Funds seek value from

Real estate and financial services are among the two most beaten up categories in today’s market climate, and that’s exactly why AIC Limited has launched four new funds that invest specifically in those sectors.

AIC believes the time is right to apply its buy-and-hold value strategy to those sectors through the AIC Global Real Estate Fund, AIC Global Banks Fund, AIC Global Insurance Fund and AIC Global Wealth Management Fund.

“Getting it out now is [just a matter of] pushing up our timetable to get out in the middle of this market environment. It does allow us to start the funds at a time where the valuations are incredibly compelling,” says AIC’s CEO, Jonathan Wellum. “We have spent the week on the road promoting these funds before we launched today because we wanted to get out while there is blood on the streets. People are sort of negative and concerned [about these sectors], and that’s the best time to start dollar-cost averaging.”

Marketing distressed sectors in a volatile marketplace is not an easy task, something Wellum readily admits. He believes there is a growing demand, from large brokers in particular, for smaller specialized funds that focus on a specific market sector that can be used for diversification in the portfolio.

“It’s much easier to market products that are the flavour of the day,” he says. “That clearly isn’t the case here.”

Those familiar with AIC will know its foray into financial services is nothing new. In fact, financial service companies, and wealth management in particular, form the backbone of many of its major offerings, says Rudy Luukko, investment funds editor for Morningstar Canada.

Luukko notes that the majority of holdings for AIC’s two flagship funds are in the financial services.

“According to our most current holdings data available, the AIC Advantage and AIC Advantage II funds each held more than 80% of their assets in financial services,” Luukko says. “Even if you look at AIC’s largest fund, the AIC Diversified Canada, it is diversified by industry sector. Even that fund has a 55% weighting in financial services.

“As AIC will tell you themselves, they continue to have conviction in these stocks. If they liked them before they crashed, they like them even better now,” say Luukko. “That seems like a plausible reason for a product launch. These stocks have bottomed out or are close to bottoming out.”

Wellum has a high opinion of real estate and financial services stocks, believing they are the bedrock of economies. While they are down now, he says it’s inconceivable that they won’t be fundamental staples of the economy in the future.

“People have to feel comfortable that we are going to need banks in the future and we are going to live in buildings. These are long-term businesses that have to be there,” he says. “If you can buy a world-class bank at almost book value, then typically that bank can earn 16% ROE. If you do the math, it shows the relatively inexpensive nature and the strength of the business. It doesn’t mean they are going to see great profits in the next three months, but it’s the kind of recipe for investing that should stand in good stead.”

AIC doesn’t have the in-house expertise in real estate that it has in financials, so it has brought on Third Avenue Management of New York’s Michael Winer and Jason Wolf to manage the AIC Global Real Estate Fund.

According to Wellum, Winer believes that real estate values are at a 10-year low, as there is mispricing between Wall Street and Main Street.

“A year ago you could sell any real estate fund, and people were buying in large numbers. Valuations have come down over the last 12 months 20% to 40%. Michael Winer is seeing discounts to the net asset value of his real estate companies he hasn’t seen for 10 years,” Wellum says. “Valuation of real estate companies in the U.K. have dropped 40% or so over the last 13 or 14 months. Have rents gone down 40%? Have vacancies decreased? Absolutely not — they haven’t moved at all.”

Wellum believes an old-fashioned value investment approach with dollar-cost averaging is a better way to deal with market volatility than to follow the popular trend of locking investments into principal protected products.

“What you’ve also seen in January is very large redemptions in all these protected note products. That’s problematic,” he says. “Anyone who buys these protected notes and the markets drop 20%, you’re in very deep trouble because you really only get your capital back, and you do not have the ability to dollar-cost average and buy low. These are real problems in our industry, and there is going to be a bit of a shake-out.”

One other issue with the new financial funds is that the large financial companies do tend to pay hefty dividend yields. AIC will be monitoring these and there will likely be distributions, so it will offer T-class options for tax efficiency, although he’s not a big fan of T-class. AIC will try to put in protections from having distributions if the net asset value of the funds drops substantially.

“We will offer some T-class options for people, but we are leery of T-class. I think some advisors are probably getting an education on T-class in this market,” he says. “When people promise T8 and distributions like that, in an environment when the market is down 20%, you are harvesting capital at a very quick rate. In our view, that is problematic. We are trying to line our product up with things that are sustainable, honest and have integrity to them, not just marketing glitz.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(02/11/08)

Mark Noble