Don’t Buy Mutual Funds, Buy the Company!

AGF.B One Year Chart

Chart courtesy of the Globe and Mail website

In one of his books Derek Foster has a wonderful quote. He says “Don’t buy the bank’s products, buy the banks!” Well the same can be said for Mutual Fund companies as well. The sad fact is that buying a mutual fund is far less profitable, than actually buying the company that provides the fund. I’m excluding Bond and MMKT Funds  in my example. I’m also exluding high-risk  sector funds – a lot of people lose money on those. I’m sure there are other exceptions, but lets look at one of my recently purchased holdings AGF.B ~ AGF Management.

Back in the Spring/Summer 2009 when I moved to my second financial advisor, we both picked AGF Canadian Large Cap Dividend D Fund. This is one of those large cap mutual funds that holds basically some top Canadian banks, Suncor, and any other big blue chip stock that you can think of. Over a 14 month period the investment did well, gaining 14% in share price. Not a bad return for a conservative mutual fund.

Ironically the only distribution I received on the fund was $5.42 for all of 2009, a paltry 0.4% return, so my total return for 14 months was 14% + 0.4% = 14.4%. That’s a reasonable return for the time, and most fortunately my broker at that time charged me no commission (front or back) as a favour. But also consider this fund has a MER (Management Expense Ratio) of 1.58%, so that is another 1.58% lost in profit – but not for the managers that received it. In July 2010 I sold this fund (it’s still trading at the same NAVPS and is too dependent on bank stocks).

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But lets look at a better option. Had I bought any bank stock (that this AGF fund was holding) in the Spring of 2009 I would have fared a much better return. Most stocks after the 2008 crash were decimated, especially the banks. TD Bank for example was trading around $40 per share, and that was off its lows of around $30 $35. In August 2010 when I sold the AGF Dividend Fund, TD Bank was trading around $65 so that would have meant a nice 62.5% return. On top of that you can add the nice dividend of perhaps 4% that banks were paying around that time. And the same is true for Mutual Fund companies, they were decimated with redemptions after the 2008 crash, and they were holding mostly banks anyway. The point being, if you bought one or two bank stocks, and collected the dividends, you were getting a far superior return than any mutual fund that held them 🙂 That’s my point about holding AGF Management stock instead of their mutual funds. Plus you pay commissions and MER’s to buy AGF mutual funds… But AGF Management stock (AGF.B)  has a current dividend yield of 6.5%, so they pay you to buy their stock. Ironic isn’t it ?

So why didn’t I buy a bank stock instead of AGF Management ? Bank stocks seemed to be trading at a high, but many mutual fund companies were trading near their lows. Also AGF Management had a higher dividend than the banks. Obviously buying any Canadian Bank Stock would have been fine, they are starting to rally now, but at the time AGF Management looked like a bargain. I bought in at the end of July for 14.63 per share. You can see from the chart I posted, two very large trading volumes occurred after I bought AGF Management (AGF.B) – perhaps signalling institutional investors buying. The stock is trading today at 15.53 per share, a return on my capital of  6.2% in 2 months. And lets not forget the current dividend yield of 6.5% we can add onto that.  Not a bad investment if 12 months from now the stock is only at the same price!

Right now I think AGF Management will do very well for 2 reasons. First, its a solid company in the mutual fund and investment dealer industry. Even though people are becoming more aware of Index Funds and ETF’s, most people hand their investments over blindly to investment dealers and buy mutual funds (like I did). AGF Management is well positioned in that industry. Secondly, RRSP season will be approaching in a few months, and with the recent market rally you can be sure the general public will be buying in. Sadly most people buy in after the strong market rallies. Right now AGF Management has a very high liabilities-to-equity ratio of 3.7%, which is far above my buying standard. But with a current PE Ratio of 10.94 and dividend yield of 6.5% I think it Will fare well.  Also consider Banks and Mutual Fund Companies are in position to issue funds, bonds and other investment generating revenue to pay their debt. Manulife for example just did that recently. Once the TSE is on a tear and interest rates rise, these mutual fund companies and banks will be in very profitable situation. I’m looking forward to the profit on this one come RRSP season. Thanks for reading!

Disclaimer

This is the part of the website where I tell you I am not a financial advisor (thank goodness) or an investment dealer (LOL). This website does not offer professional or financial advice, only my personal rants and opinions (hope you enjoy them). I’m also supposed to tell you to consult with a “professional” financial advisor before making any investment decisions. Be prudent and cautious. Do your research, and only invest in what you understand !

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