New leader tackles challenges

Phillips, Hager & North isn’t a major player by fund industry standards. But it’s an influential and closely-watched company and many readers of this newsletter hold some of their funds. So when there’s a change at the top, it’s a significant development.

That happened last month when the company named John Montalbano as its new president. He’s been with PH&N since 1987 in a variety of capacities. Most recently, he oversaw the firm’s distribution arm, a role that entailed responsibility for all client relationships. He also managed institutional specialty equity and balanced accounts.

Don’t expect the new president to turn everything upside down. PH&N doesn’t operate that way. This is a conservative organization that believes in evolution, not revolution. The three principals who gave their names to the company have long since departed the scene, as have most of their immediate successors, but the firm continues on its quiet way as a middle-tier manager of pension and mutual fund money.

However, all is not well at PH&N and Montalbano has some challenges ahead. The company’s fixed-income team is still one of the best in Canada and the Canadian eqty group is doing a credible job. The company’s client service is top-notch and the firm continues to keep its costs low, passing on the savings to investors in the form of MERs that are among the best in the business.

But that’s where the good news ends. There are some weak spots that are in desperate need of attention. Recently, I had a lengthy, free-wheeling telephone interview with Montalbano and PH&N vice-president Richard Self that touched on a wide range of topics concerning the company. Here are two of the key issues we talked about.

U.S. equity funds a problem. I noted that both of the company’s U.S. stock funds are underperforming and have been for some time. The U.S. Growth Fund, which normally has a small to mid-cap bias, has taken on a low return/high risk profile in recent years, which is exactly the opposite of where a fund should be on the spectrum. The company’s flagship U.S. Equity Fund, which has a large-cap focus, has been unimpressive in recent years and has performed well below the standard of its peer group and its benchmark index (the S&P 500).

Montalbano’s response was unequivocal. Fixing the U.S. side is “the number one issue in the firm”. He went on to add: “We are spending a lot of time and management effort to improve the U.S. Equity Fund”. He didn’t provide a timetable but there is clearly an urgency to deal with this quickly.

I hope it works out. However, I have to note that the company struggled with its international funds for several years and made a number of false starts. The company has now taken a new direction, which brings me to the second problem area.

The international quagmire. PH&N has been trying to operate a successful international fund for what seems like forever. Every effort has been a failure but they keep regrouping and starting over. Each time, they change the fund name so the disaster doesn’t seem quite as bad. Hence we’ve gone from the International Fund to the Euro-Pacific Fund to, now, the Overseas Equity Fund. The latter has an official start date of July 2000 but in fact it is just a successor to the other two.

They’ve tried several different approaches. During the 1990s, they used a top-down method that involved identifying 7-12 countries that offered the best growth prospects and then picking a selection of funds from each. The results were poor, in part because the screening process kept zeroing in on Japan where stocks persisted on going nowhere, year after year. The next iteration was to build an in-house team, run by a highly-regarded stock expert from the U.K. That idea fizzled too and the expert has departed. Last fall, the company moved in yet another direction. It handed the managerial responsibilities to Jennifer Witterick of Sky Investment Counsel, a company of which PH&N is part-owner. We may finally be seeing some results; the fund gained 9.7 per cent in the six months to April 30, slightly above average for the International Equity category.

Montalbano noted that this move involved a slight shift in stock selection emphasis for the company. PH&N has historically been a GARP manager (growth at a reasonable price). Witterick puts a little more emphasis on a value style, an approach that may be more effective in today’s market environment.

I would like to see PH&N succeed here. It’s a nuisance for investors to have to go elsewhere for their overseas content but that is what we have been forced to recommend for several years. But it is still early days so my attitude is one of wait-and-see.