AGF money manager report March 2012

Rory Flynn, AGF International Advisors Chief Investment Officer since Sept. 2011 and with AGFIA since 1992, spoke to financial advisors by webcast.

Funds managed by AGFIA have experienced below average performance over the last four years due to their relatively high investment in European companies and European financial companies in particular.  The companies owned by the funds continue to do brisk business and in many cases are taking advantage of their weaker competitors to emerge stronger for the next economic cycle.

Since the fall of 2011 Rory has adjusted the risk controls on the funds by setting limits on exposure to any particular sector, requiring some content from different sectors and reducing the maximum investment in any one company.  AGF Global Value will now hold no more than 5% in one company and will hold between 50 and 70 companies at any one time.  While this is a modest overall change, the managers believe it will reduce the fund’s price fluctuations over time with the same expected returns.

The dividend yield of the companies in AGF Global Value is currently 4.8% and the earnings yield is about 9%.  Companies pay dividends to investors from their total earnings, and may use the rest of their earnings to build cash, pay down debt, grow their business, buy back their shares or make acquisitions – all of which are good for investors.  This is in an environment where long term government bonds pay about 2%.  This is quite remarkable since on average, dividends double in 10 years and so do share prices, while a bond has a fixed value and a fixed income.  This indicates a deep level of fear in the minds of investors, since by choosing bonds they are accepting an income 60% lower than dividend yields and  78% lower than earnings yields in order to have higher investment price stability.

In summary, equity prices are low in both historical and relative (compared to bonds) terms and this bodes very well for future returns.  Markets have been consolidating for some time now and it appears that phase may be over, with significant gains in just the last few months perhaps indicating the next part of a return up to historically normal price levels.