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Mutual fund makeovers
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.

Portability of track records

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.

CI Canadian Growth

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 signalled 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. That loss represents about 5% of this fund's current net assets.

    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, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
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    Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...