AGF hands International Value to Arnold, Flynn

Advisors who feel fund companies are not listening to your concerns, take note: Your complaints can shape decisions at head office.

AGF Funds has announced the replacement of Harris Associates as portfolio manager for its flagship AGF International Value Fund. Management of the fund has been handed over to the AGF International Advisors Company Limited, headed by the Dublin-based investment team of John Arnold and Rory Flynn.

“I went on an exhaustive cross-country tour this year and spent a lot of time talking one-on-one with advisors,” says Randy Ambrosie, president of AGF Funds. On this tour, advisors repeatedly told him they were growing tired of defending the International Value Fund.

He acknowledges the argument that Harris’ style is simply out of favour, though admitting that there is some debate in the industry on whether to terminate a manager who follows their prescribed discipline yet still underperforms.

“By Harris’s own admission — and these are a great bunch of guys — they just weren’t able to get the fund to perform,” he says. “When our sales force was getting consistent feedback from advisors that they and their clients were fatigued by holding onto the fund, it became more and more obvious that we should at least consider replacing the manager.”

Once the decision was made to change managers, Ambrosie says AGFIA’s team of John Arnold and Rory Flynn was an obvious choice.

“They have so dramatically outperformed in virtually everything we have asked them to be involved in,” he says. “That provides a very stark contrast to the underperformance of the International Value Fund.”

The International Value Fund was once one of Canada’s largest, back in the heyday of mega-cap global investing, but as the tide turned against this style in 2000, assets dwindled.

Perhaps the biggest blow to the fund came in 2002, with the abrupt departure of Brandes Investment Partners as the fund manager. Brandes turned around and set up shop as its own company in Canada, luring away many investors.

AGF announced it would embark on a global search to find the right replacement for Brandes, eventually naming Harris. But the fund struggled, with performance falling behind both its benchmark — the MSCI EAFE Index — and its peer group of International Equity funds.

Despite the fund’s laggardly performance in recent years, one fund analyst says the change was not long overdue. The poor performance was derived from a combination of factors, but at its essence was that the style was simply out of favour.

“I’m probably in the minority with that opinion. Earlier this year I took a closer look at Harris, trying to find why performance had been trailing most other funds,” says Dan Hallett, president of Dan Hallett & Associates. “I came out of that review continuing to recommend them. I still did as of this morning.”

Hallett admits that his assessment is subjective and that another analyst could come to the opposite opinion based on the poor performance numbers posted by Harris.

“I look at other managers that I think have a similar style,” he says. “There are a number of managers suffering similar performance issues. I would say that the timing is probably not great for making the change.”

Hallett emphasizes that the switch to AGFIA is positive for the fund, as the team of John Arnold and Rory Flynn has a record of supplying investors with fairly strong returns.

Hallett thinks that the quality of the new managers should allay investors’ worries about the succession of managers. “I think they’re very different managers, but I think they’re a good replacement,” Hallett says. “They’re quite different from Brandes as well.”

When Brandes took over the fund in 1994, the mandate was changed from that of a U.S. equity fund to an international fund.

The International Stock Class managed by AGFIA is less constrained than the International Value fund, which had a more rigid mandate on market capitalization and geography. Arnold and Flynn also manage AGF’s Global Perspective Class.

The three funds managed by Arnold and Flynn have very different geographic weightings. International Stock Class is extremely Eurocentric, with over 82% of assets in Europe and none in the U.S., as of May 31, 2006, according to Morningstar Canada.

AGF Global Perspective Class also has a heavy weighting in Europe, at 42%, but has a 21% exposure to the U.S.

International Value Fund, on the other hand, has a far greater U.S. exposure, at 45.5% of assets. There is also a substantial base of European assets in the fund, at 36% of the portfolio.

The three funds also vary widely in assets under management, with International Value being the largest at nearly $3.3 billion, while International Stock Class is $1.1 billion. Global Perspective contains just $81 million.

Ambrosie says the parameters for International Value will mandate a minimum 90% equity weighting and a range of between 5% and 85% collective weighting for Canada and the U.S.

Of the two funds already managed by Arnold and Flynn, Ambrosie says the International Value Fund (and Class) will most closely resemble Global Perspective, as it will still contain U.S. assets. The new managers have set a geographic weighing target of 50% Europe, 30% U.S. and 20% Asia.

The biggest difference between the two funds will be dictated by the vast gulf between their AUM. The $3.3 billion International Value Fund will contain between 80 and 90 positions, compared to the 50 positions in the $81 million Global Perspectives Class.

Ambrosie says AGF has no plans at present to merge the two funds, as advisors have told him they did not look forward to explaining the change to clients. The general message has been: We positioned these specific portfolios with our clients for a reason, and as such, for AGF to unilaterally merge the funds presumes that the company knows why the funds were selected in the first place.

“John made the point that there are no bad stocks in this portfolio, there’s no urgent call to arms,” Ambrosie says. “But if you look at the overall profile of the fund, the dividend yield and the price/earnings largely resemble the index. John will over time have that portfolio much more closely resemble the 30-30-30 philosophy that his team follows.”

That “30-30-30 philosophy” seeks out stocks that trade at a 30% discount to the overall market’s P/E ratio, offer a dividend yield at least 30% higher than the market, and trade at least 30% below their 18-month high.

“We felt a sense of responsibility to the advisors who support the fund and sell it to their clients, and to the unitholders, to give them the best that we had to offer,” Ambrosie says. “In this case, the best that we had to offer was putting the money in the hands of John and Rory and their team.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(09/06/06)