Even though R. Gregory Ross has been president and CEO of Toronto-based AEGON Capital Management Inc. for more than two years, he misses the trading desk and action in the markets.
"At heart, I'm an investment guy, and though I'm not running portfolios on a daily basis, I still spend time on the trading desk, talking to analysts and money managers. It's a big part of what I do," says Ross, who cut his teeth in fixed-income markets in the mid-1980s.
While Ross frequently discusses market dynamics with his 11-person investment team, he's also involved in determining the asset allocations of several target-date funds, such as Transamerica Futurepoint 2020 GIF, sponsored by an affiliated firm, Transamerica Life Canada. And he is active in portfolio construction of products such as imaxx Canadian Balanced, which maintains a 60-40 split between equities and fixed income.
"We've introduced more rigour to the process," says Ross, noting that stocks are ejected from portfolios if their prices drop 30%. "In these tough markets, you need to have a discipline and clear process if you want to generate consistent returns that your clients are happy with."
Exercising discipline means focusing on better performing names and dropping losers. Recently, the AEGON team sold its shares of Manulife Financial Corp. MFC, citing concerns about capital ratios and the falling share price. In its place, they added to their existing positions in Bank of Montreal BMO and CIBC CM.
"Both banks are better positioned for growth over the next few years," says Ross. "Both of them pulled back during the third-quarter reporting season and presented better investment upside potential."
Since taking over from Mark Jackson in June 2008, Ross has had a mandate to reduce the volatility of the imaxx equity funds. To that end, he decided to make changes to the equity team and apply the same disciplined process that existed on the fixed-income side. In March 2009, Ross brought in growth manager Stephen Carlin from KBSH Capital Management Inc.
As head of equities, Carlin revamped the $39-million imaxx Canadian Equity Growth and focused on about 45 holdings that have above-average earnings growth and higher upside than the market. Lately, this approach has not been very rewarding. The fund returned 6% for the 12 months ended Sept. 30, putting it in the fourth quartile in the Canadian Equity category.
Carlin is also responsible for the $156-million imaxx Canadian Fixed Pay, which is among the better performers in its peer group. The fund returned 21.3% for the 12 months ended Sept. 30, way ahead of the 7.9% median return in the Canadian Equity Balanced category. A higher-yielding fund, it is heavily weighted in real estate investment trusts and other types of income trusts.
Ross, who has worked in the investment industry for more than 20 years, came to it by chance. While studying philosophy at the University of Toronto, he landed a job as a summer intern at what was then Elliott & Page Ltd. Ross liked what he saw and joined the firm full-time in 1987. He resumed his studies at night and graduated with a BA in 1991.
In 1993, Ross moved to G.E. Sanders Investment Management, a fixed-income boutique, but not for long. The following year he returned to Elliott & Page and worked as a senior portfolio manager. In 1998, he joined AEGON Capital, the investment arm of AEGON Canada ULC, a subsidiary of the Netherlands-based AEGON NV.
AEGON Canada's $7 billion in assets under management are mostly in Transamerica Canada's segregated funds, the insurer's own operations and institutional client accounts. Mutual funds account for about $500 million of the total.
When Ross moved into the CEO position, the transition on the fixed-income side was seamless. Marc Goldfried, who Ross hired in 1999, took over as leader. "We still have the same credit focus, and conduct a lot of analysis. We don't take any interest-rate risk outside of the benchmark duration," says Ross. "We add value through corporate bonds and credit. That's been the process since day one."
The 4-star rated imaxx Canadian Bond returned 9% for the 12 months ended Sept. 30, versus the 6.5% median return for the Canadian Fixed Income category.
Part of the outperformance is attributable to a 70% weighting in investment-grade corporate bonds. "We look to outperform the market by five basis points a month," says Ross. "It's not sexy. But it adds up over a year." The fund returned 4.9% on an annualized basis for the five years ended Sept. 30, compared with 4.4% for the median return.
Ross believes that fixed-income securities -- particularly corporate bonds -- are fully priced, while equities have reasonable upside. "Corporate spreads have rallied a fair bit in the last year and a half," he says. "On the equity side, companies have taken a lot of action to get balance sheets in line. There are good earnings to be generated -- probably a little better than what the market believes."
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