Between 1973 and 1979 Albert and Carol Cavin, a retired Vancouver couple now in their mid-70s, invested $50,000 in two of Canada’s best-performing mutual funds, Templeton Growth Fund and Taurus Fund Ltd. Now, their investment is worth about $300,000—and that does not include $35,000 which the Cavins have already withdrawn to help their daughter and grandchildren pay for cars and houses. Even though they did not know it, the Cavins were trend-setters. In the past several years thousands of other Canadians have discovered what the Cavins have known for some time—that well-managed mutual funds, which permit investors to pool their capital to make investments, can make them more money than the declining interest rates paid on the old reliable Canada Savings Bonds, savings accounts and guaranteed investment certificates (GiCs). With the generally bullish performance of the stock markets in the past three years, buying into mutual funds has become an investment fad.
Indeed, sales of the funds in Canada and the United States are breaking all records. According to the latest figures available from the Toronto-based Investment Funds Institute of Canada (IFIC), which represents 160 of the country’s 275 mutual funds, sales—the amount of money clients are putting into funds—reached $2.87 billion in the
first nine months of 1985, up from $2.1 billion in all of 1984. About one million Canadians now have money invested in mutual funds, up dramatically from approximately 80,000 people in 1984.
In the United States sales more than doubled to $62.8 billion (U.S.) in the first 10 months of 1985 from $25.8 billion in 1984. Said Peter McCrodan, 30, a stockbroker with Nesbitt Thomson Bongard Inc. in Toronto who invested $1,000 of his own in a mutual fund for the first time last year: “These funds are good for both sophisticated investors and those who don’t have a lot of
money and want exposure to the markets through a diversified portfolio that is professionally managed.”
Since 1932, when the country’s first mutual fund—Montreal-based Canadian Investment Fund Ltd., still in operation—was formed, funds have offered strength in numbers to small investors who lack the experience or time to manage their own investment portfolios. Hundreds of investors pool their money by purchasing units, or shares, in a fund. The fund is run by professional managers who use the money to invest in a portfolio of stocks, bonds or other financial instruments.
Many Canadians, who have a reputation as financial conservatives, prefer so-called balanced funds that hold a mix of preferred and common stocks, bonds and mortgages. The diversity minimizes the risk of losing money when any one stock or group of stocks falls in value. But investment experts caution their clients to consult the IFIC in order to compare the performance records of a wide variety of mutual funds before investing. Said the iFlC’s president, Keith Douglas: “That is the track record of the fund’s management. You are not buying a stock as much as you are buying the services of an investment manager.”
Indeed, while many funds are run by a committee of managers, experts say most of the top performers have been funds that have a strong leader who is ultimately responsible for making the
decision on what to buy and sell. Often that decision-maker is the fund’s founder, such as 73-year-old John Templeton, who heads the $1.6-billion Templeton Growth Fund. Templeton, an industry guru in Canada and the United States with a reputation as a globe-scanning bargain-hunter, still holds a pre-eminent position—but during the past 10 years newer funds have gained steadily. The managers of that newer breed—all in their 40s— include Peter Cundell, who controls Cundell Value Fund Ltd., Alexander Christ, chairman of MacKenzie Financial Corp., and Robert Krembil, manager of Trimark Fund.
All of them, says David Wilkes, a stockbroker with Toronto-based Moss Lawson and Co.
Ltd., have several qualities in common, including a well-known patience for ferreting out value. “They have modest lifestyles, they all have a little grey around the temples and they tend to be very disciplined and consistent in their investments,” he said.
Russell Isaac, president of Vancouver’s Great Pacific Management Co. Ltd., a mutual fund broker which sells about 120 funds, agrees that investors should be aware of any changes in a fund’s management. “The person often makes the portfolio,” he added. Indeed, Trimark is only five years old but is already very popular because its manager and cofounder, Robert Krembil, had established his reputation as a vice-president of another popular fund, Bolton Tremblay Inc.
Aside from differences in the way funds are managed, there is a wide variety of funds designed to meet different investment requirements. Investors willing to take a high degree of risk can choose a mutual fund that invests in volatile securities which may produce exceptional capital gains. Conservative investors prefer fixed-income funds that invest in bonds, mortgages and preferred shares which usually pay a steady but lower return. Some buyers choose funds specializing in a specific commodity, such as gold.
But the attraction for many novice investors is that most types of mutual funds have steadily outperformed fixed-interest-rate investments. According to Wayne Walker, a vice-presi-
dent at Winnipeg-based Investors Syndicate Ltd., which manages 12 mutual funds worth $3.3 billion for 340,000 clients, in the past 10 years (during which inflation averaged 9.4 per cent a year) the annual return on a Canada Savings Bond averaged 10.5 per cent.
ASSETS OF MUTUAL FUNDS MUTUAL FUNDS SALES
♦first nine months
But mortgage mutual funds returned 12.2 per cent and funds emphasizing dividend income yielded 15.6 per cent, while funds investing in Canadian common stocks earned 18.7 per cent.
For many Canadians, the motivation for entering mutual funds is concern about future financial security. Great Pacific’s Isaac said that last year the company sold about $100 million in mutual funds to new clients whose average age was 35. Said Isaac: “Their main motivation is retaining a good standard of living in retirement.” For many other investors, trying to make money in stock markets that are dominated by professional money managers
has proven to be too difficult.
But the decision involves a price. Stockbrokers and mutual fund salesmen earn a negotiable commission fee of not more than nine per cent of the amount the client invests, which can be as low as $1,000 and can be built up through small, regular payments. The commission, which most funds have, is called a front-end load. In addition, fund managers levy an administration fee of between one and two per cent of the fund’s total assets each year to cover expenses and salaries. No-load funds do not have a sales fee, but they usually charge a higher annual administration fee.
Still, some experts are critical of mutual funds. Stephen Jarislowsky, president of Montreal-based Jarislowsky, Fraser and Co. Ltd., an investment counselling firm that manages $4.5 billion for 800 wealthy clients, says that the cost of getting into a fund often outweighs the benefits. He added, “It is a hell of a lot of money to hand over to a salesman.”
Industry spokemen say that mutual funds have fallen in and out of favor with Canadians throughout their 54year history. The funds remained extremely popular as the stock market continued to rise steadily throughout the late 1950s and 1960s. Indeed, by 1970 the iFIC’s member funds listed a record 771,000 unit-holders. But the funds’ popularity began to drop when the market entered a seven-year downturn in 1969, erasing millions of dollars from the funds’ portfolio values. By 1978 there were only 421,032 accounts. Since then the number of accounts has risen steadily. That has occurred in tandem with a stock market that has remained generally buoyant despite occasional fluctuations (page 36).
Douglas, for one, says that investors should not consider mutual funds as a get-rich-quick investment. “The stock market follows a cyclical pattern,” he said, and investors should be prepared to wait at least five years to see substantial returns.
Many mutual fund salesmen predict that the markets will again decline, disappointing thousands of their clients. But they also say they are confident that the funds will continue to attract small investors.
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