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Millions of Canadians poured money into mutual funds in the early '90s. Some of them lived the dream and struck it rich. But like most of them, I did not. It's kind of ironic, given that I actually worked for a mutual fund company for four years: Global Strategy Financial Inc. I also invested in Global Strategy's funds. Yet I'm still living in the same narrow townhouse by Toronto's Gardiner Expressway that I bought a decade ago. The whopping $8,500 portfolio of Global Strategy funds that I amassed before I left the company in 1998 is now run by AGF Management Ltd., and it's still worth, well, about $8,500. I guess I'm hanging on for the long term.

Richard Wernham, the driving force behind Global Strategy, did much better than me. In 2000, he sold the company to AGF for $438 million, and collected an estimated $289 million for his 66% controlling stake. Even before that, he was doing very well indeed. His mansion in Rosedale was among the Top 10 in Frank magazine's ranking of Toronto's most valuable homes. Some of we troops at the company drove by the place one day. Very swish-ornate masonry, barred fence, the works.

Do I feel shortchanged? One difference between Wernham and me is that he is a brilliant securities lawyer and entrepreneur, and I am not. Yet, like many other investors who bought into the mutual-fund dream in the 1990s, I can't help noticing that the people who seemed to profit the most from the fund boom were the executives and money managers at the fund companies themselves. The adage about it being better to own a casino than patronize one comes to mind.

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Actually working at a mutual fund company was also an eye- opener. From the outside, the mutual fund business creates genuine wealth by encouraging saving and investment, and rewarding innovation and risk-taking. On the inside, it's also about marketing and management fees.

In the early 1990s, mutual funds looked like a winning proposition for just about everyone. The theory behind them is solid. I'd studied economics at university and reported on business at Maclean's, and I could repeat that theory by rote. Over the long term, stocks have tended to do better than bonds, which in turn have tended to do better than GICs, ordinary bank savings accounts and other low-risk, low-return investments.

The trouble is that most ordinary individuals have only a few thousand dollars to invest at any time. They can't afford to buy enough individual stocks and bonds to put together a properly diversified portfolio-one with holdings in many different companies, industries and regions. Mutual funds allow them to pool their savings and buy and sell holdings in bite-sized quantities. The mutual-fund surge meant that the masses could participate in the market as readily as those of high net worth.

Another big draw for the average investor in the early 1990s was the phenomenon of the star fund manager. In the United States, the biggest kahuna was Fidelity Investments' Peter Lynch, who ran the Magellan Fund for 13 years, racking up returns that averaged more than 25% a year. He then "retired" in 1990-at age 46-to become Fidelity's promotional front-man and a bestselling author. In Canada, Frank Mersch was on a tear with his Altamira Equity Fund, posting returns of more than 30% for three years in a row between 1991 and 1993.

There was a populist, stick-it-to-the-big-banks appeal to mutual funds as well. Independent fund companies like Altamira, Trimark and Mackenzie were luring away billions of dollars from the Big 5. Given the fat double-digit returns the funds touted in their advertising, it was a no-brainer for Mr. and Mrs. Canada to haul money out of GICs and savings accounts and plunge in.

Consumers had a bulging candy store of hundreds of funds to choose from. Stock funds, bond funds, international funds, T-bill funds, oil and gas funds, technology funds-sectors and investment vehicles that a lot of individuals hadn't even considered before. Plus, you didn't have to do any detailed investment research or portfolio balancing yourself. All those supersmart fund managers and your investment adviser would do that for you-well worth whatever sales commission you paid and a measly 2% annual management fee.

Global Strategy was one of the new independents, and a genuinely innovative one from its beginnings in 1983. The company pioneered international bond funds in Canada, and introduced the first 100% RRSP-eligible foreign funds, which analysts dubbed clone funds. Fund managers used derivatives, rather than actual foreign stocks or bonds, to match the returns of foreign market indexes. That made it possible to invest as much as you wanted in, say, a Japanese, European or U.S. fund and still not violate Revenue Canada's foreign content limit for RRSPs.

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I joined the company in October, 1994, and signed up for a no-fee staff RRSP account. I had about $4,000 in a deferred profit-sharing plan from my previous job that I could transfer tax-free. After using up my other savings to buy my townhouse in 1995, I scraped up another $1,200 in cash in early 1996 in time for the annual end-of-February RRSP deadline.

Given all Global Strategy's international fund offerings, I diversified geographically. I went a tad overboard for such a weenie portfolio. I divvied up the $4,000 between an Asia fund and two derivative-based clone funds-one European equities and one international bonds. I split the $1,200 between a Latin American fund and a Canadian small-cap stock fund.

Stock markets boomed in the 1990s, and like a lot of new mutual fund investors, I was on a roll at first. At the end of 1996, that $5,200 had grown to more than $7,000. At the end of 1998, the year I left Global Strategy, the total value was $8,630. I was really partying in 1999-I had $9,624 at year end. But that was pretty well as good as it got. On my AGF account statement this past Sept. 30, the total was $8,532.

That's a long stretch of non-growth. Quite astonishing, really, considering all the complex strategizing and re-engineering by the managers of those funds over the past decade. At least my stint on the inside allowed me to see why some initiatives worked and some didn't, and why I and a lot of other mutual fund investors still trail Richard Wernham by a couple of hundred million dollars or so.

When I arrived at Global Strategy, it was flush from the early-'90s fund boom. The company had more than $3 billion in assets under management, and a staff of more than 200 spread over three floors of a downtown Toronto office tower. I worked in a department called Media Services. I wrote for and edited two magazines, one for unitholders in Global Strategy's funds, and one for the brokers and mutual fund dealers who sold them.

There was plenty of money at our company and others to spend on wacky promotional ideas, plus the old tried-and-true method of conducting seminars and the like for brokers and fund dealers-and then wining and dining them. The idea behind Media Services was that by delivering material in journalistic format, in addition to the rah-rah traditional brochures and sales sheets produced by the marketing department, we would look more credible than banks and competing fund companies. There were also four former radio reporters who put together a daily recorded newscast about the fund industry and reports on our funds that brokers and dealers could dial up by phone. There was a video guy as well and, later, an on-line specialist. Media Services eventually had a staff of about 30.

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As for Wernham, after a handshake and hello my first day on the job, I didn't have much direct contact with him other than the odd how-are-you on the elevator. Still, he seemed very down-to-earth, with a quick smile and a scruffy beard, and a life-sized statue of Louis Armstrong in his office. His dry wit enlivened staff meetings and functions.

Away from the office, Wernham has hobnobbed in some pretty luxe circles over the years. He's become wealthy enough to be a big-time philanthropist. He's been on the boards of the Art Gallery of Ontario and the Royal Ontario Museum, and, with his wife, Julia West, he has attended society shindigs like the annual Brazilian Ball; one year they donated $500,000 to sponsor prostate cancer research at Princess Margaret Hospital. In 2001, he and West gave Upper Canada College the biggest donation in its history-$6.9 million-to establish the Richard Wernham and Julia West Centre for Learning. In 2000, they committed $10 million to set up Greenwood College School, whose goal is to develop the whole child, rather than just stuffing kids full of facts for standardized tests.

West, a former litigation lawyer, is passionate about interior design, and she'd had a hand in decorating our offices. Pricey-looking antiques were scattered around the place. In 1998, she founded Julia West Home, which bills itself as "an atelier, a studio of ideas from which objects of use and beauty emerge." West was always a cheery sort at company functions, too, although I don't think she was impressed one day when she was showing guests around and she walked into an impromptu Media Services dance party, with James Brown's Get Up Offa That Thing booming out of the radio guys' sound system.

Before I arrived, the company had been clever at marketing funds as well as creating them. Lacking an established brand name, Wernham had signed up venerable London-based Rothschild Asset Management to manage Global Strategy's international funds. Rothschild, in turn, owned 27% of Global. In visits or radio spots, the Rothschild fund managers could be a great promotional tool, thanks to their plummy English accents, long sentences and bon mots like, "It's generally the train you don't see that hits you" (to describe market risk).

By the time I got there, however, Global Strategy was discovering that people were finding more attractive places to park their money. International bonds had soared in the early '90s, thanks largely to declines in interest rates in many major economies. Global's World Bond Fund and Diversified Bond Fund posted double-digit yearly returns-performance you'd expect from stock funds-and soared to more than $1 billion apiece in assets.

But in 1994, the U.S. Federal Reserve Board hiked interest rates. International bond prices were hammered. Worse, Rothschild had hedged the foreign currency exposure in the funds to ensure Canadian investors would earn the same return as bond investors in foreign countries. Many rival fund firms didn't hedge, and their bond funds did better than ours because major foreign currencies gained against the Canadian dollar.

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Industry buzz put much of the blame on Rothschild, and investors started redeeming our two big international bond funds heavily. I saw the daily figures: During my first two years there, the company often lost as much as $1 million or $2 million a day in assets. From early 1994 to mid-1996, World Bond's assets declined from $1.13 billion to $448 million, and Diversified Bond shrank from $1.36 billion to $604 million.

Even some Global Strategy staff literally crossed the street (Bloor) to buy funds at then-popular Altamira. They soon learned the perils of chasing performance. Golden boy Frank Mersch had wielded a hot hand with resource stocks, but he sold rising bank shares too early in the mid-'90s and lagged behind rivals.

In November, 1994, Wernham reduced Rothschild's role in managing international funds, including my Asia fund, to one-third, and added other outside managers to each one. Global Strategy also launched six "multi-adviser" funds. Most of those funds didn't catch fire at first. In Media Services, we wrote a lot of articles urging investors and their advisers to hang on for the long term. But fund performance over the short term sucked, and investors kept bailing.

Despite the asset drain, some stubborn attitudes persisted at Global Strategy. The company refused to advertise or to sell directly to consumers, the theory being that they should deal only with investment advisers. We weren't supposed to push star fund managers or hot funds either. Other firms were more aggressive, some of them even advertising in a newfangled medium-television. At Global Strategy's Christmas party, Wernham and some other managers in tuxedos performed a skit spoofing an ad by rival Dynamic Mutual Funds that featured a rowing team.

Trimark Investment Management was another internal competitive obsession in the mid-'90s. Its Canadian stock funds posted solid results, making it the second-biggest fund company by assets. However, like Altamira, Trimark later sagged, as its managers shied away from then-hot (but soon-to-fade) tech and telecom stocks. Consumers were finding out that no matter what the marketing says, and no matter what the managers do, over the long term mutual funds tend to go up and down with the market.

At Global Strategy, the asset hemorrhaging continued, and the company had to change. It had a couple of veteran value managers running its Canadian funds-Tony Massie for large-cap stocks, and small-cap specialist John Sartz. In 1996, Massie's Income Plus Fund, which invested in both stocks and bonds, and Sartz's Canadian small-cap fund both racked up strong results and started selling fast. In the run-up to the March, 1997, RRSP deadline, Global Strategy started running newspaper ads with photos of Massie and Sartz and their performance numbers. The company that began as an innovative international outfit, one that had pooh-poohed star managers, was now looking a lot like its rivals.

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Another Massie fund, Gold Plus, climbed by 100% between November, 1995, and May, 1996. It started selling, too, and Global Strategy's own sales reps-who dealt with brokers and fund dealers-began pushing it hard. Alas, Gold Plus lost 48.2% in 1997, largely because the gold sector tanked thanks to Bre-X.

I left Global Strategy in the summer of 1998 to join Report on Business magazine. Shortly after that, Global Strategy folded six international funds into two bigger global ones. My Asia fund became part of something called the World Companies Fund. My Latin American fund became part of the Diversified World Equity Fund. Each of the six discontinued funds had less than $10 million in assets. "We simply have not seen sufficient investor demand to support their continuation," Wernham said.

Even before I left, there was speculation in the industry-and within Global Strategy-about consolidation, and which fund companies were ripe for takeover. Wernham's aspiration was to be an acquirer, not a target. But in August, 2000, he and AGF president Blake Goldring announced that AGF was buying Global Strategy, complete with the Rothschild connection. By then, assets under administration had climbed to more than $6 billion. "We are excited about continuing the relationship with such a respected name in international money management," said Goldring. Industry analysts said the $438-million purchase price was high-7.3% of the value of Global Stategy's total fund assets. We often urged our customers to hold on to our funds for the long haul, until they were sure it was time to sell. Wernham was exercising the latter part of the dictum perfectly: The TSX peaked shortly after the sale.

AGF's excitement, the Global Strategy brand name and the relationship all evaporated pretty fast. In November, the day after AGF finalized the deal, it parted ways with Massie and Sartz, and announced that Wernham would not join the merged firm. In total, AGF laid off 72 of Global Strategy's 217 employees, including all of my former colleagues in Media Services. It made AGF's slogan below its prowling-tiger logo look kind of ironic: "What are you doing after work?"

As an investor, five years of AGF ownership has done just about nothing for me. In July, 2001, AGF merged Global Strategy's funds into funds of its own. I've ended up with a Canadian small-cap fund, a European equity fund, a global bond fund and a world companies fund. Most major stock markets began a long slide that spring, however, and so did my AGF portfolio. It bottomed out near $6,300 in late 2002 and early 2003. But markets have climbed since then, and I have my $8,500 back.

Staring at my monthly statements, and remembering what it was like inside the business, reinforces two fundamental truths for me: 1) Mutual funds are created, promoted or killed based on the best judgment of the fund companies. This does not mean they are sound or unsound ways of saving for retirement. 2) Investors-even many investors who have advisers-are stupid. They chase performance, buying funds that have gone up in value and selling ones that have gone down. We saw that every day in Global Strategy's sales statistics.

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The promise of mutual funds in the early '90s was that they could give even the average person access to a world of investment options, and an expert fund manager could navigate among those options for you. But plenty of academic research shows that most fund managers don't beat the relevant market indexes over the long term.

Given all that, the priority for fund companies, banks and other institutions is to gather assets-win over those fee-paying customers and hang onto them. If you have the smarts, the guts and the resources to do that, like Richard Wernham did, you may end up with $289 million. I hope I still have my $8,500 when I retire.

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