Changes at Saxon Stock could mean a less-stellar future

The Globe & Mail’s latest mutual fund number cruncher focuses on the top-performing Canadian Equity funds for the ten years ending June 30, 2010.  Quantitative screens like this can be illustrative.  As I read that Mackenzie Saxon Stock – Investor Series topped the list of 10-year performers, a few thoughts came to mind.

As Shirley Won noted in the article, most of this fund’s history (and most of the last decade) is attributable to Saxon co-founder Rick Howson.  (Mackenzie Financial acquired Saxon in August 2008.)  While the fund is now under new management, lead manager Suzann Pennington has real skill.  Fee changes, however, are less obvious.

The management expense ratio (MER) is now listed as 2.02% for the year through September 2009.  HST will kick this up a notch for 2010 and beyond (as it will for all funds).  But this fund was materially cheaper throughout its history.  For several years leading up to the Mackenzie acquisition, Saxon Stock boasted a MER of 1.87% annually.  Saxon had a policy of charging a management fee of 1.75% to this fund, plus taxes.  Unlike most firms, Saxon covered all operating expenses out of its management fee.  Knowing that this practice would not continue under its new owners, it was only a matter of time before all Saxon funds saw MERs rise.

Arguably more important is the reason behind the fund’s top performance.  I have often urged advisors and investors to avoid holding too many mutual funds. I have a long-held belief that a single true all-cap stock fund is all that’s needed to cover Canadian stocks.  Forget about trying to colour in each square in the style matrix.  This is akin to paint-by-numbers in the art world.  Canada’s stock market is neither large nor deep.  A single fund easily does the trick.  The problem is that so few funds are able to pursue a true all-cap strategy.

Many Canadian stock funds have become victims of their own success.  They start out buying a healthy mix of bigger and smaller companies – i.e. an all cap strategy.  The result is an added level of diversification and (usually) a performance boost.  But strong performance usually attracts big money.  And once the fund amasses significant assets – say well above $1 billion or so – the fund gets squeezed out of being able to invest substantially in the smaller companies that helped build the track record that attracted so many investors.  Such funds, then, grow into a large-cap bias.  This bias toward larger companies – and away from smaller companies – grows directly with the amount of money in the fund.

Saxon Stock Fund has been able to maintain its all-cap focus because it has been less than $1 billion throughout its history.  But with the Mackenzie marketing machine behind it, its days as a true all-cap fund may be numbered.  Talent is talent and I have no doubt that Suzann Pennington will do well by the fund’s investors.  But this fund is destined to change so understand that it may be much more challenged to be among the next decade’s list of outperformers.