MUTUAL FUNDS FOR PEOPLE WHO AREN'T TERRIBLY HIP ABOUT MONEY

ALEXANDER ROSS October 1 1968

MUTUAL FUNDS FOR PEOPLE WHO AREN'T TERRIBLY HIP ABOUT MONEY

ALEXANDER ROSS October 1 1968

MUTUAL FUNDS FOR PEOPLE WHO AREN'T TERRIBLY HIP ABOUT MONEY

ALEXANDER ROSS

THE CONFRONTATION is inevitable, so you might as well be ready for it. This man is going to phone you, say he’s a friend of a friend of an old fraternity brother or something like that, and ask to drop around to talk about Investments. He'll come to your office, attacheé case in hand, looking like an ex-wing commander or an ex-ski instructor, and take you out for a big lunch. Maybe later he’ll drop up to the house after dinner for a drink

to talk about Investments some more with you and your wife. By the time he leaves, you’ve signed a piece of paper which, your new friend seems to imply, virtually guarantees you a return on your money that makes bank interest look piffling by comparison. Without exactly realizing the import of what you are doing, you have committed a tidy portion of your income — seldom less than $30 a month — to the New People’s Capitalism. You

have just bought yourself into a mutual fund.

The Canadian Funds: a checklisting

There are about 75 Canadian mutual funds to choose fro,,i, plus about 20 trust -Co/n pan in vestment funds and a/,os.it 15 fixed-incomc~ fuizds, vhich invest only in bonds. The follow ing list is far fi-oiii complete hut includes many of the newsinaker,s.

WELL-ESTABLISHED HOT PERFORMERS

By the yardsticks of performance and staying power, Canada’s three most successful funds are Guardian Growth, American Growth and United Accumulative. United, the second largest fund in Canada with assets of $385 million, is heavily invested in U.S. stocks and is up 94 percent in the past five years and 216 percent in the past 10. Sheer size has taken some of the edge off its recent performance. American Growth specializes in U.S. securities.

BIG, SAFE, CONSERVATIVE_

Investors Mutual (Winnipeg) is the Big Daddy of all the Canadian funds, with an enormous portfolio worth $534 million. Its goals are conservative and its performance has lagged. Canadian investment Fund (Montreal) is the country’s original mutual, founded in 1932. With 90 percent of its $175-million portfolio in blue-chip Canadian stocks, it's considered too conservative by some critics. Commonwealth International (Montreal), with assets of $84 million, has also found it difficult to keep up with the market. But it has a peppy affiliate, Commonwealth International Leverage, which has been turning in a hot record.

MED!UM-TO-LARGE, BETTER THAN AVERAGE

While not exactly the go-go class, these medium-to-large funds have outpaced the market fairly consistently over the past several years: Canadian Gas & Energy (Toronto). Natural

Resources Growth (Calgary), Andreae Equity

(Toronto) and Regent Fund (Montreal).

SMALL BUT SWINGING_

Several smaller (assets below $10 million) performance-conscious funds currently are giving the bigger, successful funds a run for thenmoney. Some haven’t been around long enough to test their staying power — such as Harvard Growth, Pension Mutual (both Toronto) and Phillips, Hager & North (Vancouver). But others such as Formula Growth and Canabam (both Montreal) have.

NEW, AGGRESSIVE, WITH BLUE-CHIP BACKERS

Many older, larger funds — some finding size a deterrent to exciting performance — have set up far more adventuresome, smaller offshoots in the past couple of years. Out for fast growth and heavily invested in the U.S. market, the most successful of these so far include United Venture Fund (Toronto), Mutual Growth (Vancouver), All-Canadian Venture (Montreal), Investors International (Winnipeg) and Growth Equity (Toronto).

THE NO-LOAD FUNDS__

A handful or so Canadian funds are “noloads" — are offered without any sales charge and are generally available through investment dealers. Canadian Scudder and Canadian Anaesthetists have the best records among this group, but many funds charging a maximum load have turned in better net performances.

TRUST COMPANY INVESTMENT FUNDS_

Strictly speaking, they’re not called mutuals, but as far as investors are concerned there are no practical differences. Good ones have proved to be Canada Trust Funds, Guaranty Trust and Waterloo Trust.

Anyhow, that’s roughly how it happened with me. This man from Investors Overseas Services came around to the office, gave me a lot of sincere talk about Performance and Net Asset Value and, after a good Chinese lunch, more or less guided my hand to the contract form. Now Í get a computerized statement every month of my holdings in IOS’S Regent Fund, along with the occasional letter from the IOS people in Montreal, which I don’t fully understand because they’re always written in French. (IOS has somehow got the idea that I speak French.)

I bought into Regent Fund because, like a lot of people, I’ve got a little money left over these days and I want to invest it in something. There isn’t enough of it to buy land, and there isn’t enough to warrant a stockbroker’s giving me more than a moment’s notice. I’m too chicken to chase penny stocks and too greedy to settle for bank interest. So a mutual fund, which allows me to invest $30 a month in a collection of common stocks that have been appreciating by about 30 percent over the past few years, seemed like a plausible proposition. I wrote a lot of postdated cheques so that the money gets deducted from my bank account automatically every month and I never miss it.

So far, so good. I keep paying in my money for 10 years or so, and if the market keeps performing the way it has for the past 10 years,

I calculate that my $30 a month could be worth around $12,000 by 1978.

This would be a good deal, except that a few months ago I bought a house, and decided that I could use that $30 to better effect by applying it to my second mortgage and paying it off faster. The way most second mortgages are stacked these days, every extra dollar you pay off now is like putting three dollars in the bank. That’s when I first became aware of some of the pitfalls of buying mutual funds. For it turns out that the piece of paper I signed was, in effect, a contract. If I wanted to get out, it was going to cost me money. It works roughly like an insurance policy. The monthly payments you make for the first few years are partially applied to the salesman’s commission. It isn’t until this is paid off that

your payments are entirely devoted to acquiring stock in the fund. By canceling early, I’d lose nearly all the money I’ve paid in.

I wasn’t conned. In fact, I think I remember the salesman explaining this point to me as he was eating an egg roll. But I’ve never been serribly hip about money, and his words didn’t really register. So I’m stuck — stuck, admittedly, with one of the industry’s betterperforming funds. By 1978 I’ll probably be glad 1 wasn’t able to get out.

It was this relatively painless lesson that prompts this essay. There are now more than 500,05)0 Canadians w'ho own mutual funds — they may soon outnumber people who buy common stocks directly — and I presume that some of them are no more sophisticated financially than 1 am. Also, there are those salesmen. There are nearly 10,000 of them selling funds these days; they are aggressive, and not all of them are as straight as my man from IOS. If you don’t own a fund already, sooner or later one of these salesmen is going to get on to you. Although they’re as solicitous of your future prosperity as any insurance man, they’re not exactly in the Peace Corps. In New York last year, one saleswoman cleared nearly three million dollars in commissions. It makes you wonder how well her customers did.

This, then, is a treatise on mutual funds for people who aren’t terribly hip about money, but want to see theirs grow. It’s the product of research and interviews with men in the industry, with their critics, and was prepared in co-operation with the editors of The Financial Post, which means it’s a lot more authoritative than my own financial fumblings would suggest.

WHAT, EXACTLY, IS A MUTUAL FUND? It’s usually a company (though sometimes a trust) and you buy shares in it just like any other company in the hope that the value of your shares will rise. The difference is that a fund’s only assets are the shares (or bonds) of other companies. If their shares go up, so do the fund’s. The other difference is that the fund will always buy back your shares from you. The advantage of buying into a fund instead of into the market directly is that you can do it without having much money. A single share of IBM costs you about $365 these days, and it’s pretty awkward asking a broker to buy you one share of IBM this month and another share the next time you have some money. Through a fund, you can own a piece of IBM, General Motors, Canadian Pacific and maybe 30 or 40 other blue-chip stocks that you couldn’t afford to buy directly. This process minimizes your risks. If you own just one stock directly, you get hurt very directly if it goes down. But if you own a small piece of 50 stocks, your money is much less susceptible to fluctuations in the value of one or two of them. The other obvious advantage is that the funds are professionally managed. The people who buy and sell shares with your money are much better qualified to do so than you are.

WHAT’S THE BEST KIND OF FUND TO BUY? That depends on / continued on page 82

Guardian Growth: a fund that grew hot

IF YOU'D PUT $1,000 in Guardian Growth Fund eight years ago you could cash it in today and buy a new, air-conditioned Mercedes sedan, with a little left over for change. This means that Guardian, which has grown by a fantastic 808 percent since 1 960, is unquestion ably one of the most successful mutual funds in Canada, and possibly the world. The four young Toronto financiers involved, who have become millionaires because of it, are (from left to right, above): Alan Grieve, 35; Jim Cole, 44; President Norman Short, 38; and Murray Sinclair, 37. The helicopter symbolizes their McLuhanized approach to finance: they bor row it occasionally to inspect properties they're thinking of buying into.

“When you’re looking at a stock like Bramalea real estate,” says Sinclair, “you can’t get a feel for it off a map. You’ve got to see it.”

They have to do a lot of flying; they’re faintly mistrustful of the printed word and never buy big into a stock without traveling to California or Texas to look over the management. Conservative fund managers regard them almost as hippies. Their methods, though solidly grounded in caution, arc almost as unconventional as they are successful. They disdain attempts to forecast the market as a whole, for instance. “It’s just as useful and less time-consuming to toss a coin,” says Short, an Oxford-educated Scot who came to Canada in 1953. Instead, they look for “social vacuums,” try to guess what will be needed to fill them, then look for the companies that are in a position to grow as a result. They believe, for instance, that the U.S. government, as soon as the Vietnam war is settled, will be forced to spend heavily in the war on poverty. Accordingly, they’re looking carefully at companies specializing in urban renewal :>nd educational aids, and are even thinking of hiring a sociologist as an adviser.

The fund was started in 1960 with each of the three founders putting up $1.500. They used to hold their directors’ meetings in downtown clubs and shareholders’ meetings in each other’s living rooms. Today all but Grieve still hold down full-time jobs elsewhere on Bay Street, they confer constantly through the dayon direct-line telephones, meet over dinner once a week for buy-and-sell discussions that seldom end before midnight. They pay retainers to a string of U.S. think-tanks and consultants, and regard their daytime jobs as important informational assets. “This way,” says Sinclair, “we’re more closely in touch than a fund manager who spends all day at his desk.” Short believes they’re the only fund in Can-

ada that’s never hired a salesman. Instead, they rely on their financial performance, plus wordof-mouth to sell it for them. Despite their unorthodox methods, there’s been no shortage of buyers. During last winter’s monetary crisis, for instance, they established a precedent for the industry by buying gold certificates, selling them several weeks later when the two-price gold system was established. They sometimes borrow money to buy stocks, something that the Canadian Mutual Fund Association frowns upon. And their management fees are more than double the industry’s standard. Last April, when the Ontario Securities Commission set one percent as the maximum management fee for funds sold directly to the public, Guardian decided to preserve their own rate by selling no more shares to the public. That prompted a rush of buying from people and pension funds who wanted to get in before the offering closed. In a matter of weeks, Guardian’s assets doubled to $44 million. Now if you want Guardian stock, you’ll have to buy it from someone who owns it already. This is fine by Guardian’s partners. “We’ve never tried to be the biggest fund in Canada,” says Short. “Just the best."

continued from page 23

You’ve got a choice: biue-chip safety or a glamour gamble

what kind of person you are, how much you’ve got to invest and how much of it you’re willing to lose. There are all kinds of funds on the market: funds that are deliberately conservative, funds that take deliberate risks in an attempt to grow faster, funds that specialize in oil stocks or aircraft stocks or bonds or

even shares of other mutual funds.

There are lots of jargon words to describe the various types of funds. There are balanced or fully managed funds (which contain a middle-of-theroad mixture of several types of securities). There are equity or common-stock funds, which trade mostly in blue-chip slocks, and usually keep

a hefty cash reserve on hand. There are income funds, which aim at delivering a small but steady income by buying securities that don’t appreciate much, but which pay good, steady dividends. There are growth or speculative funds, which take the opposite approach: they try to buy stocks that are about to zoom on the market, are

prepared to take sensible risks and worry hardly at all about dividends.

The salesman may try to dazzle you with all this terminology, but you can safely ignore it. All you need to know, really, is this: am I haying art income fund or a growth fund?

This point is rather crucial, for the difference between the two provides some of the industry’s most flavorful controversy. People who run income funds tend to regard managers of the go-go funds as wild-eyed speculators who eventually will be punished for their profligacy. The go-go managers get pretty scornful when confronted with this charge; they point out that many of the stodgier funds haven’t even matched the growth performance of the market as a whole, as measured by the Dow Jones Average or some such indicator.

The relative advantages of income versus growth funds is one of those meaningless controversies that can’t be settled except in psychic terms. Was your daddy ruined by the Depression? Do you wear wide ties? Which do you dig: Lawrence Welk or The Moby Grape? Have you ever thought of taking up sky-diving? Do you worry about getting old? Are you a risker or a worrier? Do you really think there could be another depression? These are the sort of factors that will determine which kind of fund you buy. Sweet reason alone doesn't settle such matters.

In making the choice, though, there are a few points to keep in mind:

ONE: Don’t fall into the trap of supposing that all mutual funds are supposed to register dramatic growth rates. They’re only supposed to it that’s what they set out to do. A conservative fund these days appreciates by around 10 percent a year, which isn’t as good as the market as a whole. But that doesn’t mean it’s an unsuccessful fund. Ten percent is still lots better than bank interest and a lot safer than a spec fund, if safety is what interests you.

TWO: The funds that have achieved the best performances in recent years have done so by investing in the grooviest companies they could find: small think-tanks pioneering in laser research or miniaturized circuitry, sexy aerospace firms and so on. These are the glamour stocks. In many cases their prices aren’t based on earnings, but on the fact that a lot of smart people are betting that they’re going to make big profits some day. These stocks represent about i 0 percent of the fotal market. The very fact that so many go-go funds were chasing these stocks has been a big factor in driving up their prices. In other words, you’re dealing with a self-fulfilling prophecy. You’ve got to recognize that these glamour stocks, and the funds that have acquired go-go reputations by investing in them, are at least partially inflated by pure enthusiasm. If something unpleasant happened, many of these stocks would he hit very hard. And people who own go-go funds just conceivably could be left standing with egg on their face.

There’s no evidence at the moment that any such plunge is imminent, although U.S. glamour stocks dropped by more than 10 percent over last June and July. But there have been some continued on page 85

recent indications that the investing world has become a little less enthused by glamour stocks, and a little more impressed by stable blue-chips.

THREE: Keep in mind the following esoteric fact: for the past year or so, almost as many dollars were withdrawn from Canadian mutual funds as were put into them. This is partly caused by fund holders’ cashing in their matured investments; but it also means that many people are using the funds as speculative vehicles — buying this and selling that in the hopes of quick gains. This is a pretty dumb way to treat mutual funds. It reminds some Bay Street people of the grand old days of 1929 when Joe Kennedy shrewdly got out of the market because all the office boys and elevator operators were getting into it. Remember: mutual funds are intended to be a long-term investment. If you buy one, do so with the intention of leaving it alone for at least five years. And do regard a 36 percent annual growth rate as a delightful bonus, not as your sacred birthright.

FOUR: 1962 and 1966 were rotten years for the market. If you want to know how smart the people are who manage your fund, its performance in those years can be a revealing indication. If you ask a salesman about ’62 and ’66, he’ll probably protest that the long-term picture is what counts, not the performance in any single year. True enough, but ask him anyway. Then check what he tells you with The Financial Post’s 1968 Survey of Investment Funds, the industry’s Bible.

FIVE: This is thunderously obvious but worth stating anyway. If you don't know which fund to buy, ask somebody who does know — somebody you trust. Don’t take the salesman’s word for anything. With nearly 10,000 of them marching around, the competition is so hot that they’re starting to raid each other’s customers. The Canadian Mutual Fund Association has a lofty code of ethics, but this is no guarantee of each salesman’s objectivity. You surely know somebody in the financial world who’s got his head screwed on straight; ask him. Failing all else, ask your bank manager. He’ll probably steer you to one of the new funds sponsored by his own bank, and that’s fine.

WHAT DOES IT COST TO HUY A

MUTUAL FUND? This gets pretty tricky, because you’ve got to consider the sales costs as part of your overall investment. To begin with, there’s nearly always an acquisition charge (the “load”) of between seven and nine percent. Eight and a half is the most usual rate. This pays the salesman’s commission, buys the paper clips, pays brokerage fees. Two useful terms here: net asset value and offering

prices: the difference between them is what the fund charges for selling you its share. Example: If a fund sells you some shares at $10 each, that’s their offering price. Since they’re charging you an 8.5 percent acquisition fee (that works out to 85 cents), there’s exactly $9.15 left over to actually invest in the market. This sum is known as the net asset value — what the fund’s investments are worth at the close of each day’s trading, divided by the number of shares the fund has in the hands of the custom-

ers. On top of this, you pay a management fee of between one and two percent (usually calculated annually).

There’s been a lot of complaining about these charges not only in Canada but in the U.S. and Britain as well. Recently, the Ontario Securities Commission ruled that one percent would be the maximum management fee that any fund could charge if it wished to sell its shares directly to the public. There’s a federal-provincial committee now studying the entire in-

dustry, but it won’t be reporting for months and the resultant legislation could take years. Even then, it seems unlikely that they’ll quarrel with rates that the funds now charge. After all. most of the things you buy have a bigger markup than that; it’s partly the fact that a fund’s markup is stated so baldly that it gets so much criticism.

Anyhow, there’s no point in griping about the load. Accept it. Shop around and compare load charges if you want. But remember: it’s futile to compare

the load charges of two competing funds unless you compare their overall performance at the same time. It’s not what the fund charges you that counts; it’s what it earns you.

The crucial thing to clarify is how this charge is to be paid. Most funds that employ salesmen charge a “frontend load.” As I discovered, this means that most of the money you put into the fund for the first few months or years is used to pay the salesman. Only after this obligation is discharged

does all your money start going directly into the market. There are funds, however, that deduct the acquisition fee every month. This means you can quit any time without penalty. If you’re a weak - willed type who has trouble hanging onto money, the frontend load actually can be an advantage. It more or less forces you to save. This is great as long as you know what you’re getting into beforehand. Most funds that you buy from an investment dealer (instead of from a salesman) are non-contractual — that is, they don’t have a front-end load. And the funds that some trust companies sponsor have no acquisition charge at all: they’re very modest performers, however.

You can also buy fund shares with a lump cash sum. Many funds reduce their load charges for quantity purchases. But if you’re that solvent, maybe you’re better off in real estate.

HOW DO YOU GET YOUR MONEY OUT?

Easy. You simply return your shares to the fund, which instantly redeems them for cash. But beware: some funds charge a redemption fee.

There’s also a special class of fund known as a guaranteed or withdrawal fund, which undertakes to pay you a fixed amount every month. These funds are sold in the expectation that your monthly payments will come out of the fund’s profits. What happens if it’s a bad year and there are no profits? Then your guaranteed monthly payment comes out of your own capital; they simply pay back what you put in. This is spelled out very plainly

on the contract you sign; but some guaranteed-fund customers, who didn’t fully understand the deal they were getting into, have squawked when the first profitless year came along.

WHAT SHOULD YOU BE SUSPICIOUS OF? Actually, the industry is astonishingly well - regulated. If refrigerators and used cars were sold the way mutual funds are sold, there would be many fewer people in small-debts court. The Canadian Mutual Fund Association is a hard-nosed group that really is serious about policing itself. And your average fund salesman is definitely not a sleazy type; his entrance requirements are fairly strict.

Nevertheless, be suspicious of the following, all of which are expressly forbidden by the CMFA’s code of ethics: salesmen who try to get you out of one fund and into another; (there are situations where this makes sense, but if you’re still paying off a front-end load, it’s unwise to sacrifice your investment and pay a new commission to someone else); also beware of salesmen who encourage you to borrow money to buy their fund; salesmen who make flat predictions about how well their fund will perform in the future. Mainly, though, be suspicious of yourself. The customary time to buy mutual funds is after you’ve got enough life insurance and after you’ve got a decent cash reserve in the bank. Don’t think of the fund as a quickie route to big profits; that’s what Drapeau’s lottery is for. Don’t be too cautious. But don’t be too casual either.