Life's Building Blocks

Mark Nichols January 10 2000

Life's Building Blocks

Mark Nichols January 10 2000

‘Trees don’t grow to the sky’


Ross Laver

Gordon Cheesbrough has a problem. It so happens it’s the kind of problem most of his competitors in the Canadian mutual fund industry would give their right arms to have. But the way Cheesbrough sees it, that doesn’t make it any less of a concern.

Here’s the thing: since its launch 13 months ago, the $308million Altamira e-Business Fund has generated a return of 208 per cent. Suppose you, Mr. or Ms. Savvy Investor, had put in $10,000 at the outset. As of last week, your stake would be worth $36,280, after management fees. Chances are, you wouldn’t be phoning in to complain.

So why is Gordon Cheesbrough, the 47-year-old president of Toronto-based Altamira Investment Services Inc., worried? Simply because he knows that thousands of other investors, hungry for similar returns, will be tossing money his way this RRSP season. Which is fine, except there are no guarantees when it comes to stocks and equity mutual funds. There’s an old Wall Street saying that tends to apply in these sorts of situations: “Trees don’t grow to the sky.”

Will the e-Business fund, which invests in companies positioned to benefit from the Internet and digital technology, do as well this year? Perhaps, but it’s a long shot. Although tech stocks performed spectacularly well in 1999, sooner or later the party is going to end. And when it does, a lot of investors—especially those who missed the early run-up—are bound to be disappointed.

“The thing you worry about,” says Cheesbrough, talking about the e-Business fund, “is you hope everybody doesn’t think those are repeatable numbers, year in and year out. We’ve been very lucky, and our guys are smart and they’ve done a great job. But the reality is we caught the swings and roundabouts pretty well.”

And not just with that one fund. The Altamira Science and Technology Fund gained 149 per cent in the 12 months to Nov. 30, while the Altamira Japanese Opportunity Fund returned 113 per cent. Four other funds—the company offers 39 in all—reported 12-month increases of 40 per cent or more. The company’s biggest fund, Altamira Equity, with $1.5 billion in assets, was close behind at 36 per cent.

Add it all up and the Altamira story sounds pretty impressive. In terms of fund performance, the company hasn’t looked this good since the early 1990s, when Altamira Equity, under former star portfolio manager Frank Mersch,

racked up three consecutive years of gains exceeding 30 per cent. In those days, Mersch was arguably the best-known fund manager in the country and a hero to tens of thousands of Canadians. Altamira, the little no-load company that could, was one of the hottest firms in a hot sector, attracting a flood of investors’ money. The Toronto Dominion Bank, eager to grab a larger piece of the fund business, let it be known that it was willing to buy the company for $765 million in cash and stock.

And then the wheels fell off Altamira’s bandwagon. In the fall of 1996, TD Bank, for reasons that have never been fully explained, suddenly withdrew its takeover offer. Manufacturers Life Insurance Co. Ltd., with the support of Mersch and most of the other fund managers, stepped in with a lower offer and promptly ran into a wall of opposition from the company’s then-chairman, Ron Meade, and its major investor, Montreal-based Almiria Capital Corp. As the fighting spilled over to the courts, Mersch made an ill-timed bet on resource stocks instead of the financial sector, causing Altamira Equity to J underperform the market. Criticized by some investors, Mersch also became a target of the Ontario Securities Commission over his personal trading in a penny stock and was temporarily banned from working in the investment industry. He left Altamira in May, 1998, and now runs a hedge fund for wealthy private investors.

Suffice it to say, the past few years have not been kind to Altamira, which has slipped from being Canada’s 10thlargest fund company to number 19. But under Cheesbrough, a former Bank of Nova Scotia brokerage chief who took over as Altamira’s president in early 1998, things have been looking up. In the past 13 months, Altamira has launched eight index and four new specialty funds, including e-Business. There’s also a new managed-portfolio program that makes it easy for investors to choose their funds. The company won a major award for customer service recendy, and its top manager, Ian Ainsworth, was named fund manager of the year by a panel of industry analysts. In November, the firm reported its best monthly sales in two years, which augurs well for the current RRSP season.

Cheesbrough and his team deserve credit for managing Altamira’s turnaround. Their biggest challenge now, ironically, is to manage investor expectations.