Brandes turns three
A little over three years ago, the Charles Brandes organization of San Diego sent tremors through the Canadian fund industry when it suddenly announced it was terminating its managerial arrangement with AGF in order to launch its own product line.
The move was unusual for two reasons. First, Brandes was enjoying tremendous success in partnership with AGF. The flagship AGF International Value Fund, which Brandes handled, was generating great returns and attracting millions of dollars in new cash every month. Brandes received fat cheques for their services without any of the costs involved in running an independent operation.
Second, the company does not operate any mutual funds for the general public in the U.S. so there was no infrastructure in place. A Canadian organization would have to be built from scratch.
Nonetheless, the folks who call the shots decided that it was worth the gamble. The news hit AGF like a bombshell — they still haven’t really recovered. A few months later, in July 2002, Brandes set up its own shop with the launch of a nine-fund family.
The money was a little slow in coming at first. By the end of August 2003, the funds had acculated only $800 million in assets, a piddling amount by industry standards. But then the money floodgates opened. At the end of August this year, the company had almost $4.3 billion under management. In the past 12 months alone, the asset base grew 62 per cent, the second-best performance among the 20 largest member companies of the Investment Funds Institute of Canada (IFIC).
The strong start out of the gate appears to have fuelled this investor enthusiasm. But if you look at the total picture more closely, you may think twice about putting your money here.
The Brandes funds initially benefited from a tremendous timing break. They were launched just as the deep bear market of 2000-2002 was approaching its nadir. That allowed the managers to fill their portfolios with top-quality stocks at bargain basement prices. The result was predictable. When the new bull market began late the same year, the equities that had been bought cheap took off. In calendar 2003, every one of the company’s stock and balanced funds produced double-digit returns, ranging from 16.1 per cent for Brandes Global Equity to 36.5 per cent for Brandes Global Small Cap Equity. Numbers like that are guaranteed to catch the attention of investors.
By 2004, however, the launch timing advantage was diminishing. Every fund in the group reported lower returns. In some cases, the drop was substantial; Brandes Canadian Equity went from a gain of 24.6 per cent in 2003 to only 6.8 per cent in 2004. Brandes U.S. Equity declined from 17.7 per cent to 3.8 per cent. To the end of September, Canadian Equity showed only a fractional gain for 2005 while U.S. Equity was in the red.
In fact, all but one of the Brandes equity and balanced funds have been fourth quartile performers this year. That means they are in the bottom 25 per cent of their respective categories. If investors were paying any attention to what’s happening right now and not allowing themselves to be mesmerized by the initial strength, new sales would be a fraction of what they actually are.
The truth is that we have no real sense at this time of how the Brandes line-up will perform over the long haul. The accident of timing that allowed such a great start has run its course. It’s the future that counts, and it’s murky.
Bottom line: The investment philosophy is sound and the company has a long record of successful money management in the States. But the great three-year performance numbers are largely the result of fortuitous timing and right now most of the Brandes funds are underperforming. Investors should keep a watch on this company but avoid committing any money until performance recovers.