Cover

PICKING FUND STARS

What you need to know to avoid getting stuck with another laggard

KATHERINE MACKLEM February 7 2005
Cover

PICKING FUND STARS

What you need to know to avoid getting stuck with another laggard

KATHERINE MACKLEM February 7 2005

PICKING FUND STARS

What you need to know to avoid getting stuck with another laggard

Cover

KATHER!NE MACKLEM

DESPITE THE well-deserved knocks against the mutual fund industry, Canadians returned to them en masse in 2004, after two years of pulling out their cash. That’s largely because the advantages of mutual funds are irresistible to many small investors. Funds allow people to pool their money and gain the benefits of a larger pot. Together, investors share the cost of professional management—and as long as the cost is fair and the management good, that’s a plus. A mutual fund’s portfolio holds a large number of investments, contributing to each fund holder’s level of diversification. But pick wisely, keeping in mind the economic picture and the importance of minimizing costs. Here’s how to find winners for 2005. JUST SAY NO TO HIGH FEES: The attacks on fund fees, or management expense ratios, have been gaining ferocity, which is good news for investors. In response, some fund companies—recently Fidelity Investments—have been dropping their fees. But some smaller investment houses have consistently kept MERs low, long before the issue became a cause célèbre. It’s worth seeking them out. At Phillips, Hager & North, a Vancouver firm that’s been in business since 1964, for instance, equity fund MERs top out at 1.87 per cent while rivals’ can approach five per cent. On its website (www.phn.com), PH & N compares the impact of higher MERs on investments. Over 20 years, $100,000 in a low-MER (0.89 per cent) balanced fund will be worth $327,436—$83,000 more than the same sum invested in a fund charging the average 2.43 per cent. Note that even with its low fees, PH & N manages some of Canada’s best-performing funds.

Minding fees is especially vital in bond funds. With interest rates so low, and many

bond funds still charging in the range of 1.5 per cent a year, you may be better off with a high-interest savings account.

TAKE THE LOAD OFF: While the industry is moving away from them, back-end loads (also called DSCs, for deferred sales charges) remain an irritant. These are the fees companies charge on the sale of funds. The longer you hold a fund, the lower the fee, and after some years the fee drops to zero. From the fund company’s perspective, this motivates people to invest long-term. But, as many investors found when they tried to bail out of funds during the falling market, deferred charges can be expensive (as much as six per cent of your investment) and feel like a kick in the pants if the fund you’re cashing out is worth less than when you

bought it. Front-load funds initially cost less, but you can also look for no-load funds. Note that no one can forecast how well a fund will perform, but the load expense is firm, spelled out in the fund’s prospectus. DOUBLE-CHECK YOUR DIVERSIFICATION: Yes, you already know not to put all your eggs in one basket. That’s why you have a largecap equity fund, plus, to capture strength in the banks, you’ve put some money into a financial-services sector fund. Look again: among the most sizable holdings of your large-cap fund might well be the big bankswhich have become very heavily weighted in indexes—doubling up your exposure.

The cardinal rule is to diversify your holdings geographically, by industry sector and by type of holdings (bonds, equities, etc.).

LEARN MORE Investor Education Fund: Backed by the Ontario Securities Commission (and paid for out of fines levied against financial crooks), the site has a calculator for figuring out the im-

pact of fund fees, www.investored.ca m SEDAR: The service gives you regulatory filings on every mutual fund sold in Canada, including annual reports and prospectuses with benchmark comparisons, net

fund assets and MERs. www.sedar.com » All Star Fund Trader. The U.S. newsletter is one of the best at forecasting market and fund industry trends. $247 a year, www.allstarinvestor.com

Generally, the younger you are, the safer it is to invest in equities because you have time to withstand the vagaries of the market. Older people, who will need their money sooner, will want to safeguard more of it in income or money market funds.

GO OVERSEAS: The world is out there, and with Canada representing a miniscule amount of the global market, your money should be out there, too. Most Canadians automatically opt for U.S.-focused funds. But with the Yanks running such huge deficits and the greenback projected to drop further, now is a good time to look toward Europe and Asia, as U.S. fund returns will be eroded by the American dollar’s slide.

To go beyond your RRSP’s 30 per cent foreign-content allowance, look for Canadian companies with interests abroad and mutual funds that hold them. Another route is funds containing Canadian bonds denominated in a foreign currency; as long as the issuer is a Canadian government or corporation, or an international group such as the World

SOME investment houses kept their MERs low long before the issue became a cause célèbre. Seek them out.

Bank, these bonds aren’t considered foreign for RRSP purposes. Clone funds, which track the performance of other funds, are another way to invest abroad—look for clones with underlying foreign funds. Beware, though: clones usually carry high MERs. GET READY FOR A SLOW YEAR: Economists expect the equity markets in Canada to slow down a bit in 2005, as the Canadian dollar rises against the swooning greenback. For the past two years, corporate profit growth has been 20 per cent or more; in a report, Merrill Lynch economist Robert Spector predicts “a significant slowing in profit growth” for 2005. Spector says fixed-income investments like bonds are likely to be lacklustre as well. Together, these factors suggest two investment strategies. One, lower your expectations. Two, look for funds heavy in high-yielding (i.e., dividend-paying) sectors that don’t tend to be cyclical, such as utilities, telcos, consumer staples or financial institutions. fill

THE BEST AND THE BIGGEST MUTUAL FUNDS OF 2004 For the Top 10 fund performers, the year was about energy, trust income or über-investor Eric Sprott. (See the 25 best and worst funds of iast year at www.macleans.ca/finance) FUND NAME TYPE ASSETS «MILLION) RETURN (%) 1. AGF Managed Futures_Alternative strategies 30.1_47.5 2. CIBC Energy Natural resources 96.7 46.8 3. Acuity Pooled Canadian Small Cap Cdn. small cap 9.0 44.6 4. Acuity Pooled Income Trust Cdn. income trust 51.9 42.9 5. Friedberg Currency Alternative strategies 10.6 39.2 6. Cl Global Energy Sector Natural resources 87.4 39.1 7. Acuity Income Trust Cdn. income trust 173.8 38.4 8. Resolute Growth Cdn. small cap 245.1 38.4 9. Sprott Canadian Equity Cdn. equity 577.2 37.9 10. Dominion Equity Resource Natural resources 50.9 37.8

Canada’s largest equity funds by assets (ranked here by three-year return) had a decent year-but only three beat the S&P/TSX 60 index fund. (See the 20 biggest at the site above.)

ASSETS 3-YEAR ANNUALIZED FUND NAME TYPE «MILLION) RETURN (%) 1. RBC Dividend Cdn. dividend 4,327.1 11.5 2. RBC Canadian Equity Cdn. equity 3,662.5 8.1 3. Trimark Select Canadian Growth Cdn. equity 3,720.6 8.0 4. Fidelity True North Sr A Cdn. equity 3,077.7 6.2 5. Mac Ivy Canadian Cdn. equity 5,346.5 4.0 6. Trimark Select Growth Global equity 5,595.8 1.7 7. MD Growth Investments Global equity 3,760.4 0.1 8. Templeton Growth Global equity 6,087.0 -0.6 9. Fidelity International Portfolio Sr A Global equity 3,130.2 -2.5 10. AGF International Value Global equity 4,336.7 -3.9 SOURCE: MORNINGSTAR CANADA

FEES: WHO TAKES THE LARGEST-AND THE SMALLEST-BITE Take the 10 highest and 10 lowest MERs among the 100 largest equity and balanced funds, and what do you find? A wide gap-in cost and performance. 3-YEAR

PRICIEST 10 ASSETS MER ANNUALIZED FUND NAME «MILLION) (%) RETURN (%) 1. Dynamic Power Canadian Growth 1,169.5 3.57 14.1 2. Talvest Global Health Care 1,040.5 3.11 -0.4 3. AGF Canadian Growth Equity 923.4 3.10 7.7 4. AGF American Growth Class 877.0 3.07 -12.0 5. Templeton International Stock 2,726.0 2.98 -2.1 6. London Life Balanced Profile 814.5 2.94 2.7 7. AGF International Stock Class 856.9 2.90 2.7 8. AGF International Value 4,336.7 2.88 -3.9 9. Synergy Canadian Class 919.6 2.87 10.7 10. IA Ecflx Diversified 892.3 2.81 5.8 CHEAPEST 10 1. PH & N Balanced Pension Trust Series A 1,970.8 0.57 4.7 2. CIBC Canadian Index 838.6 0.96 7.3 3. Professionals Qc Balanced 783.2 1.00 5.5 4. Legg Mason Diversifund 848.7 1.02 2.8 5. PH & N Canadian Equity Series A 1,127.0 1.16 8.8 6. PH & N Dividend Income Series A 2,543.2 1.18 9.9 7. Scotia Canadian Dividend 1,251.4 1.18 11.1 8. RBC Monthly Income 4,429.5 1.21 10.7 9. CIBC Monthly Income 3,006.2 1.40 11.2 10. MD Equity 2,278.9 1.45 10.1 SOURCE: MORNINGSTAR CANADA