The Cundill legacy

Peter Cundill, one of Canada’s value investing pioneers, passed away earlier this year. But he left a legacy of first-rate funds that bear his name, which are now part of the Mackenzie Financial line-up. So although he’s gone, you can still profit from his vision and philosophy. Here are two of the best. Ask your financial advisor if they are suitable for your needs.

Mackenzie Cundill Value Fund. This was Peter Cundill’s original fund and his “buy a dollar for forty cents” approach still guides the current managerial team of Andrew Massie and David Tiley.

This conservatively-run fund normally produces above-average returns and does a good job of preserving capital in tough markets. Like all equity funds, it was hit hard by the 2008-09 collapse but the 12-month loss of slightly less than 32 per cent to Feb. 28/09 was better than most global funds were able to do.

Almost 50 per cent of the assets are in U.S. stocks, so this fund provides excellent exposure to that market, which is performing well so far in 2011. Japan is in second position at 13.2 per cent and that percentage is rising which suggests the managers have been bargain-hunting in the wake of the series of disasters that struck the country in March. Surprisingly, unloved and financially troubled Italy is third in terms of assets, at 6.2 per cent. Interestingly, the fund has no exposure to China / Hong Kong , indicating the managers feel those securities are overvalued. The largest individual positions are in Chesapeake Energy (8 per cent), Dell Inc. (6 per cent), and ConocoPhillips (5.8 per cent).

The fund gained 10.6 per cent in the year to March 31 compared to an average of 8.2 per cent for the Global Equity category. The 10-year average annual compound rate of return was 4.6 per cent (C units) compared to a category average of -0.02 per cent. This is still a top choice for long-term value investors. The code for the front-end C units is MFC736. Rating: $$$$.

Mackenzie Cundill Recovery Fund. Here’s another global fund that is perfectly in tune with Peter Cundill’s philosophy of searching out cheap stocks. Its mandate is to invest in companies that are underperforming, in turnaround situations, have low credit ratings, or any combination thereof. You’ve heard of junk bond funds? This might be described as a junk stock fund. I don’t say that negatively. The Cundill managers are masters of making silk purses out of sows’ ears and this fund is the culmination of their deep value approach.

In some ways, this is one of the most remarkable funds around. It shows relatively high volatility which usually equates with higher risk, but until the market collapse of 2008 it had never lost money in a calendar year since it was created in 1998. Unfortunately, the first losing year was brutal – a plunge of 53.8 per cent. The good news is that the fund bounced back with a gain of 60.3 per cent in 2009 and added another 27.3 per cent in 2010 (C units). Over the 12 months to March 31, it gained 18.2 per cent.

Despite the collapse in ’08, investors who have held units over the long term have done very well. Over the 10 years to March 31 this fund gained an average of 12.4 per cent annually while the Global Small/Mid-Cap Equity category as a whole was showing an average annual gain of only 5.4 per cent. That means $10,000 invested in this fund a decade ago would be worth more than $32,000 today, assuming all distributions were reinvested.

Where have the managers been finding the “junk” that was doing so well? Look down the list of the top 10 holdings and you’ll see they are companies from countries like Russia, Indonesia, Malaysia, Hong Kong, and Ukraine. You probably never heard of a single one of these firms: Heidelberg Cement, Motor-Sich, Mriya Agro Holding PLC, or Raven Russia; the Cundill team digs very deep.

This fund has strong growth potential and would be a good choice for an aggressively-managed Tax-Free Savings Account. But RRSP investors should approach it with caution because of the potential for high volatility. RRIF investors should stand clear; at that stage in your investing life there is simply too much risk involved. Choose the front-end load C units, code MFC742. Rating: $$$$.

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