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Analysis: Within the European equity category, one of the hardest hit funds has been the AGF European Equity Class Fund which has dropped more than 15.7% in each of the past three years. When you open the hood on this fund, it is not hard to see why. The fund is heavily invested in financial stocks, which have been severely punished by the markets since the onset of the global credit crisis in 2008. With continued volatility expected in the sector and continued loan write downs expected, more downside for this fund is likely.
On October 4/11, it was announced that long-time fund manager John Arnold would be retiring from AGF effective October 31, handing the reigns to co-manager Rory Flynn. While the timing of Mr. Arnold’s retirement may be a bit of a surprise, his successor is not. It has been common knowledge that Mr. Flynn would take over from Mr. Arnold when he finally decided to hang it up.
Under Mr. Flynn’s management, there will be no changes to the stock selection process. They will continue to follow their 30/30/30 approach which seeks out stocks which have a price to earnings ratio that is 30% lower than the market, dividend yields which are 30% higher than the market, and a stock price that is at least 30% below its 18 month high. There will, however, be some refinements to the portfolio construction process which include setting the maximum exposure of any one stock within the portfolio, setting the minimum and maximum number of stocks within the portfolio, and setting the minimum number of sectors which must be in the portfolio.
It is our opinion that these refinements are positive for the fund and over time will prevent significant sector concentration such as we’ve seen in the fund recently. Further, we expect that these changes will help to bring the overall level of volatility down within the fund, to levels which are more in line with the broader index.
That said, even with the changes, we would be reluctant to recommend the AGF European Equity Class Fund at the moment. In our opinion, with a final solution of the European debt crisis many months or even years away, there is far too much volatility risk within the region. While we believe that the region will inevitably come back and reward investors with gains, we feel that it may be many months before that occurs. Instead, it is our recommendation that investors take their European exposure and invest it in a more broadly focused, actively managed global mutual fund. This approach is favoured as the fund will still have some exposure to the European region, but the manager may invest as little or as much in the region as they feel the risk reward trade off warrants.-