Volume 11, Number 6
June, 2005
Single Issue $10.00
What's New♦ INCOME FUNDS GALORE. New income funds are popping up like weeds. As predicted in the May issue, Phillips, Hager & North has filed a preliminary prospectus to create the PH&N Canadian Income Fund. The fund will invest in a portfolio of income-generating common stocks, bonds, income trusts, REITS, and money market instruments, although at this stage we do not know in what proportions. The exact timing of the launch has yet to be determined but president John Montalbano says it will likely not happen for another nine to 12 months. The company is testing its own internal version of the fund before rolling it out to clients. Fidelity has rebranded its Diversified Growth and Income Fund as the Fidelity Monthly Income Fund. The target asset mix of the portfolio is being adjusted to reflect the revised mandate to 30% Canadian dividend-paying securities, 30% Canadian fixed-income securities, 20% Canadian income trusts, 10% U.S. high-yield securities, and 10% U.S. commercial mortgage-backed securities. The fund, which is managed by Derek Young, has always paid monthly distributions since it was launched in late 2003 but many people didn’t realize it. The name change clarifies matters and brings it into line with a growing sub-set of the mutual funds industry. Let’s just hope the change in asset mix doesn’t cause performance to deteriorate. The fund gained 10.5% in the year to April 30, well above average for the Canadian Balanced category. There’s more. CIBC is adding to its income funds line-up with the upcoming launch of the new CIBC Diversified Income Fund. It will be the third CIBC fund to offer monthly payments. The other two, CIBC Monthly Income Fund and CIBC Mortgage and Short-Term Income Fund, are on the MFU Recommended List. Competitor Royal Bank has just unveiled its new RBC $US Income Fund for investors who want more U.S. dollar cash flow. The portfolio will consist of a mix of 70% U.S.-dollar fixed-income securities and 30% high-quality American stocks with above-average dividend yields. The initial distribution has been set at US2.25c per unit (US27c annually) although this may be adjusted up or down in future. Based on a $10 net asset value, that projects to an annual cash yield of 2.7%. If that seems rather puny, consider that the RBC U.S. Money Market Fund returned only 0.82% in the year ending April 30. The new option suddenly looks a lot better, doesn’t it? ♦ CI ENDS CONFUSION. It was long overdo but the sprawling CI fund empire has finally gotten around to ending an unnecessary source of investor confusion. More than a decade ago, CI launched what, if memory serves me correctly, was the first umbrella fund in Canada. These are corporations that offer several pools in which people can invest, such as Canadian equity, U.S. equity, European equity, etc. The idea is to allow for tax-sheltered switching from one pool to another in a non-registered account. Moving money from an ordinary mutual fund in such circumstances triggers a taxable event. For some unknown reason, CI decided to call the corporation CI Sector Fund and the pools became “sectors”. That term usually applies to mutual funds that invest in a specific area of the economy, such as natural resources, financial services, or health care. Predictably, many investors were perplexed as to exactly what they were buying. The uncertainly is now over. CI Sector Fund has been rechristened as CI Corporate Class and what were “sectors” are now “classes”, in line with general industry practice. All I can say is, about time ♦ ACUITY TRIMS LINE-UP. The Acuity organization only has 16 funds available to ordinary investors and that number is about to be trimmed by two if the company gets unitholder approval for planned mergers. The Acuity Clean Environment Science and Technology Fund, which has less than $1 million in assets, would vanish into the Acuity Clean Environment Global Equity Fund if approval is obtained. Neither fund is particularly attractive; Science and Technology shows a three-year average annual loss of 0.58% while Global Equity has dropped 1.78% a year over the same period (to April 30). The second merger would fold Acuity G7 RSP Equity Fund into Acuity Global Equity Fund. The G7 fund is another tiny one, with $2.5 million in assets, and shows an average annual loss of 8.1% over five years. Neither will be missed. ♦ FOREIGN CONTENT RULE STILL HERE. The dramatic budget vote in the House of Commons that almost toppled the Liberal government allowed investors who have been running up the foreign content in their RRSPs to breathe a little easier. But the abolition of the 30% ceiling isn’t a done deal yet. The budget bills still must be reported back from committee, secure third reading in the Commons, be approved by the Senate, and receive Royal Assent. Nonetheless, the odds are now heavily in favour of the budget being passed, which would spare investors, and the Canada Revenue Agency, a big headache. Shortly after the budget speech, the CRA said it would no longer impose penalties for exceeding the 30% foreign content limit in registered plans. This is in line with budget tradition whereby tax announcements that are effective immediately are implemented by the CRA before enabling legislation is passed. Had the budget gone down and the foreign content provision not be subsequently reintroduced, the CRA would have had a real problem on its hands. Having announced it would no longer collect penalty interest, it would have been forced to do an about-face because the Income Tax Act would never be amended. What a mess that would create! Fortunately, it looks like we’ve dodged that particular bullet. - Gordon Pape Return to the table of contents... DYNAMIC IS JUST THAT You see their ads everywhere, on turnstiles, on garage exit bars, in subways. But do you own any of their funds? If not, you’re missing out. For a fund company that constantly seems to be in your face, whether you’re exiting a parking garage or going through a turnstile, Dynamic hasn’t always received as much attention from investors as it should. Fortunately, that’s now changing and with good reason. This is a company that is truly living up to its name these days. Their fund line-up has been recharged and Dynamic now offers a wide selection of products that should meet any investor need. People are catching on to the fact that things have changed at the firm. In the year to April 30, assets under management grew 25%, from $9.6 billion to just over $12 billion. That was enough to move Dynamic up two notches to 13th place among the member companies of the Investment Funds Institute of Canada. There are several reasons behind this resurgence. One is the emergence of a new generation of high-powered money managers at Dynamic. Their names may not be familiar to many investors but people like David Taylor, Noah Blackstein, Oscar Belaiche, and Rohat Seghal are highly respected within the industry. As well, Dynamic has revamped its fund line-up to include products with wide popular appeal and has boosted the returns of many of their entries by adding large positions in the burgeoning income trusts sector to the asset mix. (Of course, this could come back to haunt them down the road but thus far the move has paid off with some eye-popping performance numbers.) Perhaps most important was the decision by Dundee Wealth Management CEO Ned Goodman to step out of the executive suite and resume his old role as an active money manager. Dynamic created its Focus+ line especially for the 67-year-old veteran and several of its funds (although not all) have been first-rate performers in recent years. We have just completed a full review of the Dynamic line-up and we found more than a dozen funds that merited a rating of $$$ (above average) and a few that earned our top $$$$ (superior) ranking. Capsule summaries of our top choices follow. All results are to April 30. We have just one caveat. Some of Dynamic’s management expense ratios (MERs) struck us as being excessive. Equity funds with MERs in excess of 3% were too common for our liking. These high costs reduce the net return to investors, so you need to consider that carefully before buying. $$$$ Funds Balanced funds Dynamic Focus+ Balanced Fund. The performance of this fund during the long bear market was nothing short of astounding. While the average Canadian Balanced fund was posting losses, this one made profits in every single year of the bear. The fund is managed by Ned Goodman in a conservative way, with preservation of capital a high priority. That may explain why bonds account for 49% of the assets, with cash holdings at 11%. That means less than 40% of the portfolio is exposed to the stock market, a significant shift in the weighting from two years ago. The fund invests primarily in high-quality bonds and common shares, with some income trusts. In the latest year, the fund recorded a below-average 6.3% return, which can be attributed to the heavy emphasis on bonds. However, longer-term results are still way above average for the Canadian Balanced category. This is a solid fund with a well-designed and conservative strategy, under the canny leadership of Ned Goodman. MER is 2.57%. Dynamic Power Balanced Fund. The Power brand is Dynamic's growth fund line-up. It's headed by Rohit Sehgal, who has done a first-rate job since joining the company from London Life in 1998. This fund targets a 50-50 stock/bond split with the equity side focusing on large-cap growth stocks, although you'll also find some mid-cap stocks in the mix. The track record is first rate. The fund has only lost ground once in a calendar year since its launch in 1998 – a modest decline of 3.5% in 2001. Other than that, it has a pristine record. Returns are well above average over all time frames. For example, the five-year average annual compound rate of return is 6.4% compared to an average of 3.8% for the Canadian Balanced category. If you want a value/growth style blend in your portfolio, combine this with the companion Dynamic Focus+ Balanced Fund and you've got it. The MER of 2.86% is on the high side for a fund of this type but not outrageously so. Specialty funds Dynamic Focus+ Diversified Income Trust Fund. If you want a genuine income trust fund, this will be to your liking. Over 90% of the portfolio is invested in trusts, along with small holdings in preferred shares, convertible debentures, and cash. The portfolio, which is managed by Oscar Belaiche and the venerable Ned Goodman, is well-diversified with 32.2% of the assets in resource trusts, 29.4% in business trusts, 18.9% in REITs, and 12.6% in utility trusts. Because of the heavy focus on income trusts, it should come as no surprise that this fund is one of the top performers in the category, but is also has one of the highest risk levels. One-year return is 28.6% compared to an average of 22.1% for the peer group. Over three years, the average annual compound rate of return is 23% against an average of 16.7%. The fund pays distributions at a monthly rate of 8c a unit and this has been consistent since July 2004. Cash yield over the 12 months to the end of May was 7.2%. However, if distributions are maintained at the same rate the cash yield over the next year based on a recent NAV of $16.52 would be down to 5.8%. Still, that’s a reasonable yield and there is capital gains potential here. Just don’t lose sight of the risk level. This is one of the best of the income trusts funds right now and we are raising our rating to $$$$. The MER is a reasonable 2.39%. We are adding it to the MFU Recommended List. $$$ Funds Canadian equity funds Dynamic Canadian Dividend Fund. David Taylor, a former star at Altamira, took over responsibility for this former StrategicNova fund in late 2003 and has been doing a fine job with it. Over the year to April 30, investors enjoyed a healthy gain of 21.8%, well above average for the category. The cash flow is good too, with monthly distributions of 5c a unit plus a year-end capital gains top-up. What's strange is the portfolio – this is certainly not your usual dividend fund. Just over 60% of the assets are in Canadian common stocks, 15% are in international stocks (including a 6% position in Israel), 10% are in the American stock market, 2% are in preferred shares, and 1.6% are in bonds, with the rest in cash. Conventional, this fund is not! But the results speak for themselves so the fund retains its $$$ rating. MER is 2.44%. Dynamic Canadian Value Class. This fund got off to a rocky start, losing 14.5% in 2002, its first full calendar year. But it righted itself nicely with gains of 40.3% and 22.7% in 2003 and 2004 and is doing well thus far in 2005. Perhaps not coincidentally, the improvement started as soon as David Taylor (who also runs the Dividend Fund, see above) took over as manager in January 2003 and brought a disciplined value approach to the portfolio. There are some points you need to be aware of before investing, however. For starters, a large chunk of the assets is invested abroad. Only two-thirds of the portfolio is in Canadian stocks with 13.6% in the U.S. You are also getting heavy dollops of Indonesia, Israel, and South Korea for your money. Second, the MER is extremely high at 3.48%. This is apparently because this is part of Dynamic's Corporate Class but an expense ratio of that magnitude is hard to justify. And third, the volatility here is higher than average for the Canadian Equity category. So there is inherently more risk involved, although you wouldn't know it from recent results. Having said all that, Taylor's results speak for themselves. Dynamic Focus+ Small Business Fund. The mandate of this fund, as the name suggests, is to invest in small businesses. This raises the question of why it is classified as a Canadian equity fund as opposed to being placed in the Canadian Small Capitalization category where it obviously belongs. Either way, it has done well since the Beleiche-Goodman team took over in mid-2002. The three-year average annual gain is 14.9%, much better than the 6% average for the Canadian Equity category and better than the 10.7% average for the Small Capitalization group. You could also make an argument that this fund belongs in the income trusts category, since almost two-thirds of the portfolio is invested in trusts. So while the returns are good, make sure you understand what you are buying here. It is not a true Canadian equity fund, not a true small-cap fund, and not a true income trusts fund. Consider it a sort of mongrel, albeit a loveable one as long as it keeps producing good results. We don’t like the 3.5% MER, however. Dynamic Power Canadian Growth Fund. This fund is managed by Rohit Sehgal, who uses a growth approach to stock selection, combining top-down economic analysis with bottom-up company analysis. Sehgal is an active trader who believes in being fully invested (the fund currently shows a zero cash position). Volatility is on the high side for the category although the fund has experienced only one really bad year, a 13.2% drop in 2001. He rallied back from the bear market with a big gain of 35.6% in 2003 and followed that with a 16.7% advance in 2004. The major negative is the very high MER of 3.57%, which is 74 basis points higher than the average for the Canadian Equity category. Dynamic Value Fund of Canada. This fund has a long track record (since 1957), but it languished for several years under indifferent management. The appointment of David Taylor to handle the money in early 2003 turned it around, however. Of course, the timing was fortuitous for Taylor, coming right at the start of a new bull market. But a manager still has to produce the goods and he did, with gains of 28.7% in 2003 and 22.4% in 2004. This is a conservatively managed value fund that invests in all types of stocks. Currently, Taylor favours energy (16% of the assets), metals and minerals (15.2%), and chemicals (11.1%). His approach is working well; The Fund Library ranks it 10th of 539 Canadian stock funds over the two years to April 30. The MER is 2.66%, which is actually better than average for the category. Global and international equity funds Dynamic Global Small Cap Value Fund. This is a global recovery fund, seeking undervalued opportunities in smaller companies undergoing restructuring and which may be situated in emerging markets. The manager looks for securities that are unlikely to be owned by competitors so as to ensure low or no correlation. David Fingold only took over in October 2004 so we don't have a long record on which to judge him but so far he has made a spectacular debut. The fund gained 18.3% in the six months to April 30, a move that should satisfy even the most demanding investor. As you might expect from the mandate, most of the companies in the portfolio will be unknown to investors. About half the assets are in Canada and the U.S. with the rest coming from all parts of the globe from Brazil to South Korea. We like the look of this one although the 3.4% MER may give some people pause. Dynamic Power Global Growth Class. This fund was launched in February 2001, just as the bear market was taking hold. Predictably, it got off to a terrible start, losing 21.8% in 2002, its first full calendar year. But since then it has looked pretty good with gains of 20.3% in 2003 and 17.1% in 2004. According to The Fund Library, those results were good enough to rank it number 33 out of 390 funds in the Global Equity category over the three years to April 30. Manager Noah Blackstein uses a strict bottom-up approach to create a portfolio of fast-growing companies. About half the fund is invested in U.S. stocks (Google is the largest position there) with the rest of the money widely distributed geographically. If you're looking for a growth fund that plays on the world stage and you can accept the very high MER of 3.89%, it's worth considering. Balanced funds Commonwealth Canadian Balanced Fund. This used to be known as the Dynamic Partners Fund. For several years it was a mediocre performer but it rose to the top of its category in 2003 and 2004 with first-quartile performances. As a result, returns are above average for all time periods out to five years. The three-year numbers are especially strong with an average annual compound rate of return of 8.4%, almost double the average for the Canadian Balanced category. Currently, equities account for about 60% of assets, while bonds are about 36% of the fund, with the rest in cash. The volatility is somewhat higher than that of the peer group, but not enough to cause us concern. Dynamic says the fund is conservatively managed with capital preservation as one of the top priorities and the results during the bear market tend to confirm this. The fund suffered losses in 2001 and 2002, but they were quite small. This fund has shown significant improvement in recent years under Ned Goodman's steady hand. MER is 2.62%. Dynamic Dividend Fund. We like this fund a lot. It's the name we're dubious about. It used to be a genuine dividend fund, with a high proportion of preferred shares, and Dynamic's description of the fund still conveys that impression: "The fund seeks to maximize dividend income through investment primarily in preferred and equity securities of Canadian companies as well as income trusts." In fact, preferreds make up only 14.5% of the portfolio. The largest asset group is income trusts, at 34.2%, followed by Canadian common stocks at 26.6%. So in reality this fund belongs in the Canadian Balanced category rather than the Canadian Dividend category where it currently resides. Its make-up is more akin to a monthly income fund than to a dividend fund. That said, the fund that has posted some very decent returns in recent years. The three-year average annual compound rate of return is 12.6%, much better than the category average for either the Balanced or Dividend group. Cash flow is decent, running at 1.8c per unit monthly for a projected yield of 2.5% on an NAV of $8.80. This fund is a good choice for conservative investors, although if cash flow is the number one priority there are better options. This is one of Dynamic’s few MER bargain funds at 1.76%. Dynamic Value Balanced Fund. This fund has what appears to be a long history, but be careful. It was formerly the StrategicNova Canadian Balanced Fund so most of the old record is meaningless. The name was changed and two other StrategicNova funds were merged into it in August 2003 and the new management duo of David Taylor and Michael McHugh took over that same year. So we have less than two years of performance to judge. They've been a pretty good two years, though. The fund gained 15.9% in calendar 2003 and added 15.5% in 2004. The Fund Library ranks it at number 10 out of 477 Canadian balanced funds over the two years to April 30, which is top-notch by any standard. The fund pays monthly distributions of 3.5c a unit, so it’s a good choice if you need cash flow. Risk is somewhat on the high side for its type. Specialty funds Dynamic Focus+ Real Estate Fund. This fund got off to a weak start but it has been profitable in every year since 2000 and has a very impressive three-year average annual rate of return of 15%. The portfolio includes a mix of REITs and common shares in real estate companies. Because of the strong REIT presence, you’d expect to see regular cash distributions but that is not the case. The fund only makes payments annually and in 2004 the amount was less than 1c per unit. So if it’s income you need, don’t come here. But if you just want a real estate sector fund to add to your portfolio mix, it’s a worthy candidate. About 80% of the holdings are in Canada and the U.S. so you have limited global exposure here. The main risk is interest rates; if they rise it could spell problems. The MER is 2.46%. Dynamic Focus+ Resource Fund. As the name suggests, this fund specializes in resource-based companies, almost exclusively Canadian ones. However, unlike most resource funds, this one includes a hefty allocation of income trusts, with a focus on the energy sector (Canadian Oil Sands Trust is the largest single holding). Other major trust holdings include Westshore Terminals, PrimeWest Energy Trust, and Viking Royalty Trust. But the fund also has a lot of exposure to gold, with large positions in Newmount Mining, Placer Dome, Kinross, and Gabriel Resources. The fact that gold has been weak lately helps to explain why, after several strong years, returns for the latest year slumped to a well below average 13.9%. Three and five year numbers are still much better than par for the group, however. Risk is below average for a fund of this type but much higher than you would find in, for example, a broadly-based income trusts fund. The 3.36% MER is high for a resource fund. Dynamic Focus+ Wealth Management Fund. This fund focuses on the financial services industry. Its portfolio holdings are generally limited to 35 to 40 names and include banks, mutual fund companies, and insurance companies. The fund contains significant foreign content (about 27%), which provides the only diversification because of the otherwise tight sector focus. Performance in the latest year was a gain of 6.9%, which may not seem exciting until you consider that the average fund in the category was ahead just 2.8%. The returns over all time frames surpass those of the Financial Services peer group as well. This fund’s risk is slightly higher than average for the category and much higher than that of a more diversified Canadian equity fund. The main feature is that it provides is an opportunity to play exclusively in a strong sector. The MER is 2.89%. Dynamic Global Resource Fund. The name of this fund is misleading. It is not a global fund at all; 90% of the assets are in Canadian resource stocks, with some income trusts tossed into the mix. So you'd think the record would be similar to that of the Dynamic Focus+ Canadian Resource Fund, but it's not. This one has a different manager, Robert Cohen, and the portfolios are quite dissimilar. The Focus+ Resource Fund has never lost money in a calendar year since its launch in 1998. This one was a big loser from 1998-2000 but turned around after Cohen took over and has not seen any red ink since over a full calendar year. In 1993, the NAV almost doubled in value as the fund gained 94%. Cohen followed that with a respectable 13% advance in 2004. If you're looking for a resource fund from Dynamic, this one will offer more excitement and potentially better returns than Focus+. But it is not a global fund. The 3.54% MER is way too high. Bond funds Dynamic Corporate Bond Fund. This fund has the same manager as Dynamic Income Fund (below) but shows slightly better returns over one and three years. The three-year average annual compound rate of return to is 7.3%, more than a percentage point higher than the norm for the Canadian Bond category. Significantly, manager Michael McHugh achieved this with a slightly better than average volatility rate. Unlike some bond fund managers, he's an active trader, constantly seeking to take advantage of movements in the level of bond yields and the shape of the yield curve. The main difference between this and the Income Fund is that this one only makes quarterly distributions so Dynamic Income is the better choice if you need regular cash flow. The 1.88% MER is about average for a Canadian bond fund. Dynamic Income Fund. This is a very sound income fund – nothing spectacular, just steady returns at moderate risk. The fund pays monthly distributions which recently were running at 1.3c a unit, so there is decent cash flow. One-year return is 6.5%, better than average for the category. Risk is better than average for a fund of this type and the fund has not lost money over a calendar year since 1999, when it declined 0.4%. A good choice for conservative investors. The MER is 1.82%. Return to the table of contents...
FUND FLASH Return to the table of contents... ACROSS-THE-BOARD GAINSEvery fund but one in our Ideal Portfolios scored gains in the six months to April 30. It was a very good half-year. During the six months ending April 30, only one fund in our Ideal Portfolios lost ground. All the others produced profits, none of them spectacular but all quite respectable. The only straggler was the RBC Precious Metals Fund, which dropped 16% in the period. Gold bullion hit a wall and, as a result, all precious metals funds declined in value. What concerns us, however, is that this one fell more than most. That came as a surprise since the fund has historically been one of the strongest performers in the category. The precipitous fall raises questions about the future of the fund, which was managed for years by John Embry, who left RBC for the Sprott organization in early 2003. Therefore, we have decided to drop it from the Ideal Portfolios, at least for now. Otherwise, it was all good news. The low-risk Ideal Safety Portfolio, which is heavily weighted towards money market and income funds, gained 4.51% during the period. The middle-of-the-road Ideal Growth Portfolio added 6.58%. The Ideal Speculators Portfolio, which was the only one that held RBC Precious Metals, advanced 5.95%. Note that we are renaming the Speculators Portfolio as the Ideal Aggressive Portfolio. We feel that this better reflects the asset mix and the type of investor for whom this portfolio is best suited. The Ideal Portfolios were created on Jan. 1, 1997 with the idea of providing readers with three portfolios with different risk/return profiles which they could emulate themselves. No fund with an initial entry requirement of more than $1,000 is included. The long history of the Ideal Portfolios (we’ve been tracking them for more than eight years) offers a good yardstick of what type of returns you can expect by maintaining a consistent investment approach through a series of market cycles. These portfolios went through the Asian Crisis of 1997-98, the tech boom, the 2000-2002 stock market plunge, the rise of the loonie, and the market rally of 2003-2004. In short, they’ve seen it all. Over that period, the low-risk Safety Portfolio has gained just over 49% for an average annual return of slightly more than 5%. The medium-risk Growth Portfolio is up 59.3%, representing an average annual profit of about 6%. Despite all the stock market volatility over the period, the higher-risk Aggressive Portfolio was by far the best performer, with a gain to date of 91.1% for an average annual compound rate of return of about 8.4%. Here is a performance summary of the three portfolios with recommended adjustments for the next six months. Note that the name of the Synergy Canadian Momentum Class has been changed to Synergy Canadian Class. IDEAL SAFETY PORTFOLIO REVIEW
Comments: A quarter of this portfolio was invested in the low-risk Altamira T-Bill Fund and HSBC Mortgage Fund. With Canadian interest rates continuing to be very low, both returned less than 2% over the six-month period. However, the GGOF Monthly High Income II Fund picked up some of the slack with an 11.6% gain. We also got good results from three Mackenzie entries. Ivy Canadian and Cundill Global Balanced each added more than 6%, while Ivy Growth & Income gained 5.8%. Changes: This portfolio is performing in exactly the way we expect it to. Risk is low and the return is very acceptable in that context. But we think we can do a little better by moving our 10% position in Mackenzie Ivy Canadian over to CI Canadian Investment Fund. Both take a low-risk approach to equity investing but the CI entry, managed by Kim Shannon, has been a stronger performer in recent years. REVISED IDEAL SAFETY PORTFOLIO
IDEAL GROWTH PORTFOLIO REVIEW
Comments: Here again, GGOF Monthly High Income II Fund, which specializes in income trusts, was the strongest performer. But we also saw good returns from Synergy Canadian Class, which advanced 10.7%, Trimark Fund, which snapped out of a slump to gain 9.7%, RBC O’Shaughnessy Canadian Equity Fund, up 9.5%, and Fidelity Canadian Growth Company Fund, which was ahead 8.8%. Changes: The Fidelity Canadian Disciplined Equity Fund has done well for us but Synergy Canadian Class is doing even better. Rather than holding two small 5% positions in each, we are shifting the assets from the Fidelity fund over to Synergy and giving it a 10% weighting. However, before you do this in your own portfolio, see if you will incur a DSC charge or trigger an unwanted taxable capital gain. If so, you may prefer to stand pat. There is nothing wrong with Fidelity Canadian Disciplined Equity, we just happen to prefer the Synergy fund right now. REVISED IDEAL GROWTH PORTFOLIO
IDEAL AGGRESSIVE PORTFOLIO REVIEW
Comments: This is the only portfolio that contains the Templeton Global Smaller Companies Fund, which added 9.1% over the latest six months. It’s a consistently strong performer and should be considered for any aggressive portfolio. We’re increasing the weighting to 10%. We also had good results from the Mackenzie Universal Canadian Resources Fund, which was up 7.6%, and from the two O’Shaughnessy U.S. funds. Changes: As mentioned, we’re dropping RBC Precious Metals from the list. Half of that fund’s 10% weighting will be shifted to the Templeton fund. The other 5% will be invested in a new position in the Halcyon Hirsch Canadian Opportunistic Fund. This is a growth-oriented Canadian equity fund managed by Veronika Hirsch. It has been on the MFU Recommended List since November 2003 and gained 8.2% in the six months to April 30. Minimum initial investment is $1,000. REVISED IDEAL AGGRESSIVE PORTFOLIO
Return to the table of contents... NUMBERS CAN DECEIVEDon’t choose your mutual funds strictly on the basis of past performance. Look beyond the raw numbers to see how the fund really did. In last month’s issue, we began a series on how to choose the right mutual funds for your needs with an article on risk assessment. This month we look at the often-confusing issue of performance results. Many people rely heavily on a fund’s past record on deciding whether to invest but sometimes those numbers can deceive. You need to look more deeply to see what is really going on. Your goal should be to find funds that aren’t going to cause devastation in bad times but will tend to outperform others of the same type. So after you have assessed the risk profile of your candidate funds, look at how they did over time in relation to their peer group. Some years ago, I devised what I call an Average Quartile Ranking (AQR). Here’s how it works. Find an Internet site, such as Globefund or The Fund Library, that provides quartile rankings for every fund. The quartile ranking shows how a fund performed against its peer group in a specific time frame, say one year. If it was in the first quartile that means it was among the top 25% in its category. Second quartile means it was above average but not in the top league. Third quartile is below average but not terrible. Fourth quartile is pretty bad – the fund was in the bottom 25% of its grouping. By adding the quartile rankings and dividing by the number of periods under review, we get the AQR for the time frame you’re looking at. For example, a fund that was in the first quartile for every period would receive an AQR of 1.00 — a perfect score. One that finished in the bottom quartile every year would end up with a rating of 4.00. It’s not complicated — you can calculate it yourself for any fund in which you are interested. A fund that showed a quartile ranking of one, three, two, one and two (total nine) over the past five years would have an AQR of 1.80 for that period (nine divided by five). That’s a very good result – anything under 2.00 tells you the fund has been in the top half of its class most of the time during the period being measured. On the other hand, a fund with a pattern of one, four, three, four, and three would have an AQR of 3.00, which is not so hot. Yet many people may be drawn to it because during the most recent year it finished in the top quartile. The rest of the time it was a lousy performer, however, which the AQR reveals. The Saxon organization is small but the funds it offers are first-rate, with very good AQRs. Saxon Stock Fund, Saxon Balanced Fund, and Saxon World Growth Fund all showed AQRs of 1.71 over the seven-year period ending in 2004. On the other hand, the 3.29 AQR of the RBC Life Science and Technology Fund might send you fleeing in a different direction. Applying this overlay to the list of funds you chose based on risk profile will enable you to screen out the mediocre performers. However, be sure that the fund actually fits the parameters of the category into which it is slotted. We constantly come across funds that we feel are mislabelled, which makes peer group comparisons and AQRs meaningless. The Dynamic Dividend Fund, which is reviewed elsewhere in this issue, is an example. Although it is slotted into the Canadian Dividend category, the portfolio composition suggests it should be more correctly compared with funds in the Canadian Balanced group when judging performance. So be sure you are evaluating apples and apples when you make your assessment. Next month: Costs add up.
Return to the table of contents... Fund confusion, investing in commodities, Great-West Life shift. Bought the wrong fund Q - I purchased TD Monthly Income Fund DSC (#831), thinking I was buying TD Monthly Income Fund no-load units. When I decided to sell, I was going to have to pay the deferred load which was about 5% or $300. So I switched it to TD Canadian Money Market, not knowing it was also a DSC fund. Now I cannot sell the Money Market Fund for five years or I will have to pay about 5%. I do have the option of switching to another TD fund with a deferred charge. Should I go back into the TD Monthly Income Fund or should I choose another TD fund? Do you know of a good one for these difficult times? I have to stay invested in it for five years. I do not need the money; I just want to make a decent return. – I.W. A – I’m hearing too many stories like this these days. It’s a result of the proliferation of fund units, which has left many investors confused. The fund companies don’t help matters by often making it difficult to identify the fund code that goes with each type of unit. I believe we have reached the point where fund codes need to be as up-front as stock symbols so that people don’t make this kind of mistake. Until that happens, always ask for the no-load fund when dealing with a bank to avoid this situation. I cannot advise you which specific fund to buy at this point but TD has lots of good ones. Those that receive a top $$$$ rating from our On-Line Buyer’s Guide to Mutual Funds include TD Canadian Bond, TD Dividend Growth, TD Dividend Income, TD Monthly Income, TD Real Return Bond, and TD Short Term Bond Fund. So there is plenty of choice. You should be able to switch to any DSC fund you want in their family without penalty. – G.P. Looking for a commodities fund Q - I have recently read Jim Rogers’s book Hot Commodities. It's a good read. He makes a reasonable argument for owning commodities (vs. commodity stocks) but does not make any actual suggestions, save for buying futures. Do you know of any ETFs or commodity indexes or perhaps mutual funds that deal with pure play commodities? – M.L. A - The AGF Managed Futures Fund sounds like exactly what you are looking for as it invests entirely in commodities futures. This fund used to be a real dog but it has done better since the managerial responsibilities were taken over by Zoran Vojvodic in March 2002. However, it is still incredibly volatile, so anyone putting money in must be prepared to live with that. How volatile? Well, in 2002 the fund gained almost 72%. In 2003, however, everything turned around and it lost 42%. It rebounded to a 47% gain in 2004 and so far in 2005 (to May 27) it is ahead 44.5%. Is that volatile enough for you? The three-year average annual compound rate of return to April 30 was 27.3%. Currently, the fund's heaviest weightings are in natural gas, coffee, and wheat futures (15% each). Behind that comes crude oil (12%), cocoa (10%), and silver (10%). The manager uses leverage, with a current market exposure of 160%. – G.P. Considering Great-West Life move Q - I am in my early sixties, retired and considering moving the bulk of my RRSP from the banks to a no-load real estate fund with a reliable insurance company, namely Great-West Life. Could you please comment on the security of this investment? Please advise what degree of risk this would entail, low, medium, or high. Could you suggest any alternatives? – T.B. A – The Great-West Life (GWL) Real Estate Fund is something of an anachronism in that it is the only mutual fund remaining that invests in real property. All the other real estate mutual funds hold a portfolio of real estate investment trusts (REITs) and common stocks. As far as safety is concerned, the fund showed a profit in every year from 1996 to 2004. But prior to that, it lost money in five straight years, from 1990 to 1994, and broke even in 1995. You say you want to buy the no-load units of this fund. Take note that they have a higher MER than the deferred sales charge (DSC) units, 3.16% compared to 2.95%. This has translated into a slightly lower return. The average annual gain for the no-load units over the three-year period to April 30 was 4.24% compared to 4.46% for the DSC units. There are lots of alternatives, depending on your objectives. For example, a portfolio of conventional REITs would produce a higher return and steady cash flow at lower cost. One way to achieve this would to buy the iUnits REITs that trade on the TSX under the symbol XRE. This would give you a basket of 13 major REITs with an MER of 0.55%. This exchange-traded fund does not have a three-year record but the one-year return to April 30 was 20.4%. I suggest that you also think carefully about committing most of your assets to real estate. The sector has experienced bust periods in the past and could do so again. Your portfolio should contain greater diversification. – G.P. Return to the table of contents... RATINGS CHANGESWe rate two funds from Acuity. NEWCOMERS ACUITY ALL-CAP 30 CANADIAN EQUITY FUND $$$ ACUITY CANADIAN EQUITY FUND $$
Return to the table of contents... Mutual Funds Update Editor and Publisher: Gordon Pape Circulation Director: Kim Pape-Green Customer Service: Katya Schmied Gordon
Pape's Mutual Funds Update is published monthly.Copyright 2005 by Gordon Pape
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