Christine Hughes, former manager of AGF Canadian Balanced Fund
Christine Hughes' strategy to reduce risk, and the AGF Canadian Balanced Fund's outperformance versus its peers helped her win the 2009 Lipper Award in the Canadian equity balanced group for one, three and five years ending Dec. 31, 2008. (It is now in the Canadian neutral balanced category because it has less than 60 per cent in equities.) Her fund, which is now one-third invested in equities, bonds and cash, only lost 7 per cent last year despite the market turmoil and has posted an annualized return of 6 per cent over five years.
"I protect capital," says Ms. Hughes, who has an economics degree and had a background in running fixed-income and equity funds before joining AGF in 1999. "I did it during the tech wreck here, and I am doing it again with this fund with this [financial]crisis."
How do you run your balance fund?
Most of the time this fund looks like a normal balanced fund, meaning 60-per-cent equities and the rest in bonds and cash, except in times of systemic stress. So I am sitting here with 30 per cent in cash - the way I was in 2002. When the bond market is exhibiting stress, you can measure that by an inverted yield curve [a predictor of a recession]or credit spreads widening [as more companies are likely to default] That is all-around hostile for equities. So the bond market is very key for me, and it tells when there is a stressful situation or not.
Your fund has been 30 per cent in equities for almost a year. Why?
I had been expecting this blowup for quite a few years. There was so much debt being built up in the system. It was just time, in my mind, when the bomb would go off. It was a huge bubble of immense proportions and this mop-up now is taking years to go through. I think we are part of the way done. The asset allocation of my fund will remain in times of stress below 60-per-cent equities. My mind now is very much in protecting client assets so I have a considerable positions in bonds, cash and gold.
How does your equity portion differ from your peers?
The competitors are very focused on income and very similar to a dividend fund with lots of bank stocks and income trusts. … When markets go up, I want to participate. The equity component of this fund more closely mirrors the TSX most of the time. Having said that, it doesn't right now because I don't own or haven't owned bank stocks for the most part during all of this. I held them until spring of 2007. I sold half of my position then, and sold the other half in January, 2008.
What about gold?
I have held gold stocks since 2001. I thought it would be a complete disaster when this debt binge - this bubble - was going to be pricked. I thought they [the U.S. government]would pull out all the stops and print unprecedented amounts of money, which they are starting to do now. It will be a managed devaluation of the U.S. dollar. If you step back and look, everybody is doing it. Japan is doing it. Switzerland is doing it. The U.K. is doing it. … All of this debasement of currency is good for hard assets.
Why did you own the UltraShort S&P 500 ProShares ETF, which shorts that index?
It was 2 per cent of the fund when we bought it [spring of 2008] I made money on it, but not a lot. What it really did was smooth out volatility in the months and the weeks when there were dramatic declines in the stock market. … I didn't go out and effect a true short position. It was a hedge because I was already long the market by owing equities.
Does your fund differ now from last year?
It's slightly different. Coming through February, the market internals were improving. You could tell that a meaningful tradable bounce was coming that would have a couple of months to it - at least a 20-per-cent rally. Even though the market was going down, it was being pulled by fewer and fewer stocks. On March 9, there was an enormous move in the stock market. A lot of people were coming back to put risk back on the table. I sold the UltraShort on March 9th.
Is this rally a bounce in a bear market?
Yes. I don't think the banking system has been fixed. It takes time for these things to work. It typically takes about two-and-a-half years, and we are just past halfway now. I track the S&P 500 for the lows and highs of this cycle. … For sure, it is going to be 600 or below [from about 850 currently]when this thing bottoms out.
What advice would you give investors?
Use the rally to protect yourselves. And buy my fund - where I will be the one to decide whether the asset mix should be in equities or not. There will come a time, and it will probably be in 2010 when it will be the 'buy of the century' for equities. It's just that a lot of people probably won't be able to, they will have incurred such losses. The next 30- to 40-per-cent [drop] is so much more difficult.
What if you are wrong?
I'd love to be wrong because my portfolio is extremely liquid. The entire portfolio, or 98 per cent, can be liquidated in two days. I could get into a bullish stance. It's not really that big a deal if this [rally]turns out to be the real deal.