Top AGF funds struggle

For many years, the AGF American Tactical Asset Allocation Fund received a top $$$$ rating in my annual Buyer’s Guide to Mutual Funds. In fact, co-author Eric Kirzner and I regarded this fund so highly that in the 2000 edition of the book we gave it our highest honour by naming it Mutual Fund of the Decade for the 1990s.

The accolade was well-earned. Not once throughout the entire decade did the fund ever post a losing calendar year, even when markets were being battered in 1990, 1994, and 1997. Not a single global balanced fund came close to matching its ten-year average annual compound rate of return. And the fund achieved those remarkable results with one of the lowest risk levels in its category.

This was particularly remarkable because American TAA is primarily managed by a computer, with only limited human intervention in determining the asset mix of this balanced portfolio. The fund is run by Barclays Global Investors, using a program that was originally developed back in the 1980s. Needless to say, it has been constantly updated and made more sophisticated ever since.

Perhaps the Fund of the Decade Award was a jinx. Ever since that edition me out in late 1999, American TAA has struggled and this year the bottom fell out. So far in 2002, the fund lost more than 15 per cent, well below average for its peer group. It’s by far the worst run this fund has had since its launch in late 1988.

Meanwhile, things haven’t been much better for the companion AGF Canadian Tactical Asset Allocation Fund, which is also managed by Barclays using a similar computer-driven approach. Although never as strong a performer as its American sibling, Canadian TAA posted some very respectable results through the mid to late 1990s and in 2000. But for the past two years, it’s been a loser. The fund dropped 8.5 per cent in 2001 and so far this year is down about 12 per cent. Both are fourth quartile performance records.

So what happened? Why did two high-performance, low-risk funds suddenly hit the skids? The answer may be as simple as this: the bear market we’ve experienced is unlike any that has gone before and the computer programs that drive these funds have been unable to deal with the situation.

AGF acknowledged this in the September edition of its monthly fund update magazine, which is distributed to financial advisors.

Writing about the American TAA Fund, the publication said: “In 2002. . .the fund was positioned for an economic and market recovery by overweighting equities and underweighting bonds. However, over the past two quarters, corporate scandals have dominated the news, investors began to lose confidence in the equity markets, and the dry-up in capital spending lasted longer than usual.”

In reality, the root problem goes back much further than two quarters. Investors have been hit with one shock after another since mid-2000, including the incredible collapse of the high-tech sector, the Sept. 11 attacks and the ensuing War on Terrorism, and revelations that once-respectable financial analysts were touting stocks that they privately regarded as dogs in order to curry favour and promote underwriting business.

These were developments that no computer could foresee. The programs that generate the investment decisions are largely based on historical patterns and market valuations. After the plunge of the technology sector and the huge interest rate cuts to re-stimulate the economy, the models showed that stock prices looked cheap while bonds were expensive. The asset mixes of the funds were adjusted accordingly. In the first quarter of 2001, the Canadian Asset Allocation Fund was 80 per cent in equities and only 20 per cent in bonds. By mid-year, stocks were up to 85 per cent of the portfolio. After Sept. 11, the equity position was scaled back but still accounted for 70 per cent of the assets. No wonder the fund has lost money.

The same pattern continued in 2002. The computers kept insisting that stocks were cheap and bonds were expensive, while the markets went in the exact opposite direction. As of mid-November, both funds held equity positions of about 75 per cent of total assets.

Barclays has responded by doing some fine-tuning to its computer programs to give greater weight to market sentiment indicators, including such bellwethers as insider trading. “We’re constantly looking at the risk/return trade-offs and making adjustments,” says Rajiv Silgardo, chief investment officer of Barclays’ Canadian operation.

The tinkering may finally be having some positive effect, or it may simply be a case of “wait long enough and you’ll eventually be right”. In any event, we’re starting to see an improvement in the relative performance of both funds.

Over the six months to Nov. 30, the American fund lost 2.2 per cent but it outperformed its peer group by almost five percentage points. In November, the fund gained almost 5 per cent, compared to a category average of 3.9 per cent.

The Canadian fund did not fare quite as well, losing 8.2 per cent over six months compared to an average loss of 7.7 per cent for the category (Canadian Asset Allocation funds). But in November, it gained 4.4 per cent compared to a peer group average of 2.3 per cent.

It’s too soon to tell whether this is the start of a long-awaited turnaround. Based on the current asset mix, that’s only going to happen if the markets finally catch up to the computer’s belief that stocks are the best value around these days.

So my advice for now is to hold any existing units but don’t buy more until we see clear evidence that the funds are back on track. I’ll continue to watch them closely.

This article originally appeared in Mutual Funds Update, a monthly electronic newsletter of common sense mutual fund advice edited by Gordon Pape. Take advantage of a three-month trial subscription available to users for just $9.97 plus tax!