 and AGF International Value as of December 31, 2001.)
However, Harris has indicated a keen sensitivity to taxable
investors. And it's worth noting that for more than a year, U.S. mutual funds
have been mandated by the SEC to report both pre-tax and after-tax returns. I
would expect a fair amount of turnover in the beginning, with a more gradual
transition subsequently to better conform to Harris’ top picks.
Lost in
this big announcement were two other appointments. Brandes is also responsible
for AGF International Stock (an overseas stock fund) and AGF Emerging Markets
Value funds. Interestingly, AGF announced that sub-teams within their own AGF
International Advisors would assume responsibility for both funds. While I’m
doubtful that they’d be the best choices (of all firms available globally), I
think the choices are quite good.
John Arnold
and Rory Flynn will take over the AGF International Stock fund. The team has
done a great job with AGF European Equity using a value style. Since Europe
makes up 70 per cent of all stock markets outside of North America, I’d say
this fund is in good hands.
As for Patricia
Perez-Coutts' appointment to the Emerging Markets Value fund – it’s a good
move. Recall that she was the lead manager for Trimark Americas fund, which had
a unique mandate to invest in U.S and Latin American mid-cap stocks. So,
emerging markets are familiar ground for Ms. Perez-Coutts. She has managed AGF
Latin America since October 18, 2001.
Whenever
such a fundamental change in money managers takes place, it’s sometimes a
challenge to evaluate the change and make a call. I’m still doing more research
on these recent changes announced by AGF, particularly on Harris Associates.
However, I feel quite confident in saying that unitholders of all of the
affected funds should resist the urge to sell. This is particularly true of
those invested on a deferred sales charge (DSC) basis; or those sitting on big
unrealized gains on these funds in taxable accounts.
For loyal
Brandes followers, the new firm and funds should be available in a few months.
Dan Hallett, B.Comm., CFP, CFA is the 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, Alberta, and Manitoba.