Mutual funds see the other
shoe drop
By SUSAN HEINRICH
Mutual Funds Reporter The Financial Post
It was d‚ja vu yesterday for those mutual fund managers
who decided to gamble and were still holding Bre-X Minerals
Ltd. when the bottom fell out from under them a second time.
With trading halted on Bre-X yesterday after the devastating
news that the Busang gold deposit is a fraud, managers were
forced to write the stock down to zero to set end-of-day unit
values of their funds.
The first writedown occurred on March 26, when managers
who held the stock dropped its value to about $1 from the
$13.50 it had been halted at the previous day, after the size
of the deposit first came into question.
It did not hurt as much this time around as managers had
reduced their positions significantly after the first writedown.
Some, including John Embry, manager of the Royal Precious
Metals Fund, got out completely after being burned the first
time. Embry said he got out because he couldn't find anyone
who could give him a reasonable valuation for the company.
Those who stayed in held positions below 0.5% in most
cases, a far cry from the 8% one precious metals fund held
when the stock price was first written down in March. No
one has said they bought more after that.
Some decided to hang on to small positions, choosing to
treat the stock like an option, said one manager who still held
Bre-X but didn't want to be named.
Another manager who asked not to be named said he was
considering his small position like a lottery ticket. The stock
had already fallen so far that there wasn't much left to lose.
There remained only a possible gain if the outcome had been
different.
The AGF Canadian
Equity Fund held 0.2% of
its assets in Bre-X as of
the end of March, said
portfolio manager Laura
Wallace of AGF
Management Ltd. She
decided to hold on to the
small amount because it
would not have much of an
effect if the worst-case
scenario happened. She
said it was hard to believe
fraud of this magnitude
could be pulled off. "With
50,000 assay samples and
major companies
expressing unequivocal
interest, this was not a
one-hole wonder,"
Wallace noted.
Fund managers rely on the
fact that information they
are given is correct, said
Wayne Deans, a partner
and portfolio manager of
Vancouver-based Deans
Knight Capital
Management Ltd. Deans
maintained small positions
in Bre-X in the three funds
he manages. "If there's
criminal intent, it's difficult
[for fund managers] to
detect," he said. "We relied
on very credible
organizations throughout
the process. Like when we
read audited financial
statements, we assume the
numbers are correct."
It was not only resource
and precious metals funds
that have been caught
holding the bag.
General equity and
supposedly lower-risk
balanced funds also had
exposure to Bre-X. The
Phillips, Hager & North Balanced Fund was among those.
This was surprising, given that Phillips, Hager & North
Investment Management Ltd. is known as a conservative
investor. A partner at the firm said the exposure never
exceeded 0.75%.
In hindsight, Bre-X was a high-risk investment. But many
fund managers bought into the fairy tale of one of the largest
gold finds in history buried in the jungles of Borneo. The
opposite table shows that 14 of the 20 largest mutual fund
companies, by assets, held Bre-X in their funds in the last
year.
Only six passed on the opportunity and escaped unscathed.
Templeton Management Ltd. was among those.
"We just don't buy things where it is difficult to ascertain the
value," said senior vice-president and portfolio manager
Norm Boersma. "This is one of those cases where you're
living drill hole to drill hole. The speculation tends to run
ahead of the results."
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