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Star manager dumps AGF
Brandes to launch funds directly

Just two short weeks ago, San Diego-based Brandes Investment Partners LLP announced that it intends to launch its own family of mutual funds. Brandes has garnered a large and loyal following amongst financial advisors and investors, alike, due to their outstanding performance on such funds as AGF International Value and AGF International Stock Class. Both advisors and investors are now wondering what to do.

Background

A fund company by the name of 20/20 Funds Inc. had a fund called 20/20 U.S. Growth. It was historically a sub-par performer. In 1994, 20/20 gave the fund a facelift by changing the scope of the fund, from U.S. to global stock, and by appointing a new manager. The management firm that took over in the fall of that year was a firm that was relatively unknown to retail investors - Brandes. Within a year, 20/20 was acquired by AGF Management Ltd.

Over the past seven years, AGF has put a lot of effort into marketing the Brandes philosophy and style. That story was an easy sell, of course, thanks to the very strong performance ever since Brandes took over that original 20/20 fund, now known as AGF International Value.

Now that the funds managed by Brandes have been AGF's top sellers for nearly two years, Brandes announced its plans to terminate its long-standing relationship with AGF and launch its own family of mutual funds. In effect, they will compete directly with the firm that made them a household name in the Canadian retail market.

Given the uncertainty investors have faced over the past couple of years, the timing for Brandes couldn't have been better (due to its steady value style), and for AGF it couldn't have been worse since Brandes-managed funds are what have kept their business growing.

Reflecting on the past

Fund manager mobility is a fact of life. I categorize fund manager changes into two types: uneventful or major. Uneventful changes aren't expected to have any adverse impact on investors. Major changes usually will entail a change of recommendation on the involved mutual funds - either for better or worse. The announcement by Brandes is about as big as it gets. While we don' t yet know who Brandes' replacement will be, a glimpse into history should show that not all changes are bad - even if they appear to be at first.

When Spectrum Investments went by the name of United Financial, Gerry Coleman and Jerry Javasky managed its Canadian Equity fund. In late 1992, after many years at the helm, Gerry and Jerry left to work for Mackenzie to launch the Ivy family of funds. Many thought this was a huge blow to United. However, a relatively unknown manager by the name of Catherine "Kiki" Delaney was brought in to take charge of the fund. If we look at the performance of Spectrum Canadian Equity vs. Ivy Canadian from October 1992 to May 1999, we find that the new manager (Kiki) outperformed her predecessors by nearly two percentage points annually. If we continue to track those same managers to the present, we'll find that gap has narrowed.

Kiki then left Spectrum in May 1999 to manage the newly created Trimark Enterprise fund. In this case, Spectrum appointed affiliate McLean Budden to fill Kiki's shoes and few, if any, investors followed Kiki to her new fund. However, investors who remained loyal to Spectrum have earned a respectable return in excess of 9 per cent per year, but that's more than a full percentage point each year less than Kiki's loyal followers.

(Gerry Coleman now leads CI Harbour funds; while his former partner, Jerry Javasky, continues to lead Mackenzie's Ivy team.)

Recommendation

If nothing else, this brief glimpse into history should show that there is no general rule when it comes to such situations. It's tough enough to guess whether it's better to stay put or follow a departing manager. That job gets much tougher when we don't even know who's taking the place of the departing manager - as is the case with AGF and Brandes.

In short, my advice to advisors and investors in any mutual fund managed by Brandes is to simply sit tight. Don't make any rash moves until we find out who AGF gets to replace Brandes.

Some may be afraid to stick around for fear of a "redemption run" on the affected funds. Looking at similar situations at AIC, Altamira and Trimark in the past indicates that no more than about 20 to 25 per cent of the fund' s assets will leave AGF - but that's a worst-case scenario. My gut tells me that the amount of money that leaves AGF at the end of the day (as a result of Brandes' departure) will be in the 10 to 15 per cent range - hardly anything to fear.

Once an announcement has been made, I will report back with my assessment. In the meantime, I am urging investors and advisors to be patient.

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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