The global liquidity crisis stemming from the U.S. sub-prime mortgage mess has tarnished many financial services stocks, but value manager John Arnold believes it's one of the best buying opportunities in many years.
"This is a re-run of 1999," says Arnold, 60, co-manager of the $1.8-billionAGF International Stock Class
and managing director of AGF International Advisors Co. Ltd. in Dublin, Ireland. Back then, he recalls, investors were dumping banks and insurance companies, and loading up on technology, media and telecommunication stocks.
"Valuations on financial services went out to an extreme, both on a price-to-earnings and relative yield basis. That was the most extreme point in my career," says Arnold. "It's the same today. On a relative basis, the financial services sector is as cheaply valued as it's ever been."
Arnold has been vindicated before. In 2000, the $1.7-billionAGF European Equity Class returned 12.4% and outperformed the European Equity category by a wide margin. "A lot of that was driven by the realization that people woke up to the fact that financial services was all about being a financial supermarket. That hasn't gone away."
Favouring insurance firms such as Royal & SunAlliance Insurance Group PLC and retail-oriented banks such as BNP Paribas SA, Arnold likes their low valuations, good management practices and strong franchises.
Today, however, investment banks have "clouded the situation," says Arnold, and the sell-off has been across the board. Indeed, for the 12 months ended Nov. 30, the 4-star rated European equity fund lost 1.9%, versus the median return of 3.3% within its category. The 3-star ratedAGF International Value lost 2.9%, compared to the median global fund's 0.6% loss.
On a longer-term basis, though, the funds have outperformed their peers. The European equity fund was in the top-quartile over three, five and 10 years. The international equity fund has achieved top-quartile returns over two, three and five-year periods.
"As the situation clarifies, I expect to see our funds perform strongly," says Arnold. "There is nothing new creeping up on us. What is happening now is the 'echo effect.'"
A native of England, Arnold has been immersed in the financial services world since he graduated in 1969 with a diploma in commerce and administration from Portsmouth Polytechnic. Arnold began working as a trainee analyst at National Provident Institution, a mid-sized life insurance firm. At 25, he became a UK equity fund manager.
In 1982, Arnold was hired as a senior manager by Crown Financial Management, a UK subsidiary of Toronto-based Crown Life Insurance. Several years later he lost his job when Crown Life dismantled its London operations.
Arnold landed on his feet when he was asked to run AGF's fledgling European office in Dublin. "I was very lucky, when I thought I had retired for life. Then I got a phone call from Warren Goldring, [co-founder of Toronto-based parent AGF Management Ltd.]."
Although the Dublin branch had only two employees in September 1993, it has since expanded to 10 investment professionals who oversee $16 billion in assets.
A bottom-up value manager, Arnold works closely with Rory Flynn, who joined AGF shortly after Arnold did. They run highly concentrated portfolios, where positions will go as high as 9.5% of fund assets.
As they are patient investors who wait until value is realized, turnover tends to be very low. The European fund had a 10.5% turnover rate for the year ended Sept. 30, 2006. It was 6% for the international equity fund in the same period.
Arnold is well known for his so-called "30-30-30" value discipline. To be selected, a stock's current price must be at least 30% below its high over the past 18 months; its price-to-earnings ratio must be at least 30% below the market p/e, and its dividend yield must be 30% above the market yield.
With the time-tested process firmly in place, Arnold is applying it in his firm's newest challenge. Last November, the Dublin team, along with AGF's chief investment officer, Martin Hubbes, began to oversee the $304.8 millionAGF Canadian Value and the $1-billionAGF Canadian Balanced .
Formerly managed by Keith Graham, and part of the "Real Value" product line, the funds are being run by a team which combines talent on both sides of the Atlantic. Arnold's colleague, Richard McGrath, is picking international stocks from Dublin, and Niall Dineen, who has moved to Toronto, is picking Canadian stocks. AGF's fixed income specialist Tristan Sones, in Toronto, is running the bond portion of the balanced fund.
Both portfolios are being restructured. For instance, the balanced fund is shifting from a 70/30 asset mix to a 60/40 blend of stocks and bonds.
"We're getting rid of the high-yield products and making the portfolio cast-iron safe with government bonds," says Arnold, adding that they have also disposed of precious metals stocks that don't fit their criteria. "At the end of the day, this is meant to be a neutral portfolio. That's the good old-fashioned guideline I was used to in the 1980s."
returned 12.4% and outperformed the European Equity category by a wide margin. "A lot of that was driven by the realization that people woke up to the fact that financial services was all about being a financial supermarket. That hasn't gone away."
Favouring insurance firms such as Royal & SunAlliance Insurance Group PLC and retail-oriented banks such as BNP Paribas SA, Arnold likes their low valuations, good management practices and strong franchises.
Today, however, investment banks have "clouded the situation," says Arnold, and the sell-off has been across the board. Indeed, for the 12 months ended Nov. 30, the 4-star rated European equity fund lost 1.9%, versus the median return of 3.3% within its category. The 3-star ratedAGF International Value lost 2.9%, compared to the median global fund's 0.6% loss.
On a longer-term basis, though, the funds have outperformed their peers. The European equity fund was in the top-quartile over three, five and 10 years. The international equity fund has achieved top-quartile returns over two, three and five-year periods.
"As the situation clarifies, I expect to see our funds perform strongly," says Arnold. "There is nothing new creeping up on us. What is happening now is the 'echo effect.'"
A native of England, Arnold has been immersed in the financial services world since he graduated in 1969 with a diploma in commerce and administration from Portsmouth Polytechnic. Arnold began working as a trainee analyst at National Provident Institution, a mid-sized life insurance firm. At 25, he became a UK equity fund manager.
In 1982, Arnold was hired as a senior manager by Crown Financial Management, a UK subsidiary of Toronto-based Crown Life Insurance. Several years later he lost his job when Crown Life dismantled its London operations.
Arnold landed on his feet when he was asked to run AGF's fledgling European office in Dublin. "I was very lucky, when I thought I had retired for life. Then I got a phone call from Warren Goldring, [co-founder of Toronto-based parent AGF Management Ltd.]."
Although the Dublin branch had only two employees in September 1993, it has since expanded to 10 investment professionals who oversee $16 billion in assets.
A bottom-up value manager, Arnold works closely with Rory Flynn, who joined AGF shortly after Arnold did. They run highly concentrated portfolios, where positions will go as high as 9.5% of fund assets.
As they are patient investors who wait until value is realized, turnover tends to be very low. The European fund had a 10.5% turnover rate for the year ended Sept. 30, 2006. It was 6% for the international equity fund in the same period.
Arnold is well known for his so-called "30-30-30" value discipline. To be selected, a stock's current price must be at least 30% below its high over the past 18 months; its price-to-earnings ratio must be at least 30% below the market p/e, and its dividend yield must be 30% above the market yield.
With the time-tested process firmly in place, Arnold is applying it in his firm's newest challenge. Last November, the Dublin team, along with AGF's chief investment officer, Martin Hubbes, began to oversee the $304.8 millionAGF Canadian Value and the $1-billionAGF Canadian Balanced .
Formerly managed by Keith Graham, and part of the "Real Value" product line, the funds are being run by a team which combines talent on both sides of the Atlantic. Arnold's colleague, Richard McGrath, is picking international stocks from Dublin, and Niall Dineen, who has moved to Toronto, is picking Canadian stocks. AGF's fixed income specialist Tristan Sones, in Toronto, is running the bond portion of the balanced fund.
Both portfolios are being restructured. For instance, the balanced fund is shifting from a 70/30 asset mix to a 60/40 blend of stocks and bonds.
"We're getting rid of the high-yield products and making the portfolio cast-iron safe with government bonds," says Arnold, adding that they have also disposed of precious metals stocks that don't fit their criteria. "At the end of the day, this is meant to be a neutral portfolio. That's the good old-fashioned guideline I was used to in the 1980s."
