Trimark hangs tough

Let’s just call it the lost year. Certainly, that’s the way Trimark’s fund managers remember 2005. It was a year in which all the equity funds that the group offers went into a collective swoon. While stock markets sizzled, these funds sputtered with well below-average returns and rankings that in some cases were in the bottom 10 per cent of their category.

“It was a crap year,” candidly admits Trimark’s chief investment officer Patrick Farmer. But in the next breath he points out that things are going much better so far in 2006, with most of the fund showing considerable improvement over last year’s pitiful results. “Maybe things are starting to shape up again,” he says hopefully.

So what went wrong with this popular family, which is now part of the AIM Trimark organization? In a word, energy. Oil and gas stocks were the big story on the TSX last year, accounting for two-thirds of the total advance. The Trimark funds missed the party.

For example, Geoff MacDonald, manager of the Trimark Canadian Endeavour Fund, went to a zero weighting in energy in June 2005. During the next quarter, the energy sector was up 20 per cent. Ian Hardacr and Heather Hunter, who manage Trimark Canadian and Trimark Select Canadian Growth respectively, had some energy exposure but it was well below market weight.

Why the mistrust of energy stocks? “The thing that gets us out is valuation,” Farmer explained. “When valuations are high, we sell.” There’s no doubt that energy valuations were high last year – the problem for Trimark was that they kept going higher.

Historically, the Trimark funds have performed better in weak markets than in strong ones and that appears to be the case again in this cycle. One reason for this is the investment philosophy of “buying good businesses at reasonable prices” that was the credo of the organization when Robert Krembil was the head honcho and was carried over when the company was swallowed up by AIM several years ago.

The Trimark approach is generally regarded as a value style but Farmer admits his team is somewhat schizophrenic about that term. He prefers to think of it as growth at a reasonable price (GARP) with a value bias. Most of the AIM funds, by comparison, use what is described as an earnings growth approach – often called “momentum” although they don’t like that word.

However you describe the Trimark style, the group’s managers are in their glory right now, snapping up what they see as bargains as market volatility and investor uncertainty combine to knock down prices.

“We look at a company like CEMEX (a Mexican-based cement manufacturer) which dropped 30% between April 30 and June 13 and we see a first-class firm trading at seven times earnings,” says Farmer. “Those are the types of companies we own – something with real value. There are exceptional buys out there and we’re going to make money for unitholders.”

So does that mean the Trimark team believes we’re heading into a new bear market? Farmer won’t go that far out on the limb but he says: “Could we see more pain? Yes, we think so. We would agree that there is a good likelihood that with 82 central bank tightenings in the past year there could be a downward shift in the global economy.”

So if you’re a conservative investor, where should you be in these circumstances? “Trimark Global Balanced Fund,” he says without hesitation. “It’s a wonderful fund and it offers the maximum flexibility for unitholders.”

For conservative investors who want a Canadian equity fund, Farmer says Trimark Select Canadian Growth is the best choice. Manager Heather Hunter takes small positions in the companies she selects, thus reducing the risk of any one stock dragging down results, and has less global exposure than the other two Canadian equity entries.

And what about the bond side of the equation? Trimark offers several fixed-income funds which Farmer himself ran for many years. Right now, the funds are in a defensive mode, struggling to keep their heads above water. In fact, the three largest bond funds, Advantage Bond, Canadian Bond, and Government Income were all fractionally in the red for the year ending May 31. Only the new Trimark Floating Rate Income Fund, which was launched in January 2005, shows a one-year gain, a modest 2.3%. That was only slightly better than the average money market fund.

Farmer thinks there could be a little more rough sledding ahead for bond markets because he expects the U.S. Federal Reserve Board to continue to raise rates in an effort to combat inflation. He predicts another 50 to 100 basis points of tightening before the Fed is done, which is a more pessimistic outlook than most economists are forecasting. But when the Fed finishes, that will be the time to buy and Trimark’s fixed-income team will shift to a more aggressive posture.

The bottom line is that the Trimark funds have gone through a tough period, mainly because of valuation issues. However, these funds tend to perform better in difficult markets, which is where we may be heading next.

Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: