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Mutual fund reports are about accountability. Some companies fall short

The Brandes Canadian Equity Fund has been in a spot of trouble over the past while.

Spare the politeness, you say? Okay, if this fund were a hockey team, it would be the Toronto Maple Leafs. If it were a month of the year, it would be February. If it were food, it would be the half-uneaten sandwich your kid left in his knapsack over the weekend. Investors who own this fund, and there are quite a few, would probably like to know what's going on here.

A few years ago, securities regulators anticipated just such a situation. That's why they required fund companies to issue semi-annual investor updates called a management report of fund performance.

Problem is, the fund industry has proven less forthcoming than regulators hoped when updating clients. Last week, the Ontario Securities Commission issued a notice saying there's room for improvement in the way companies explain fund performance to clients. In particular, the OSC said the management discussions need to be more thorough and analyze the nature and reasons for changes in a fund.

To see what the OSC was getting at, the Personal Finance column has examined the most recent management discussions of some of the worst-performing funds around. Conclusion: the OSC is right. Some fund companies are being less than forthcoming.

Take Brandes Canadian Equity, for example. Here, we have a fund run by the Canadian arm of a U.S. firm that is highly respected for its savvy in value investing, or searching for beaten down stocks with the stuff to rise again. In this fund's portfolio, you will find Nortel Networks, Kingsway Financial Services, Intertape Polymer Group and Wescast Industries, each of which is indisputably beaten down.

You can argue that Brandes is doing its job in holding these stocks, and the company's broader success should provide a level of assurance of profits ahead. Brandes pretty much says this in its most recent management discussion of fund performance, which is dated Dec. 31. "Brandes LP typically expects it to take three to five years for the market to realize the true worth of companies that it purchases, therefore unitholders are encouraged to maintain a long-term focus of a similar duration."

This is a legitimate comment, but it doesn't really address this fund's performance issues of late. For the first five months of this year, the fund lost 9.7 per cent; for the 12 months to April 30, it plunged 34.7 per cent; over the past two years it lost 14.8 per cent annually.

What does Brandes say about all of this? Let us turn to the Results of Operations area of the management discussion.

Brandes could have sucked it up and addressed its bad returns right off the top, perhaps by putting them in the context of a pronounced slump for value investing in general. It might also have weaved in some stories about how its portfolios have recovered from previous setbacks. Or, it could have reminded clients what the hidden investing merits of Nortel, Kingsway, Intertape and Wescast are.

But no. Instead, we start with a bland observation that Brandes Canadian Equity has not significantly changed its asset mix since its last report. It's not until you get into the middle of the section that Brandes unleashes this bit of introspection: "During the period (since the last update), the Brandes Canadian Equity Fund had negative returns."

If you're looking for more than that, forget it. All you get is some filler about which sectors have done well for the fund, and which haven't. Sharp-eyed readers may notice that paper and forest products companies were a drag on returns, and connect it with an earlier comment that this sector is one the fund has bulked up on recently. There's no explanation of why, though.

Brandes acts blasé about the problems of its Canadian equity fund, but this is preferable to the approach taken by AIC Funds in its most recent management report on AIC American Focused . A quick recap: management of this fund was changed last year because of a decision to load up on U.S. financial stocks that have been annihilated in the past year.

AIC tells us the fund generated a one-year return of "(42.3 per cent)," which is how accountants, not everyday people, express a financial loss. Unitholders are then told that a firm called Ariel Capital Management took over the fund on Oct. 25, 2007, and that all commentary will focus on the period between then and year's end. This is an odd decision, given that between May and October the fund turned an investor's $10,000 into just over $6,200.

AIC's response is that it has been keeping its clientele updated on the fund by communicating extensively with investment advisers. At Brandes, they say they've tried to meet the OSC's requirements for management reports. "If there's a gap, we're very willing to sit down with whomever we need to," said Leah Brock, senior vice-president of marketing.

Why worry about management reports when few investors read anything they get from their fund companies? It's all about accountability from an industry that has a history of treating investors like know-nothing sheep.

© 2007 The Globe and Mail. All rights reserved.

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