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A History Lesson in Mutual Funds
When track records are meaningless

Depending on your source of mutual fund research, you may be looking at numbers that don't mean a thing. By that I mean that many historical track records that exist for some of today's best and/or oldest funds don't reflect current mandates or managers. In short, many times a track record means absolutely nothing. Here are a few examples of fund track records of which to be watchful.

Dynamic Fund of Canada and Power Canadian Growth

Once run by resource specialist Jonathan Baird, both of these funds used to emphasize relatively smaller resource companies and were traded frequently. For a time, it worked well but sagging performance and a desire by Baird to strike out on his-own turned these funds into orphans in 1996. By 1998, a significant transformation had taken place. David Goodman had been assigned to the Fund of Canada with a large cap value mandate. Dynamic then lured away veteran Rohit Sehgal from London Life to run the Power Canadian Growth using his successful large cap earnings momentum strategy. I believe that both funds have received very positive makeovers, but look much more than a couple of years into the histories of these funds, and you'll see two funds that are quite a bit riskier than I would expect going forward.

AGF International Value

Prior to the fall of 1994, this was a mediocre performing US equity funds going by the name 20/20 US Growth Fund. (Recall that AGF acquired 20/20 funds in the fall of 1995). 20/20 Funds decided to change the fund's mandate to include global equities and found Brandes Investment Partners. Unknown to most Canadians, Brandes took to the road to introduce themselves to financial advisors across the country. Even with no Canadian-based track record, their story and was impressive. Now, many investors have found out just how impressive their results have been.

CI Landmark American

Newer investors will recognize this as star manager Derek Webb's US stock fund, which is run in his popular earnings momentum style. While Webb moved to CI last summer, this fund boasts a record that is more than ten years old. Prior to that, the fund was conservatively run and bought the biggest names on the New York Stocks Exchange. Bill Priest, of BEA Associates, had managed the fund since inception using a blended style of value and growth. When his style drifted somewhat (and returns followed), the fund was taken over by the passionate James Abate of Credit Suisse (which had previously acquired BEA Associates).

Abate managed the fund in a similar style but spent much more time studying a company's qualitative factors. During his relatively short time at the helm of this fund, he had good success and would have fared quite well in this rocky environment. A year ago, he had nearly half of this fund in defensive stocks. Abate left for the corporate finance world and CI appointed an internal manager until Derek Webb's arrival. Again, the historical profile of this fund understates the risk that can be expected from Webb's gun-slinging momentum style. Let's just hope that higher risk pays off for unitholders in the way of higher returns.

CI Signature American Small Companies

Though its track record is impressive it has no relation to the current team running the show. This fund was originally managed by Lazard Frhres, a New York-based money management firm. Lazard was taken off the job when BPI developed its own in-house money management subsidiary. In fact, they did a terrific job for the three years or so that they ran this small cap sizzler. However, when CI acquired BPI, another management change occurred, in favour of CI's newly built in-house team. The fortunate part for unitholders is that there isn't a great deal of difference in these three teams' styles, as compared to the other examples above.

So how do you spot potentially misleading track records? A good start is comparing the manager's tenure to the age of the fund. If there's a big gap, start asking questions. Often (though not always), fund companies' client service people have fund histories directly at their disposal. Also, that annual mutual fund guide some of you pick up from year to year could prove to be a useful reference. Fund descriptions in these books are fairly detailed and will allow you to quickly judge if the track record of the fund you bought today was achieved under a different identity. As always, buyer beware.

The More Things Change...

Speaking of manager changes, CI announced this week that John Zechner will be stepping down from his duties as lead manager on CI Canadian Growth, CI Canadian Balanced, CI Canadian Income, and CI Insight Canadian Growth Pool. His firm will continue to run the CI Canadian Bond and the CI Insight Canadian Fixed Income Pool. Zechner says investors' preoccupation with short-term performance is at the root of his decision to step away from the retail side of the business and focus on managing money for institutional clients. CI also announced that Eric Bushell will take over all of Zechner's old funds, with the exception of the Canadian Balanced fund, which will be run by CI's Wally Kusters.

Overall, these changes are neutral in my opinion. Bushell has a successful track record, but his emphasis until now has been on bonds, preferred shares, and high yield stocks. He also uses more of a value driven approach, which is a sharp contrast to Zechner. Kusters is more of a growth manager but doesn't use the sector rotation style that made Zechner famous. If you like Zechner's style and want to keep it, take a look at the Elliott and Page family. That's where Zechner got his start in the mutual fund industry.

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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