THE BEST & WORST Mutual Funds

It was a rough year for most investors, but U.S. and foreign funds performed well

DIANE FORREST February 1 1999

THE BEST & WORST Mutual Funds

It was a rough year for most investors, but U.S. and foreign funds performed well

DIANE FORREST February 1 1999

THE BEST & WORST Mutual Funds




It was a rough year for most investors, but U.S. and foreign funds performed well

In the front yard of his home in Miramichi, N.B., Bill Hare is struggling with his snowblower. The wind is howling and the temperature is -15° C, but it’s still a lot more hospitable than the storm he weathered last year in the financial markets. The 61-yearold retired stockroom worker has been investing in mutual funds for 10 years, and for most of that time his returns have been excellent. But the outlook changed dramatically last spring when Asia’s financial hurricane hit North American stock prices. “You’re apparently doing good, then all of a sudden you’re not,” Hare says, reflecting on the downturn. By September, many Canadian equity funds had lost 30 per cent of their value, yet Hare hung in, hoping the storm would soon blow over. He finished 1998 with a slight gain in his six-figure retirement portfolio, thanks to a year-end recovery in stock prices and some smart investments in bond and European equity funds. “Last year wasn’t as good as previous years,” Hare says, “but it was better than nothing. I didn’t fret, because I’m in for the long term.”

While investors will remember 1998 as the Year of the Asian Flu—the economic whirlwind that touched off the steepest stock market drop since October, 1987—in some ways it was also the Year of Bill Hare and millions of other mutual fund holders who stood their ground while fears of a global financial meltdown battered many of Canada’s biggest and best-known funds. Mutual fund executives had long worried that small investors might panic in the event of a major downturn, but most fund holders simply shrugged off the turmoil. Several big fund companies did report heavy withdrawals after the market drop in August, but what looked at the time like a crisis of confidence was actually large institutional players shifting cash out of

money market funds and into other, more profitable short-term investments. And far from shrinking, the total amount of money invested in Canadian mutual funds continued to grow, to $394 billion as of Dec. 31,1998, from $324.1 billion a year earlier.

The rewards for investors who did stick with it were decidedly mixed. The average Candían equity fund—a staple ingredient in many retirement savings plans—lost a dismal 3.1 per cent in 1998, a far cry from the 13.6-per-cent average gain in 1997. Funds that invest in smaller Canadian companies did even worse—down 13.2 per cent for the year—

Maclean’s BellCharts Rankings


Three-year annual compound return:

Annual compound return over three years to Dec. 31, 1998.

Risk-adjusted three-year return: A ratio that measures return against the degree of risk. The number is arrived at by subtracting the amount of money an investor would have made over three years by investing in 90-day treasury bills (which are risk-free) from the fund’s three-year compound return. The result is then divided by its standard deviation—a measure of volatility. The higher the final number, the greater the return for the amount of risk.

Average oneto five-year annual return:

The average of the returns in each of the past five years. Shows which funds performed best in the medium term.

while Canadian bond funds recorded an average gain of 7.1 per cent. The biggest rewards were reserved for investors who put money in foreign stock funds. U.S. equity funds rose a whopping 23.7 per cent on average, while European equity funds performed marginally better with an average increase of 23.8 per cent.

While 1998’s final results were disappointing for some investors, a glance at this year’s Maclean’s mutual fund rankings suggests that investors who chose quality

funds three or more years ago—and stuck with them through the markets’ many ups and downs—have little to complain about. During the three years ending on Dec. 31, the average Canadian equity fund gained 37 per cent, while bond funds were up 28 per cent. (Many investment reports rank funds based on their returns in the most recent 12-month period, but Maclean’s focuses on threeand five-year returns in order to give a better idea of how a fund has done in the medium and long term.)

The accompanying tables, which show the best and worst funds in six popular fund categories, were prepared by BellCharts Inc., an independent Toronto-based company that analyzes fund performance. In each category, BellCharts ranks funds based on three measures: the annual compound return over three years; the riskadjusted return over three years; and the average annual return in each of the past five years. The figures shown are net of all management fees and are based on total re-

CANADIAN EQUITY Funds that invest in shares of Canadian corporations (3 years: 152 funds; 5 years, 126 funds)


AIC Diversified Canada 35.8

Acuity Pooled Canadian Equity 31.8

Associate Investors Ltd. 23.6

Scudder Canadian Equity 21.6

Bissett Canadian Equity 21.4

Clean Environment Equity 18.8

Investors Summa 18.7

AIM GT Canada Growth 17.8

Tradex Equity Fund Ltd. 17.7

PH&N Vintage 17.6

Middlefield Growth 1.2

University Avenue Canadian -0.4

Industrial Growth -1.4

Manulife Vista Capital Gains Growth 1 -5.3

Manulife Vista Capital Gains Growth 2 -6


AIC Diversified Canada 6.2

Acuity Pooled Canadian Equity 4.44

Associate Investors Ltd. 4.37

Scudder Canadian Equity 3.81

Ivy Canadian 3.77

Cundill Canadian Security A 3.49

Bissett Canadian Equity 3.44

Spectrum United Cdn. Investment 3.24

Universal Canadian Growth 3.22

Investors Summa 3.06

Middlefield Growth -0.71

Industrial Growth -0.86

University Avenue Canadian -0.87

Manulife Vista Capital Gains Growth 1 -1.8

Manulife Vista Capital Gains Growth 2 -1.94


Acuity Pooled Canadian Equity 21.2

Bissett Canadian Equity 16.3

Associate Investors Ltd. 16.2

PH&N Vintage 15.5

Tradex Equity Fund Limited 14.9

Standard Life Ideal Equity 14.3

Cundill Canadian Security A 14.1

Ivy Canadian 13.9

Chou RRSP Fund 13.7

Clean Environment Equity 13.7

Industrial Growth 0.8

Trans-Canada Value 0.7

Manulife Vista Capital Gains Growthl -0.7

University Avenue Canadian -1

Manulife Vista Capital Gains Growth2 -1.4

Volatile markets left many investors shaken, but only a few bailed out

turns, including dividends, to Dec. 31, 1998. Funds that have been in existence for less than three years were not included. The rankings also do not consider socalled specialty funds, such as those that invest primarily in precious metals or resources, which tend to be more volatile than other funds and are therefore suitable mainly for experienced investors.

As always, any talk of best and worst funds has to be tempered with some cautionary notes—starting with an understanding that a high score is no assurance of future performance. Among Canadian small cap funds, Concordia Special Growth often lands in the bottom half in fund rankings. But if its returns during each of the past five years are averaged, it ranks second in its category with a handsome 18per-cent yearly return.

In addition, buying top-ranked funds is no substitute for a detailed investment strategy that is tailored to an individual’s goals and circumstances. Investors who lack such a plan, experts say, frequently sell when prices are low and buy when they are high—the classic mistakes committed by short-term investors. They are also less likely to take advantage of diversi-

fication by spreading their investments among a basket of different asset classes, including domestic and foreign stock funds, bond funds and money-market funds. Judging by their response to last year’s downturn, Canadian mutual fund investors are starting to take that kind of common-sense advice to heart. “To say they didn’t panic may not be quite right,” observes Dan Richards, president of Toronto-based Marketing Solutions and a consultant on investor behaviour. “What they didn’t do is act on their panic. There were lots of anxious calls to financial advisers and banks, and new money stayed on the sidelines. But we didn’t see any massive redemptions.”

Part of the reason may be that the typi-

cal Canadian mutual fund investor is now more experienced and knowledgeable than in the past. “I will never forget October, 1987—my first major downslide,” remembers Dr. Heather Hicks, 43, a family practitioner in Grande Prairie, Alta., who invests about 30 per cent of her after-tax income in mutual funds. “I thought the world had come to an end.” Tellingly, when she got that same sinking feeling last summer, Hicks didn’t give in to the temptation to sell. “One learns that cycles are part of life and part of the equity markets.”

CANADIAN SMALL CAP Funds that invest in small and midsize corporations (3 years: 57 funds; 5 years: 38 funds)


Quebec Growth Fund Inc. 30.5

GBC Canadian Growth 19.8

Saxon Small Cap 19

Millennium Next Generation 18.3

Concordia Special Growth 17.7

Fidelity Cdn. Growth Company 17.5

Metlife MVP Growth 17

Lotus Canadian Equity 16.9

Talvest Small Cap Cdn. Equity 16.6

Beutel Goodman Small Cap 16.4

O’Donnell Cdn. Emerging Growth -5.4

BPI Canadian Small Companies -7.3

Industrial Equity Fund Ltd. -11.8

Cambridge Growth -23.6

Cambridge Special Equity -25.3


Quebec Growth Fund Inc. 5.22

Saxon Small Cap 3.05

Fidelity Cdn. Growth Company 2.97

GBC Canadian Growth 2.79

Metlife MVP Growth 2.44

Ivy Enterprise 2.38

Millennium Next Generation 2.29

Beutel Goodman Small Cap 2.25

COTE 100 EXP 2.25

Sunfund 2.21

O’Donnell Cdn. Emerging Growth -1.54

BPI Canadian Small Companies -1.78

Industrial Equity Fund Ltd. -2.71

Cambridge Special Equity -2.91

Cambridge Growth -3


Millennium Next Generation 18.4

Concordia Special Growth 18

Quebec Growth Fund Inc. 17

Sceptre Equity Growth 15.7

GBC Canadian Growth 14.6

Multiple Opportunities 13.3

Guardian Enterprise Classic 13.2

Metlife MVP Growth 12.9

20/20 RSP Aggressive Equity 12.7

Sunfund 12.4

Canada Trust Special Equity 2.1

Royal Canadian Small Cap 0.7

Industrial Equity Fund Ltd. -7.8

Cambridge Special Equity -13.3

Cambridge Growth -16.5

Most of the small investors interviewed by Maclean’s were philosophic about their losses in 1998 and glad they had decided not to bail out of the market. “If I lose anything, it’s money I never had in my hand anyway,” says Hare. Erin Gibault, a 26-yearold commercial real estate agent in Vancouver, stuck to aggressive equity funds right

through the drop. “Obviously, I’ve been burned recently in the resource sector, but I know the markets are cyclical,” says Gibault, who says he invests every dollar he can spare—between $800 and $1,800 every month—and now has a portfolio worth “in the low six figures.” Even though most market analysts predict continued volatility this year,

Gibault isn’t particularly jittery about the outlook.

He says he will “take full advantage of any downswings” to buy when prices are depressed.

Gibault may be representative of a new breed of individual Canadian investor—young, well-informed and determined to leave nothing to chance. “One of my goals is to have an annual retirement income of $100,000 at age 65, so I work backwards from there,” he says, taking into account other goals such as “how old I would like to be when I own a house and a vacation property, and putting money aside for my future children’s education.”

Gibault meets at least six times a year with his financial adviser, pays close attention to management fees when he selects a fund, and only invests in funds that he expects to hold for five or more years. He also reads media reports on mutual funds and keeps track of market trends. While he’s happy to leave the research on individual funds to


Average 1998 return by mutual fund category

Emerging markets & Latin America Canadian small cap Canadian equity ________ -2.1 Far East equity_________ -0.6 Dividend income -0.3 Specialty Canadian balanced Canadian money market International money market

his financial adviser, “I don’t have blind faith. I do my own research.”

Fellow Vancouverite Tim Brown, 30, a lawyer who specializes in estate planning, is equally methodical in his approach to retirement saving. Married with a 14-monthold son, Brown contributes the maximum each year to his RRSP. On top of that, he invests an average of $600 a month into non-

RRSP mutual funds. “If I don’t save for myself, no one else will,” Brown says. “My philosophy is that the baby boomers will completely exhaust the Canada Pension Plan.” His basic investment strategy, he adds, is to “put aside whatever you can and then don’t think about it for 35 years—don’t check on what the market is doing every day.”

Of course, not every mutual fund holder is as knowledgeable or confident about his or her ability to sift through the often-confusing barrage of investment advice. For those with less experience, the coming year could bring some relief. Already, a tentative price war has broken out among fund managers and distributors, driving down management fees on certain funds and prompting several com^ panies to refund some of g the commissions they y earn when investors put ïï money into a fund (page

0 46). As well, regulators

1 are putting increased pressure on the industry

to improve its dealings with ordinary investors. Glorianne Stromberg, a former part-time commissioner at the Ontario Securities Commission, spearheaded an earlier reform drive with a 1995 report on mutual fund regulation. Her most recent study, released by Industry Canada in early January, recommends a raft of additional changes that many argue are essential to

CANADIAN BOND Funds that invest in bonds and other fixed-income securities (3 years: 108 funds; 5 years: 86 funds)


Acuity Pooled Fixed Income 17.2

Altamira Bond 14

Spectrum United Long-Term Bond 11.6

MAXXUM Income 11.4

Green Line Canadian Bond 10.7

SSQ-Obligations Canadiennes 10.6

Batirente-Section Obligations 10.6

C. I. Canadian Bond 10.5

Sceptre Bond 10.4

Westbury Canadian Life ‘B’ 10.2

Manulife Cabot Diversified Bond 5.7

GWL Government Bond A 5.6

BPI Canadian Bond 5.4

Trans-Canada Bond 4.2

Dynamic Income 3


Acuity Pooled Fixed Income 4.98

Quebec Professionals Bond 4.89

Altamira Bond 4.68

C. I. Canadian Bond 4.57

Batirente-Section Obligations 4.55

SSQ-Obligations Canadiennes 4.36

Equitable Life Segregated Accumulative Income Fixed 4.26 Desjardins-Laurentian Bond 4.24

Westbury Canadian Life ‘B’ 4.21

Montrusco Select Income 4.2

Green Line Real Return Bond 0.84

Pursuit Canadian Bond 0.78

BPI Canadian Bond 0.59

Trans-Canada Bond -0.09

Dynamic Income -1.12


Acuity Pooled Fixed Income 12.8

Altamira Bond 12.1

Batirente-Section Obligations 9.9

MAXXUM Income 9.9

SSQ-Obligations Canadiennes 9.7

Green Line Canadian Bond 9.6

Spectrum United Long-Term Bond 9.4

C. I. Canadian Bond 9.3

Bissett Bond 9.3

NN Bond 9.2

Pursuit Canadian Bond 5.5

Templeton Canadian Bond 5.2

Manulife Vista Bond 2 5.1

BPI Canadian Bond 4.9

Trans-Canada Bond 4.7

It was a tough year for funds that invest in the resource sector

protect consumers and increase competition. Among other things, Stromberg advocates better disclosure of mutual fund costs and investment practices, less emphasis on commission-based selling and standardized training for all financial advisers.

While the industry’s reaction to her 1995 recommendations was initially hostile, Stromberg says her current report is getting a more sympathetic airing and that there is a good chance many of her suggestions will be implemented. A few “dinosaurs” may continue to behave as though the adviser knows best and what investors don’t know won’t hurt them, says Stromberg, but those in the forefront of the industry recognize that they cannot afford to alienate their customers. That’s especially true of the big financial companies that market a wide range of products and services, from traditional banking to mutual funds, insurance and estate planning advice.

Even the most sweeping reforms, however, will not relieve Canadians of the need to do their own homework before deciding where to invest their savings. During the recent bull market, success was often as simple as closing your eyes and

picking a fund at random. With prices on a steady upward march, almost everyone did well; the average Canadian equity fund gained 60.5 per cent in the three years to the beginning of 1998. Even more impressive were the results chalked up by index funds, no-brainer funds that simply track the overall stock market and, by doing so, routinely outperform most professional money managers.

But in Canada, at least, the markets are no longer so buoyant, and most of the experts are predicting a volatile 1999. While the spurt in stock prices in December and early January had many in the investment industry chirping “business as usual,” by mid-January Brazil’s devaluation of its currency, the real, had dampened spirits. “I’m a little less optimistic than I was a couple of weeks ago,” says Eric Kirzner, professor of finance and director of the executive MBA program at the University of Toronto. “After Russia and Japan, this is now the third currency crisis. Russia is not a major economy any more, but Brazil is the eighth-largest in the world.” And as the disruptions accumulate, the outlook for stocks becomes more uncertain.

But it’s when markets get choppy


Number of mutual funds in Canada

Maclean’s BellCharts Rankings

CANADIAN BALANCED Funds with mixed portfolios of stocks and bonds (3 years: 151 funds; 5 years: 111 funds)


Acuity Pooled Cdn. Balanced Investment 21.1 Common Sense Asset Builder III 19.7

Common Sense Asset Builder IV 19.3

Common Sense Asset Builder V 19

FMOQ Investment 18.6

Common Sense Asset Builder II 18.5

Fidelity Cdn. Asset Allocation 17.9

NN Asset Allocation 17.6

Montrusco Select Balanced + 16.5

Beutel Goodman Private Balanced 16.2

Guardian Cdn. Balanced Classic 5

GWL Growth & Income (AGF) A 3.4

Acadia Balanced 2.3

Altamira Growth & Income 0.7

Cambridge Balanced -18.2


Ivy Growth and Income 4.94

Common Sense Asset Builder II 4.78

Common Sense Asset Builder III 4.72

Common Sense Asset Builder I 4.57

Atlas Canadian Balanced 4.55

Common Sense Asset Builder IV 4.39

Montrusco Select Balanced + 4.38

Fidelity Cdn. Asset Allocation 4.19

Common Sense Asset Builder V 4.19

Beutel Goodman Private Balanced 4.08

Guardian Cdn. Balanced Classic 0.32

GWL Growth & Income (AGF) A -0.24

Acadia Balanced -0.53

Altamira Growth & Income -0.7

Cambridge Balanced -2.15


Acuity Pooled Cdn. Balanced Investment 15.6

FMOQ Investment 15.2

Beutel Goodman Private Balanced 13.5

Ivy Growth and Income 13.2

Montrusco Select Balanced + 13.2

Bissett Retirement 13.2

NN Asset Allocation 13

Industrial Pension 12.3

Atlas Canadian Balanced 12.2

ABC Fully Managed 12.1

YMG Balanced 5

Dundee Fund of Funds 4.7

McDonald Canada Plus 4.5

Altamira Growth & Income 1.7

Cambridge Balanced -12.1


Total mutual fund assets

that fund managers have a chance to show off their navigation skills. Who will steer best through the storms? David Picton, a portfolio manager at Synergy Mutual Funds in Toronto, specializes in analyzing different styles of management, and he predicts a good year for managers who use what is known as a “growth and

0 momentum” style. As the economy

1 slows, he reasons, the main chal| lenge will be to identify companies y that are already doing well and have “ the potential to keep growing in the I near future. (So-called value man8 agers, in contrast, look for bargains

that haven’t yet been spotted by the market.) Picton’s own growth-style Synergy Momentum Fund was the top-performing Canadian equity fund for 1998, although it has not been in existence long enough to show up in Maclean’s threeand fiveyear rankings.

Using similar logic, Ian Joseph, vice-president of Canadian equities at Altamira Management Ltd., says the funds to watch for are those that focus on the same types of companies that did well last year, despite the downturn. That means large companies that earn most of their revenue in North America, especially companies in the technology and financial services sectors. Joseph is also impressed by the recent strength of the so-called New Economy. Says Joseph: “The Canadian market is at something of a watershed. There are lots of interesting new companies in sectors such as technology, industrial products and telecommunications that are not traditionally dominant areas for the Canadian economy. And I think that’s extremely healthy.”

The forecast is not quite as cheery for Canada’s resource industries, including forestry products, mining, and oil and gas. Forecasts for continued economic growth in Europe and North America suggest that com-

U.S. EQUITY Funds that invest in shares of U.S. companies (3 years: 97 funds; 5 years: 66 funds)


Global Manager U.S. Geared ($U.S.) 44.4

Ethical North American Equity 40.9

MD U.S. Equity 39

Cambridge American Growth 38.4

AGF American Growth Class 36.3

MAXXUM American Equity 35.3

Metlife MVP U.S. Equity 32.9

BPI American Equity Value 31.8

Investors U.S. Growth 30.9

Jones Heward American 30.8

CIBC U.S. Small Companies 10.1

Investors Special 10.1

Investors North American Growth 10

AGF Special U.S. Class 5.8

Global Manager U.S. Bear ($U.S.) -18.7


Chou Associates Fund 8.49

Royal & SunAlliance U.S. Equity 6.89

Investors U.S. Growth 6.53

AIM American Premier 6.51

IRIS U.S. Equity 6.49

Ethical North American Equity 6.35

Growsafe U.S. 500 Index 6.19

Metlife MVP U.S. Equity 6.08

Hongkong Bank U.S. Equity 6.07

BPI American Equity Value 6.03

Investors Special 1.21

CIBC U.S. Small Companies 1.03

Universal U.S. Emerging Growth 1.02

AGF Special U.S. Class 0.21

Global Manager U.S. Bear ($U.S.) -6.02


MD U.S. Equity 30.6

Ethical North American Equity 30.2

AGF American Growth Class 28.8

Cambridge American Growth 25.8

BPI American Equity Value 25.5

Spectrum United American Growth 25.2

Investors U.S. Growth 25.1

Metlife MVP U.S. Equity 24.9

IRIS U.S. Equity 24

Green Line U.S. Index ($U.S.) 23.5

PH&N North American Equity 10.1

Desjardins International 10

Investors Special 9.2

Canada Trust North American 8.7

AGF Special U.S. Class 7.4

modifies may do somewhat better this year than in 1998, when prices fell 12 per cent as measured by the benchmark CRB commodity index. But experts caution that Canadian companies will not make big money hewing wood and drawing oil until there is significant improvement in the Asian and Latin American economies.

Another worry is the current high level of stock prices, particularly in the U.S. market. Picton points out that when companies are growing, interest rates are low and consumers have money to save and invest, it’s natural that equity prices should be high. But others warn that the conditions that have kept stock prices high will not last forever. When inflation and interest rates start to creep up, a nasty market correction could soon follow.

The best advice for nervous or disappointed investors is to make sure their portfolios contain a range of investments. Kirzner recently finished a year-end analysis and found that a typical investor with a balanced portfolio of domestic mutual funds would only have made two or three per cent in 1998. But if 10 per cent of the investor’s money had been in U.S. stock funds and another 20 per cent was in non-North American equity

funds, the portfolio would have returned a much more attractive nine or 10 per cent.

As for Kirzner himself, he plans to follow Bill Hare’s lead. “I’m not planning to change my portfolio at all. I’ve got a balance I’m happy with, so I’m going to stick with it.” Like a lot of investors, however, he won’t mind in the least if 1999 turns out to be a less dramatic, less stormy year than 1998.



Percentage of Canadian adults who have made, or intend to make, an RRSP contribution for the 1998 tax year


In a recent survey, 1,014 adults were asked how they decide on the amount of their annual RRSP contribution. Responses:

51% said it depends on the availability of funds

30% said they contribute the maximum allowed

8% said they guess how much they will need for a secure retirement

8% said they follow contribution guidelines contained in a written financial plan

3% did not say

Maclean’s BellCharts Rankings

GLOBAL EQUITY Funds that invest in companies anywhere in the world (3 years: 96 funds; 5 years: 64 funds)


Bissett Multinational Growth 26.9

Orbit World 26.8

Acuity Pooled Global Equity 24.4

Cambridge Americas 23.4

BPI Global Equity Value 22.1

Greystone Managed Global 21.7

AIC World Equity 21.6

Fidelity Int’l Portfolio 21.5

Canada Life U.S. & Int’l Equity S-34 21.4

Clean Environment Int’l Equity 21.2

Investors World Growth Portfolio 6.8

Beutel Goodman Int’l Equity 6.4

Spectrum United Global Growth 4.7

Cundill Value A 0.8

Cambridge Global -18.4


Bissett Multinational Growth 5.81

Orbit World 5.62

Greystone Managed Global 4.89

Scudder Global 4.87

Ivy Foreign Equity 4.63

Fidelity Int’l Portfolio 4.58

C.l. Global 4.41

BPI Global Equity Value 4.38

FM0Q International Equity 4.19

C.l. Global Sector 4.16


Trimark-The Americas 0.61

Beutel Goodman Int’l Equity 0.6

Spectrum United Global Growth 0.1

Cambridge Global -1.05

Cundill Value A -1.15


BPI Global Equity Value 17.1

Fidelity Int’l Portfolio 17.1

Canada Life U.S. & Int’l Equity S-34 16.8

CentrePost Foreign Equity 16.8

Ivy Foreign Equity 16.7

Orbit World 16.4

Acuity Pooled Global Equity 16

AGF International Value 15.9

Cambridge Americas 15.2

Green Line Global Select 14.9


Sceptre International 5.5

Cundill Value A 5.4

Beutel Goodman Int’l Equity 4.3

Spectrum United Global Growth 2.2

Cambridge Global -12.3