Chronic
underperformers are now worth a look
I think
you’ll agree that it’s pretty easy to spot the worst historical performers.
However, funds that have undergone significant changes to turn their troubled
pasts around are not so apparent. This week, I’ve highlighted two funds whose
past performance might repel you, but may be worth a look due to some changes
that are more than just cosmetic.
Whenever
funds are wound up or merged with others, some track records are lost while
others survive. When funds are merged into other existing funds, the track
record of the old, merged fund “disappears” from mutual fund databases while
the record of the continuing fund survives. This is what’s generally known as survivorship
bias. It’s called a bias because funds that are wound up or merged tend to be
below average performers – making historical average mutual fund returns look
better than they really were.
The funds
featured this week haven’t been involved in fund mergers, but they probably
will at some point; and they have experienced significant changes in lead
management. However, their historical track records remain because they belong
to “the funds” – even though they may not be reflective of manager currently in
the driver’s seat.
Launched in
1993, this fund was run by sector rotator John Zechner. (A sector rotator is a
money manager who approaches the investment process by getting a top-down view
of the economy to assess which sectors/industries hold the best promise. Stock
picks are then focused in those favoured sectors. As the outlook changes, the
manager “rotates” among various sectors to reflect his current view.) Zechner
had been successful in with his approach at the Elliott and Page Equity fund,
but moved to CI in 1993 to manage this fund with the same style.
The narrow
market movements of the late 1990s made for a difficult environment for Zechner
and his counterparts at other firms. He showed occasional flashes of brilliance
but, overall, posted disappointing results. In March of 2001, Zechner decided
to step away from the mutual fund world. He still manages money, but not for
mutual funds. He was replaced by CI’s Eric Bushell on this fund.
Looking back at the twelve calendar years since Zechner began with E&P, he had the following stats:
· performed in the first or second quartile in 8 of those 12 years;
· beat TSE 300 in 7 of the 12 years;
· most of his success was in his E&P days; and
· performance struggled for most of his 7 years at CI.
Readers who
scan this fund’s performance history might be scared away – but don’t be. While
this may not be my favourite fund, it’s better than its history indicates. Lead
manager Eric Bushell still drives this fund with a view on economic trends, but
has demonstrated an ability to consistently be right more often than he’s wrong
– and not miss by much when he’s wrong. He’s a very bright manager who nicely
blends the qualities of both growth and value managers, and is part of a
talented in-house team at CI.
Expect this
fund to be merged into the CI Signature Select Canadian fund, also run by
Bushell. Particularly for those investors who hold this fund on a DSC basis, I
would advise you to sit tight.
Mackenzie
Growth
Formerly
known as the Industrial Growth fund, it boasted the best long-term track record
in the business not all that long ago. Now, it’s regarded as a dog of a fund –
only performing well when gold and base metal prices strengthen, as they have
over the past year. Since its 1967 inception, Alexander Christ – one of the
founders and directors of Mackenzie Financial Corporation – had managed the
fund. The perception to most outside of Mackenzie was that Christ continued to
be lead manager on this fund much longer than he would have had he not founded
the company and occupied a board seat.
Investors
Group’s acquisition of Mackenzie last year effectively signaled an end to
Christ’s tenure on this fund. He ended on a positive note as gold and other
metals (and related stocks) had a stellar year and continue to show strength.
Christ stepped down just weeks ago as colleague Fred Sturm was announced as his
replacement.
Sturm has
done a terrific job with Mackenzie’s resource and precious metals funds, which
are his areas of specialty. A quote in an article by Michael Ryval for the
Globe and Mail’s February 2002 Report on Mutual Funds nicely summarizes Sturm’s
style. Sturm said the following about the 2001 performance of the Mackenzie
Universal Precious Metals fund, which he’s managed since 1994:
"Our first strategy was looking for companies that are growing through the drill bit. These are well-managed companies, with good asset bases, strong balance sheets and are developing properties. It doesn't matter what the gold price is; if you poke a hole in the ground and find a bunch, you still make your investors wealthy."
Sturm has been around the resource and precious metals sectors for many years and knows which management teams are good, and which are not. The few investors left in this little fund should be very pleased with the recent change.
Another item should give some investors added comfort. All
those years of soft returns mean that the fund should have lots of losses to
carryforward against future gains. Hence, taxable investors will be pleased to
know that the next $12 million or so of realized capital gains (i.e. profitable
stock sales) will be fully offset by the losses the fund currently has
available.
This week’s
article simply demonstrates that the numbers and the stars often don’t tell the
whole story and can even be misleading about a fund’s future potential. A
qualitative assessment of an investment, be it a fund or a stock, is critical
to making sound investment decisions. The funds above are just two examples,
but solid proof that going only by the numbers and third party ratings could
lead you away from an investment with good future potential.
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.