When track
records are meaningless
Depending
on your source of mutual fund research, you may be looking at numbers that
don’t mean a thing. By that I mean that many historical track records that
exist for some of today’s best and/or oldest funds don’t reflect current
mandates or managers. In short, many times a track record means absolutely
nothing. Here are a few examples of fund track records of which to be watchful.
Once run by
resource specialist Jonathan Baird, both of these funds used to emphasize
relatively smaller resource companies and were traded frequently. For a time,
it worked well but sagging performance and a desire by Baird to strike out on
his-own turned these funds into orphans in 1996. By 1998, a significant
transformation had taken place. David Goodman had been assigned to the Fund of
Canada with a large cap value mandate. Dynamic then lured away veteran Rohit
Sehgal from London Life to run the Power Canadian Growth using his successful
large cap earnings momentum strategy. I believe that both funds have received
very positive makeovers, but look much more than a couple of years into the
histories of these funds, and you’ll see two funds that are quite a bit riskier
than I would expect going forward.
Prior to
the fall of 1994, this was a mediocre performing US equity funds going by the
name 20/20 US Growth Fund. (Recall that AGF acquired 20/20 funds in the fall of
1995). 20/20 Funds decided to change the fund’s mandate to include global
equities and found Brandes Investment Partners. Unknown to most Canadians,
Brandes took to the road to introduce themselves to financial advisors across
the country. Even with no Canadian-based track record, their story and was
impressive. Now, many investors have found out just how impressive their
results have been.
Newer
investors will recognize this as star manager Derek Webb’s US stock fund, which
is run in his popular earnings momentum style. While Webb moved to CI last
summer, this fund boasts a record that is more than ten years old. Prior to
that, the fund was conservatively run and bought the biggest names on the New
York Stocks Exchange. Bill Priest, of BEA Associates, had managed the fund
since inception using a blended style of value and growth. When his style
drifted somewhat (and returns followed), the fund was taken over by the
passionate James Abate of Credit Suisse (which had previously acquired BEA
Associates).
Abate
managed the fund in a similar style but spent much more time studying a
company’s qualitative factors. During his relatively short time at the helm of
this fund, he had good success and would have fared quite well in this rocky
environment. A year ago, he had nearly half of this fund in defensive stocks.
Abate left for the corporate finance world and CI appointed an internal manager
until Derek Webb’s arrival. Again, the historical profile of this fund
understates the risk that can be expected from Webb’s gun-slinging momentum
style. Let’s just hope that higher risk pays off for unitholders in the way of
higher returns.
Though its
track record is impressive it has no relation to the current team running the
show. This fund was originally managed by Lazard Frères, a New York-based money
management firm. Lazard was taken off the job when BPI developed its own
in-house money management subsidiary. In fact, they did a terrific job for the
three years or so that they ran this small cap sizzler. However, when CI
acquired BPI, another management change occurred, in favour of CI’s newly built
in-house team. The fortunate part for unitholders is that there isn’t a great
deal of difference in these three teams’ styles, as compared to the other
examples above.
So how do
you spot potentially misleading track records? A good start is comparing the
manager’s tenure to the age of the fund. If there’s a big gap, start asking
questions. Often (though not always), fund companies’ client service people
have fund histories directly at their disposal. Also, that annual mutual fund
guide some of you pick up from year to year could prove to be a useful
reference. Fund descriptions in these books are fairly detailed and will allow
you to quickly judge if the track record of the fund you bought today was
achieved under a different identity. As always, buyer beware.
The More Things Change….
Speaking of
manager changes, CI announced this week that John Zechner will be stepping down
from his duties as lead manager on CI Canadian Growth, CI Canadian Balanced, CI
Canadian Income, and CI Insight Canadian Growth Pool. His firm will continue to
run the CI Canadian Bond and the CI Insight Canadian Fixed Income Pool. Zechner
says investors’ preoccupation with short-term performance is at the root of his
decision to step away from the retail side of the business and focus on
managing money for institutional clients. CI also announced that Eric Bushell
will take over all of Zechner’s old funds, with the exception of the Canadian
Balanced fund, which will be run by CI’s Wally Kusters.
Overall,
these changes are neutral in my opinion. Bushell has a successful track record,
but his emphasis until now has been on bonds, preferred shares, and high yield
stocks. He also uses more of a value driven approach, which is a sharp contrast
to Zechner. Kusters is more of a growth manager but doesn’t use the sector
rotation style that made Zechner famous. If you like Zechner’s style and want
to keep it, take a look at the Elliott and Page family. That’s where Zechner
got his start in the mutual fund industry.
Dan Hallett, B.Comm.,
CFP is Senior Investment Analyst with Sterling Mutuals Inc. He can be reached
at dhallett@sterlingmutuals.com. Sterling Mutuals is registered as a mutual
fund dealer in Ontario, British Columbia, and Manitoba.