Cole begins overhauling AIC fund

(June 24, 2005) James Cole, the new manager of AIC American Focused, has offered a progress report on the fund, outlining his investment strategy and how he has managed the transition.

Since replacing Larry Sarbit as the fund’s manager on in March, Cole has brought the cash component of the fund down from more than 77% to a still-hefty 45%. While he would prefer to be fully-invested, he insists he will not rush into any stock that does not match his investment criteria.

In a conference call, Cole described those criteria as follows: “Businesses must be domiciled in a growth industry, have a history of profitability, be in a strong financial position, have no material exposure to un-expensed stock options, or to underfunded pensions or other post retirement benefits; offer high total return potential over a horizon of at least five years; and offer limited downside risks.”

He says he may also consider deep value opportunities which offer “exceptional potential returns with very little downside risk.” He describes his strategy as diversified focus, with diversification across several sectors and sub-sectors, with the focus aspect coming from the limited number of holdings.

He calls the transition period between managers a “grey area” when performance — for better or worse — cannot fairly be attributed to either the outgoing or incoming manager. He said the fund’s performance has been a reflection on his management team since May 31, 2005.

“That’s the date that the portfolio I inherited ceased to have any material impact on the fund,” he says. “That two month transition period also provided me with enough time to position the portfolio as I wanted it to be.”

When Cole took over the fund, it held only three equities: Clear Channel, Emmis and Autonation. He has since divested the fund from these stocks. Cole says the disposition of these holdings resulted in a performance drop of 0.4%, as compared to a hypothetical static portfolio. For the American Focused Plus Fund, which he also took over, performance exceeded the static portfolio by 2.1%.

The last of the Sarbit era holding were sold off in early June, so fund reports dated May 31 will still indicate some holdings. The portfolio now holds eight stocks, including Wal-Mart, JP Morgan, Citigroup, Bank of America, Radian Group, PetroKazakhstan, Suncor and MBNA. He says the two Canadian energy stocks are forgivable in an American equity fund, since combined they only make up about 7% of the portfolio.

Cole emphasizes that communication with advisors is important for the fund.

“Provided I didn’t say anything that would be contrary to the interests of the fund’s unitholders, I wanted to be as clear and transparent as possible about what we’re doing and why we’re doing it,” said Cole.

To that end, he has disclosed all of the fund’s holdings on both the AIC website and to mutual fund databases. Of course, the fund still only holds eight stocks, and typical disclosure includes at least the top ten. AIC has also prepared business briefs on six of the holdings, which help to explain how they were chosen.

“We’re going to continue to be very price conscious, so I can’t make any predictions about how quickly the fund may get more fully invested,” he said. “My ideal is to be 100% invested, but I am prepared to hold significant cash.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.