Arnold maps out fund overhaul

Just over a week after sacking Harris Associates as managers of the flagship AGF International Value Fund, AGF’s road show stopped in Toronto with the theme Charting the Globe.

Not surprisingly, the fundco took the opportunity to reacquaint attendees with John Arnold, CIO of AGF International Advisors (AGFIA), which was awarded the International Value mandate.

“This fund is an amazing portfolio,” Arnold said. “We thought we should have gotten it four years ago. We definitely thought we should have gotten it three years ago, and last July we gave up. So it’s a bit of a shock to actually have the fund.”

However, the fund he has inherited holds 50 stocks and is burdened with a market P/E and a market yield.

“Effectively this fund is a closet indexer,” he said. “That’s not the style of Dublin.”

What is “Dublin-style” investing? It is AGFIA’s 30-30-30 strategy, which 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.

The AGFIA team plans on keeping only nine of the 50 companies already in the portfolio, while boosting the total number of positions to 75 stocks. The initial target weighting will cut the U.S. exposure from 50% to 30%, with Europe rising from 40% to 50% and Asia making up the remaining 20%.

The portfolio he envisions will have a P/E multiple of 12, representing a 25% discount to the market. That same 25% discount will be reflected in the dividend yield.

“Why do we believe in absolute return and not relative return? Because we’re not closet indexers,” he said. “Alpha is easy stuff to get. We love quartile rankings, but we prefer to talk about percentiles. Quartile isn’t strong enough for us.”

Arnold says his investment team conducts over 800 company meetings each year, accepting virtually every invitation they receive. The analysis process usually takes up to two years, with acquisitions made gradually over another two years. “Bear in mind, the share price is going down while we’re buying it, so there’s no need to rush.”

He then expects the company to spend up to four years in its trough, as management executes its recovery plan and then slowly eases out of the position.

“We sell because the share price gets back to a market multiple,” he says. “When they get back to a market multiple, we start the selling process.”

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