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What is AGF's global strategy?
Star managers shown the door

About three months ago, AGF Funds announced it had struck a deal to acquire its smaller competitor, Global Strategy Financial (GSF). Last week, AGF announced a host of changes to the investment management duties of many Global Strategy funds. In particular, two star managers, Tony Massie and John Sartz (along with GSF founder Richard Wernham), were relieved of their management duties in favour of AGF's in-house team. Though the two had struggled, some are wondering whether unitholders are well-served by these recent terminations or if AGF is simply protecting assets by placing them with teams with good recent performance.

Global Strategy - strengths and weaknesses

Global Strategy is a smallish company in this maturing industry, with just under $5 billion of unitholders' money at the end of October. Overall, their weaknesses outweigh their strengths. Bright spots among the two dozen offerings include Global Strategy: Income Plus (managed by Tony Massie), World Companies (Chris Jenkins), and Canadian Companies (Richard Wernham). In addition, GSF was innovative in its creation of the first RRSP eligible foreign mutual fund. (Technically, NN Financial's CanAm fund - a S&P 500 index seg fund - was the first investment fund created in Canada using futures contracts to skirt foreign content rules.) However, high fees and inconsistent performance on most funds have plagued the company for years. Bad currency bets hurt many of the firm's foreign stock and bond funds a couple of times during the 1990s. Of GSF's top funds listed above, the managers of two were promptly dismissed last week.

Star managers

Tony Massie, John Sartz, and Richard Wernam all ran good and bad funds for GSF but was their dismissal a positive move for unitholders? Massie has built a reputation with his stingy value style, always speaking of his holdings in relation to their liquidation value - a true sign of a strict value discipline. While his Canadian Growth fund was a chronic underperformer, his Income Plus fund (a tactical balanced fund) is a gem. Even when his stock picks didn't work out so well, his asset mix shifts added value. He outperformed most of his peers and his benchmark. So how could he manage two funds with such disparate results? The Canada Growth fund was run with more of a growth tilt - not his strength - while the stocks in the Income Plus fund were picked with his strict value style. Make no mistake about it, Massie is a skilled manager whose strict value style would have fit nicely with AGF's in-house team, which lacks a manager with such a discipline. Despite the fine replacements named for Massie's funds, letting him go is a loss to unitholders.

John Sartz is best known for his skill in picking shares of small Canadian companies. He originally ran the Bolton Tremblay Landmark fund, which today is known as Signature Explorer (CI). After BPI's acquisition of Bolton in 1994, Sartz was given the task of managing the Global Strategy Canadian Small Companies fund. Looking at his entire track record in small cap stocks, he has beaten his competition about half of the time (6 of the last 12 calendar years). While that doesn't sound impressive consider that Sartz's margin of outperformance has historically exceeded the amount by which he trailed his peers. AGF will place Gerard Ferguson (manages AGF Aggressive All-Cap and Aggressive Canadian Equity) in charge of Sartz' Canadian funds. Ferguson's track record in a lead management role is quite brief so it's tough to compare. Overall, the loss of Sartz looks neutral for fund unitholders.

While Richard Wernham's biggest fund (Canadian Companies) is still young, it managed to beat the TSE 300 in each of the last two calendar years - not an easy task over that period. Martin Hubbes will take over management of both domestic funds run by Wernham. Hubbes has done a great job with AGF's Canadian Stock fund so the change here is a positive for unitholders.

Ironically, AGF has left the management of Rothschild in place, given their foothold in Europe and other overseas markets - an area of planned expansion for AGF corporately. However, the performance of their foreign stock funds, with one exception, has been quite mediocre. Hence, the managerial changes are, in aggregate, neutral for unitholders. As is the case with most fund company corporate activities, the bulk of the benefits accrue to shareholders rather than the companies' respective fund unitholders.

Bottom line

Overall, the changes that were announced and those that have yet to come will likely be from neutral to positive for unitholders. While I am always in support of post-merger streamlining of fund offerings, I think the termination of Tony Massie is a loss. Don't feel too sorry for Massie and Sartz, they're both skilled managers who will soon pop up elsewhere in the industry quite soon. Given the fact that AGF is taking a more aggressive cost-cutting initiative than anticipated, unitholders should see a larger reduction in fund MERs than my original estimate of 0.05 to 0.10 percentage points. If that occurs, that will be good news for all unitholders.

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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