By Scott Ronalds

“If I’m curt, then I apologize. But as I understand it, we have a situation here and time is of the essence.” - Newman

I’m a Seinfeld junkie. One of my favorite episodes was “The Muffin Tops”, in which Elaine’s former boss (Mr. Lippman) decides to open a business that sells muffin tops. He runs into a problem, however – he can’t get rid of the undesirable bottoms. Cue Newman, a.k.a. The Cleaner, who is hired to make the problem go away (by eating the muffin stumps).

It looks like Newman has paid a visit to AGF. The fund company purchased competitor Acuity in February and is acting fast to get rid of the unwanted offerings in its lineup. This involves merging 9 Acuity funds, pending approval by unitholders and regulators – 8 are being merged into AGF funds and 1 is being merged into another Acuity fund.

We don’t view fund mergers in a positive light for a number of reasons. For one, the fund being merged is often repositioned or assigned a different mandate, meaning that an investor’s original reason for buying it may no longer be applicable. Second, the common practice is to merge an underperforming fund into one that has a better record or falls into a more popular category. In other words, the fund company may simply be chasing performance. Further, a fund merger can remove a weak performing fund from a company’s lineup and thereby mask a history of poor money management. (For more on the topic, see our article Patience in Investing – The Exception)

We don’t have an axe to grind with AGF, but their latest round of mergers does illustrate our point. A few observations:

  • 6 of the 9 Acuity funds are being merged into a fund that falls into a different fund category (based on Morningstar data).
  • 8 of the 9 funds being culled have a worse 3-year performance record than the fund they’re being merged into (we looked at 3-year performance, as most of the funds do not yet have 5-year numbers).
  • 6 of the 9 Acuity funds have been in existence for less than 5 years (were the managers given a suitable time horizon to achieve their objectives?).

With the purchase of Acuity, AGF acquired an additional 50+ funds to incorporate under its umbrella of close to 200 products. One positive of the mergers is that AGF is removing some of the clutter from the investment landscape. In our view, companies offer far too many funds, many of which have extensive overlap and/or mandates based on the latest trend. Our industry would be well served to grab a few more quarts of milk for Newman and set him loose on all the muffin bottoms.