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AGF shakes up marquee global fund

Underperformer lost billions

AGF Management Ltd. has axed the managers of its marquee global equity fund, a chronic underperformer that's meant the loss of billions in business for the recovering money manager.

Harris Associates LP will no longer manage all classes of the AGF International Value Fund, the Toronto fund company said yesterday. The fund's lead manager was David Herro, a U.S. investment guru best known for running the $1.2-billion (U.S.) Oakmark International Small Cap Fund.

Chicago-based Harris will be replaced by AGF International Advisors Co. Ltd., AGF's own Dublin, Ireland-based team headed by chief investment officer John Arnold. Mr. Arnold's group of European stock pickers currently manage the top-ranked AGF International Stock Class Fund and the AGF European Equity Class Fund.

The Harris team "haven't been able to get the fund to perform," said Randy Ambrosie, president of AGF Funds Inc., in an interview. The management change follows extensive consultation with financial advisers and clients, he said.

"Our clients are just fatigued. [The fund] has underperformed for too long and [clients] want to know what AGF is going to do to change that," Mr. Ambrosie said.

Indeed, AGF International Value's weak returns has prompted many customers to leave the fund company. Harris took over management duties in June, 2002, and the fund has posted a measly annual average return of 2.6 per cent over the past four years. In comparison, the median return for the global equity fund group during the same period was 5.5 per cent.

Investors left in droves. The value of the global fund and its classes have plunged to about $3.4-billion (Canadian) today from about $8.7-billion four years ago.

"Talk about not meeting expectations," said Rudy Luukko, funds editor at investment website "The fund's performance was poor . . . the fund was bleeding assets and investors were demanding changes."

The customer exodus threatened the livelihood of AGF itself as the firm began a steady, four-year decline in assets under management. The company today manages about $24.4-billion in retail mutual funds, down from a peak of $29.9-billion in 2001. Redemptions ended earlier this year.

A long list of issues were behind the fund's weak returns.

Management style. Several industry sources said it was hard to get a strong sense of Harris's investment strategy. In general, the value manager opted for traditional, blue-chip equities and shied away from opportunistic, deep-value stocks.

Asset mix. AGF International Value loaded up on U.S. equities, favouring many sluggish performers including media companies Viacom Inc., Time Warner Inc. and computer maker Dell Inc. The fund has had little or no exposure to the buoyant energy sector or Japan's hot equity market.

Size matters. In general, small funds are more nimble when it comes to equity-buying while multibillion-dollar funds must take major positions in large liquid stocks. As of March 31 this year, the fund held about 53 positions, an average investment of about $69-million per equity.

Timing. Harris was in a corner from the beginning. The Harris mandate succeeded well-regarded Brandes Investment Partners & Co. In a very public spat, the U.S. equity manager cut its ties with AGF and set up its own shop in Canada. The fund company now manages $4.8-billion in assets, a large chunk of which came from AGF's own coffers.

In addition, Harris took the reins of the global fund just as the investment community became fixated on Canadian equities and income trusts. The bulk of international funds have been mediocre performers in recent years with only a handful reporting significant sales, most notably the Mackenzie Cundill Value Fund.

Independent fund analyst Dan Hallett has "mixed feelings" about the end of the AGF-Harris relationship. He praised Mr. Arnold's stock-picking skills but nevertheless, "I would have liked to see AGF stick it out with Harris."

"When an entire group of funds with a generally similar style underperform, then I think you don't blame this on the manager. . . . You have to attribute some of the underperformance to general market behaviour," Mr. Hallett said.

By the numbers


The asset value of AGF's marquee global fund four years ago.


The fund's value today.

© 2007 The Globe and Mail. All rights reserved.

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