powered by GlobeinvestorGold.com

Rob Carrick

In this Issue

Bring on the heartbreak

Rob Carrick

OTTAWA (GlobeinvestorGOLD) — There are disappointments when you invest in mutual funds, and then there are heartbreaks.

You know about disappointments — any seasoned investor has had an experience with a dud fund. Heartbreakers are a whole different thing. You buy these highly-regarded funds, do great with them for a while and then things go wrong. You hang on, waiting for the old magic to return and it just doesn't.

The AIC Advantage Fund is just such a story. Back a little more than a decade ago, this fund was just embarking on one of the greatest 10-year runs in Canadian fund history. A quick highlight: Twice in four years, it made more than 65 per cent.

Nothing sells mutual funds like big returns, so it's not surprising that a lot of investors jumped into AIC Advantage. In fact, the fund proved so popular that AIC decided to cap it in the mid-1990s and open a clone fund to new investors called AIC Advantage II. By early 2000, both funds had attracted close to $6-billion, which is colossal by Canadian fund industry standards.

Bring on the heartbreak

The lucky ones were those investors who bought the fund in the very early 1990s. Check out these annual returns through the decade:

  1. 1990: minus 18.6 per cent
  2. 1991: 39.8 per cent
  3. 1992: 9.1 per cent
  4. 1993: 65.2 per cent
  5. 1994: minus 12.6 per cent
  6. 1995: 30.7 per cent
  7. 1996: 66.5 per cent
  8. 1997: 43.3 per cent
  9. 1998: 6.3 per cent
  10. 1999: minus 13.4 per cent

The record shows that while AIC Advantage was quite capable of taking a tumble over the course of a year, its incredibly outsized gains more than made up for it. For this reason, there was lots of motivation for unitholders to hang on during a rough patch like the one encountered in 1999. Unfortunately, 1999 might well be the year that AIC Advantage lost its mojo. Lots of investors hung on (full disclosure: I'm one of them), but this fund still hasn't made it back to anything like its previous form.

Here's how the numbers stack up for AIC Advantage. Over the past five years, it ranked among the top 25 per cent of Canadian equity funds once and among the third and fourth quartile four times. So far in 2004, the fund has been third quartile. This pattern of underperformance accounts for the fund losing a compound average annual 0.91 per cent over the past five years while the average Canadian equity fund made 6.8 per cent and the S&P/TSX composite index made 6.5 per cent.

Sadly, this fund's former glory is plain to see in its longer-term numbers. Just look at the 15-year comparison: A compound average annual 13.7 per cent for AIC Advantage, compared to 8.6 per cent for both the average Canadian equity fund and the S&P/TSX composite.

The really heartbreaking part of the AIC Advantage story is that it was possible to see the decline coming. This fund invested heavily in financial stocks, especially those of mutual fund companies, on the basis that the aging baby boom population would increasingly turn to these firms to manage their money. This was sound theorizing, but it ran smack into a three-year bear market that shattered the confidence of many investors and in turn hurt the fund industry.

AIC Advantage has broadened its holdings — five of its Top 10 holdings are financial stocks — but the old spark is gone. All in all, it's a heartbreaker for the long-term unitholders who didn't have the sense to get out when the getting was good.

Personal postscript

I still own my AIC Advantage, purchased in the mid-1990s. On the plus side, I've doubled my money. On the negative, I'm about where I was five years ago.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

Back to top