The mutual fund industry's worst nightmare has taken shape in my e-mail in-basket.
Last week, a column on the giant-sized but chronically underperforming Mackenzie Ivy Canadian Fund invited readers to answer a question. Should lead manager Jerry Javasky be described as heroic for resolutely following an investing strategy that has worked for him in the past, or as a loser who has kept his fund on the sidelines during a five-year bull market?
Globe readers, including individual investors, investment advisers and analysts, have now had their say on the matter. Suffice it to say that they won't be attending any future meetings of the Javasky fan club. God help the mutual fund industry if everyone was as critical as these hard cases.
The issue with Ivy Canadian is a lack of exposure to the energy and mining stocks that have largely been responsible for the doubling of the S&P/TSX composite index in the past five years. Mr. Javasky prefers to buy and hold the shares of top businesses rather than speculating in stocks dependent on commodity prices.
"I applaud Jerry for sticking to his convictions, but common sense seems to have escaped him," wrote Brandon Moore, a financial planner with TD Waterhouse Financial Planning in Penticton, B.C. "His inability to capitalize on market change isn't what people who are paying for his services want to hear."
Lack of exposure to resource stocks is just one problem with Ivy Canadian, wrote Ken Hawkins, vice-president of research and development at Second Opinion Investor Services. In his judgment, the fund has too high a cash weighting (7.7 per cent as of Sept. 30), too high a weighting in U.S. stocks (almost 30 per cent) and too light a weight in financials (17.2 per cent).
Mr. Javasky's view is that his fund holds good stocks that are simply out of sync with the market. Mr. Hawkins disagreed, to put it mildly. "He should not blame the market for his shortcomings," he wrote of Mr. Javasky. "He should put the blame on his shoulders, where it belongs."
Ottawa investor Joey Cardamone noted that Ivy Canadian holds some great companies. In the Top 10 as of Sept. 30 were such names as Manulife Financial, Canadian National Railway, Shoppers Drug Mart, McDonald's and, in a rare dip into the resource realm, Imperial Oil. "He holds great stocks and underperforms," Mr. Cardamone wrote. "This sounds like a window-dressing fund. Result: Avoid. Five years is long enough."
Ivy Canadian has enjoyed significant success in the past, so slamming it when it's down almost seems unsporting. That said, investors and advisers tend to be way too passive about dealing with weak funds. A casual check on Globefund.com uncovered more than 50 funds of all types that managed the hideous feat of losing money on an average annual basis over the past 10 years. Well in excess of $2-billion is sitting in these funds.
For that matter, there's about $3.5-billion sitting in Ivy Canadian. Should you sell because of the past five years' worth of disappointing returns? I'd say no, given that Ivy Canadian is a proven down-market survivor and we're probably closer to a major market decline than we are to another sustained rally. But that's just me. You have to do your own analysis, like the people who responded to last week's column.
In fact, several of these people keyed in on the fact that Ivy Canadian behaves in a manner that is quite independent of the broader stock market. In a down market, this would be a real asset.
"I am sure his relative performance will be better in the future," a skeptical Mr. Hawkins wrote. "I am sure he will then talk about his superior performance and take full credit for it, even though it will be a result of poor markets, not superior skills."
Looking ahead toward a possible bear market, independent fund analyst Dan Hallett noted that Ivy Canadian holds a lot less cash (it keeps a fund buoyant in a down market) now than it has in the past. Incidentally, Mr. Hallett is no fan of Ivy Canadian, having issued a "sell" recommendation on it three years ago.
"I certainly recommend funds that are in a similar position - such as Trimark Canadian," Mr. Hallett wrote in an e-mail. "But I just don't have the confidence in Javasky when there are so many other [managers] that are very good."
The billions sitting in Ivy Canadian suggest many investors and advisers do have confidence in Mr. Javasky. That's a defensible viewpoint, but let's hope it's based on analysis and not on the basis that it's easier to sit tight and do nothing.
© 2007 The Globe and Mail. All rights reserved.
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