♦ MR. CHOU’S PHILOSOPHY. I always look forward to reading the annual reports from the Chou Funds. Unlike most corporate documents, manager Francis Chou’s comments are frank, down-to-earth, and sometimes brutally honest. He does not hesitate to tell unitholders when he has goofed and has even been known to reduce his management fee if he feels his performance in a given year was sub-par.

The 2005 Chou Associates annual report landed on my desk recently so I immediately dived in to see what gems he has to offer this time around. One of his main messages is the importance of admitting mistakes early, making needed corrections, and moving on.

To illustrate this, he describes his experience with an unnamed stock he held last year: “The company had high cash holdings and its management had significant stock ownership. Accordingly, we felt that management would act rationally and strive to maximize shareholder value. We gave undue weight to this factor and not enough to compelling evidence suggesting that, historically, management had not managed the business for the benefit of shareholders. In fact, they suffered from a syndrome that is popularly known as the bladder problem: ‘The more cash one holds, the greater the pressure to piss it away.’”

That’s what happened and Mr. Chou ended up dumping the stock. The lesson: “Admit the mistake early on and avoid any temptation to justify or rationalize the decision along the way. After that, make the necessary correction and move on.”

♦ THE COST OF SARBANES-OXLEY . The Sarbanes-Oxley Act was passed by the U.S. Congress to tighten corporate governance in the aftermath of financial collapses such as WorldCom and Enron. Although it only applies to U.S. companies and those listed on the American exchanges, it may end up costing Canadian investors some of their mutual fund profits.

In his 2005 annual report, Francis Chou writes that the 1.75% management expense ratio (MER) of the Chou Associates Fund, which invests primarily in U.S. stocks, is probably as low as it will ever go. In fact, he expects it to rise in future years although he hopes to keep it below 2%. The culprit: Sarbanes-Oxley.

“Complying with the Act will cost businesses listed on U.S. stock exchanges an estimated $28 billion in 2007 {and} the costs will escalate as we move forward,” he writes. “At some point the regulators will have to assess whether the costs borne by the unitholders, as well as the management time and human resources required by fund companies to meet the compliance requirements, are worth the debatable intended benefits.”

Then he adds: “What may also be affected are the style and manner in which letters to the unitholders are written. We believe that our investors would like to hear from their portfolio manager in a straightforward and forthright manner on how he or she is looking at the investment landscape rather than have the letter drastically rewritten by public relations or legal counsel.”

If that implies future Chou Funds reports would be written in bureaucratese, I say amen to that.

♦ NEW ETHICAL MANAGER. In the March issue, we praised the relatively new Ethical Canadian Dividend Fund, giving it a debut rating of $$$. However, we expressed one concern: the pending replacement of manager Robert Vanderhooft of Greystone Managed Investments who had guided the fund’s fortunes from the outset.

On June 6, portfolio management responsibilities will pass to Highstreet Asset Management of London, Ontario. This is a young company (founded in 1998) that mainly manages portfolios for families, foundations, pension plans, and corporate investors. The Highstreet team has never managed a mainstream mutual fund, however the company does offer a number of pooled funds (minimum investment $500,000) for pension plans and high net worth individuals.

For the most part, these have performed well. The Highstreet Canadian Equity Fund, for example, had a five-year average annual compound rate of return of 16.3% to April 30, almost double the category average. Because it is a pooled fund it has a low MER of 1.6% (the Ethical fund’s MER is 2.27%), but the difference is not enough to be significant in this context.

Highstreet does not offer a dividend fund as such but its Canadian Equity Fund has a similar make-up to the Ethical Dividend Fund with a strong focus on blue-chip stocks. Even the portfolio mix isn’t that different; in both funds financial and energy stocks are the most heavily-weighted categories. However, the Highstreet fund has a much higher materials component than Ethical Canadian Dividend, which has put more emphasis on industrials until now.

On balance, this looks like an inspired move by Ethical. We’ll await the results with interest.

♦ IFIC CHANGES REPORTING. It’s long overdue but the Investment Funds Institute of Canada (IFIC) has finally changed its reporting system to reflect the sales results in each individual category available to investors. Previously, several categories were lumped together so it was difficult to get a clear picture of exactly what was happening.

The latest results, to the end of April, show that despite the strong performance of Canadian stocks investors have been putting their money into lower-risk funds so far in 2006. Year-to-date, Canadian dividend funds are the number one favourite with net new sales of $3.1 billion (excluding reinvestments). Second on the hit parade are Canadian income balanced funds with $2.8 billion in sales. In third, surprisingly, are bond funds with $2.5 billion in net sales – this despite the fact bonds were weak in the early part of this year.

Where is the cash coming from? A large chunk has flowed over from money market funds which experienced net redemptions of $2.7 billion in the first four months of the year.

Triple-digit swings have become the norm on the TSX and fund investors are seeing the effect on their valuations. How can you get off the roller-coaster?

May was one of those months when investors gritted their teeth every time they picked up the business pages. The TSX was down more than 100 points. The TSX was up more than 150 points. The TSX was down more than 200 points. We haven’t seen volatility like this since the bad old days of the high-tech collapse!

Blame oil and gold for the most part. If crude and bullion prices both rose significantly on the same day, a triple-digit gain on the commodity-heavy TSX was virtually guaranteed. Conversely, if both lost ground, index losses in excess of 100 points routinely followed.

Many mutual fund investors were shaken by the impact on their portfolios, especially those who were heavily weighted towards growth funds. Precious Metals funds were hit particularly hard, with some losing more than 10% in the 30-day period to May 26. Natural resource funds also took it on the chin.

As we point out in the semi-annual review of our Ideal Portfolios in this issue, those who are willing to accept these gyrations are rewarded over time. But market corrections such as we experienced in May can be painful. If you prefer a more sedate style of investing, what can you do? Of course, you can always retreat to the sanctuary of money market, mortgage, and short-term bond funds. But even with the recent rise in interest rates, your returns will still be very low. If you want to retain exposure to the equity markets while wringing most of the risk out of your portfolio, you need to look for funds with historically low volatility.

There are three key numbers to help guide your research, all of which can be found on The Fund Library website by calling up a fund family and clicking on the Risk tab. They are:

Beta . This measures the risk of a specific mutual fund in relation to the overall market. A neutral rating is 1.00, which means that the fund’s risk exactly matches that of the benchmark index. The lower the beta, the less the relative risk.

Sharpe ratio. This number represents the risk-adjusted performance of a fund. It was developed by Nobel Prize winner William Sharpe, who referred to it as a “reward-to-variability ratio”. The higher the score, the better.

Standard deviation . Here you are looking at the extent to which a fund’s monthly return deviates from the norm for the group. The lower the number, the less the standard deviation which means the fund is less volatile in nature.

So which Canadian equity funds should you look at if you want to reduce risk in your portfolio? Here are some that stand out. As you will see, several are already on the MFU Recommended List.

Chou RRSP Fund . This has one of the lowest betas in the Canadian Equity category at 0.34. That means the risk inherent in this fund is about one-third that of the index and the track record bears that out – the fund did not lose money during a single calendar year of the 2000-2002 bear market; in fact it recorded double-digit gains in each of those years. The fund’s Sharpe rating is 0.58 – not the highest by any means, but very respectable. The standard deviation is a very low 1.62. Taken together, these numbers indicate a low-risk fund that offers relatively good returns without violent price swings. A prime reason for this is the fund’s low exposure to commodities; entering 2006 there were no energy stocks in the portfolio and only a 6.2% exposure to the materials sector. As a result, the fund has significantly underperformed its category over the past three years with an average annual gain of 14.6%. But that’s often the price you have to pay for lower risk.

Mackenzie Cundill Canadian Security Fund . Here we are looking at a very low beta of 0.42 combined with one of the better Sharpe ratios in the Canadian Equity category at 0.68 and a low standard deviation of 1.51. Returns were very good during the bear market (no losing years) but have been sub-par recently. This profile is very similar to that of the Chou RRSP Fund and the reasons are much the same: low exposure to commodities, with only 2.3% of the portfolio in energy stocks and 5.5% in materials as of April 28. As with the Chou fund, expect underperformance during strong markets with the best relative results occurring when stocks are in decline.

Leith Wheeler Canadian Equity Fund . This fund has one of the best Sharpe ratios in either the general Canadian Equity category or the pure Canadian Equity category (which means no foreign stocks in the mix). The 0.78 score is outstanding and tells us that on a risk/return basis this is one of the best equity funds around. The beta of 0.66 is higher than that of either the Chou or the Cundill funds as is the 2.20 standard deviation, but taking all the numbers together this adds up to a formidable package. The reason for the high Sharpe ratio is that this fund has significantly outperformed the Cundill and Chou entries in recent years with a three-year average annual compound rate of return of 25.5% to April 30. There is more commodities exposure here, with 11.5% of the portfolio in energy and 6.6% in materials. However, the management team has shown itself to be very adept at controlling risk over the years. We are adding this fund to the MFU Recommended List on the strength of the combination of low risk and high return. However, note that the minimum initial investment is $25,000 (which may be split among several of the company’s funds) and that units are only registered for sale in Ontario and the four Western provinces.

TD Canadian Blue Chip Equity Fund . Among the big bank funds, this is the one that stands out when we look for a combination of decent returns and low volatility. The fund shows a beta of 0.61 and a good Sharpe ratio of 0.62. The standard deviation is 2.02. This fund does not usually show up on investors’ radar screens because it tends to be overshadowed by some of the higher-profile TD funds but if you are seeking to reduce volatility in your portfolio it would be a sound choice. The fund is managed by the highly-respected Montreal firm of Jarislowsky Fraser and shows above-average returns for five and ten-year periods. More recent results have been below average although somewhat better than those turned in by some of the other funds mentioned in this article, with a three-year average annual compound rate of return of 18.9% to April 30. What sets this fund apart from the others is the fact it has an unusually high energy component of 23.3%, so there is more commodity exposure here.

IA Canadian Conservative Equity Fund . This underappreciated fund, which is on our Recommended List, isn’t as low-risk as some of the others we have mentioned with a beta of 0.65 and a standard deviation of 2.19. However, it shows a respectable Sharpe ratio of 0.57 and has a fine track record with long-term above-average results and close-to-average recent returns (one-year gain to April 30 was 23.6%). Although it has never displayed high volatility, it’s important to note that, unlike the other funds mentioned here, energy stocks make up the largest single component of the portfolio at just over 29%. Add to that a 10.3% position in materials and you find that almost 40% of the assets are invested in commodities. Despite this, the fund held up reasonably well during the May correction so we felt it to be worthy of inclusion in this review.

Mackenzie Ivy Canadian Fund . Next to Chou RRSP and Cundill Canadian Security, this is the lowest-risk Canadian equity fund we could find. The beta is a miniscule 0.40 while the standard deviation is an excellent 1.73. The major negative is a low Sharpe ratio of 0.34 which tells us that while this fund may be safe, it does not offer much in the way of rewards. In fact, the returns are below average for all time periods out to 10 years with a gain of only 5.2% in the latest 12-month period. Commodity exposure is very low with only 6.6% of the portfolio in the energy sector and a negligible amount in materials. We removed this fund from our Recommended List last year because of the poor performance but if safety trumps all else you may want to revisit it.

Bottom line : The May correction may just be a pause in the long bull market that has been running since late 2002. But sooner or later, it will come to an end. If you want to retain exposure to Canadian equity markets while reducing your portfolio’s risk profile, consider adding some of the funds mentioned here to your mix.

Surging stock markets rewarded aggressive investors while leaving safety-firsters in the dust.

The six-month period ending April 30 was one of the most successful in a long time for followers of our Ideal Portfolios. And the more aggressive you were, the richer your rewards.

Our Ideal Aggressive Portfolio, which invests exclusively in equity and income trusts funds, gained more than 19% during the period. Every fund contributed to the advance, led by Mackenzie Universal Canadian Resources Fund which jumped almost 36% during the period.

Other big gainers included RBC O’Shaughnessy U.S. Growth Fund, which was up 26.3%, and Synergy Canadian Corporate Class and Halcyon Hirsch Opportunistic Canadian Fund, both of which added 21.2%.

We were particularly pleased to see a gain of 19.6% in the Altamira Global Small Company Fund. We advised substituting this fund for Templeton Global Smaller Companies in the December 2005 issue. The Templeton fund turned in a 12.7% gain over the six-month period but that was only average for the category.

The Ideal Balanced Portfolio also did well over the six months, with a total gain of 10.4%. All the equity funds in the portfolio turned in double-digit gains with the exception of MackenzieCundill Value Fund (+7.1%) and RBC O’Shaughnessy U.S. Value Fund (+7.8%). The only loser was TD Canadian Bond Fund, which slipped a modest 0.3% as rising interest rates took a bite out of bond prices.

Those same interest rate hikes hit the Ideal Safety Portfolio as well, limiting the six-month gain to 6.2%. This portfolio is heavily weighted (55%) to bond and money market funds, all of which were relatively flat during the period. The best bond fund result came from the GGOF Canadian High-Yield Bond Fund which gained a modest 3.4%. The highest overall gain was turned in by GGOF Monthly High Income Fund II, which invests in income trusts. It added 17.8% during the period.

It has now been more than nine years since we launched the Ideal Portfolios, on Jan. 1, 1997 . Over that time we have seen stock market collapses (October 1998), the tech boom of 1999, the great bear market of 2000-2002, and the bull market that began in late 2002. The long-term results continue to show that fund investors who take the highest degree of risk are rewarded, even though the ride can be bumpy. To date, the Ideal Aggressive Portfolio is up 146% since inception. In contrast, the low-risk Safety Portfolio has gained only 62% in the same time frame. The only compensation is that Safety Portfolio investors may sleep better at night.

Here is a review of the three Ideal Portfolios with recommended changes. All performance figures are to April 30.

Comments : A return of more than 6% in six months is actually very good for a low-risk portfolio such as this. It’s just that it pales when compared to the returns from the Ideal Balanced and Ideal Aggressive Portfolios. In this case at least, slow and steady is not winning the race but investors are preserving their capital and enjoying modest gains in the process.

Changes : We see no reason to change any of the funds currently in the portfolio. However, we will tinker with the mix slightly. The indication from the Bank of Canada that it will hold the line on interest rates for the next several months is good news for the bond market. Accordingly, we are increasing the weighting of the TD Canadian Bond Fund to 20%, while cutting Altamira T-Bill Fund and CIBC Canadian Short-Term Bond Index Fund back to 10% each. Here is the revised portfolio.

Comments : A total of 35% of this portfolio is invested in bond, mortgage, and money market funds. Combined, they more-or-less broke even during the six months under review. It was the income trusts and equity funds that propelled us to a 10.4% advance for the period. It’s worth noting that last December we advised moving out of Trimark Fund and into Fidelity NorthStar Fund. We received a bit of a go-ahead from that switch; the Trimark Fund gained 13.3% during the period (SC units) while the Fidelity fund added 14.4%.

Changes : This portfolio is performing very much as expected. Therefore, we are not recommending any changes at this time.

Comments: We benefited from an advance of almost $4,000 in the value of this portfolio over the six months. That’s the largest dollar advance ever for a similar period. As mentioned, every fund in the portfolio gained ground. However, it would be unrealistic to expect a similar result over the summer and fall. During May we experienced a sharp market correction which will cut into the returns of our equity funds regardless of what happens going forward.

Changes : Prudence suggests that we should take some steps to make this portfolio a little more defensive. For starters, we will increase the weighting of the GGOF Monthly High Income Fund II to 15% while reducing the Mackenzie Universal Canadian Resource Fund to 5%. We have done very well with the Resource Fund but commodity prices are very high and may be due for a pull-back. As well, we are reducing the weighting of the RBC O’Shaughnessy U.S. Growth Fund to 5% and increasing the companion RBC O’Shaughnessy U.S. Value Fund to 15%. The Growth Fund has given us very good returns but prices of U.S. small-cap stocks have had a great run and the emphasis now appears to be shifting to large-cap issues, which are better represented by the Value Fund. All else remains the same.

Bottom line : Stocks are looking rocky as we go into the summer. Aggressive investors should therefore be prepared to see lower returns over the next six months. The Balanced and Safety Portfolios may outperform at this stage as bond markets rally.

National and HSBC don’t rank with the Big Five but they offer some funds that are worth a look.

They’re not up there with the heavyweights – the Big Five that dominate Canada ’s banking sector: Royal, TD, CIBC, Bank of Montreal, and Scotiabank. Those big boys also wield a lot of clout in the mutual fund sector with almost $200 billion in assets under management among them.

By comparison, National Bank and HSBC are pipsqueaks. But they are pipsqueaks with thousands of clients and each offers a comprehensive line of mutual funds. So this month we turn our attention from the major players to two of Canada ’s smaller banks to see what they have to offer investors.

Montreal-based National Bank of Canada is not one of the country’s Big Five but it is a significant force nonetheless with assets of more than $110 billion and a network of about 500 branches across Canada and in Florida . The company offers a broad range of no-load mutual funds and also owns the Altamira funds, most of which are run by subsidiary Natcan Investment Management.

In general, we rate the bank’s fund line-up as mediocre – there are too many entries that are consistently third and fourth-quartile performers for our taste. However, a few funds do stand out from the pack. Here they are:

National Bank European Small Capitalization Fund . This is one of the most successful international small-cap funds you'll find right now and it has the added advantage of being no-load. The Natcan management team has very skilfully combed the European small and mid-cap market for high-performance stocks and the performance results speak for themselves. Over the three years to April 30, the fund gained an annual average of 26.8%, well ahead of the 18.2% average for the European Equity category. The latest one-year gain was a healthy 26.2% although the fund ran into a rough patch in May which doesn't yet show up in the statistics. The portfolio is well-diversified by sector, with financials and industrials leading the way. We have one caveat, however: the risk here is higher than normal for a European fund and we are concerned that European markets may be in a correction mode. So if you are interested in acquiring this fund, we advise building your position gradually over time. Rating: $$$.

National Bank Mortgage Fund . This is one of the best choices in National Bank’s line-up. Returns are above average over all time periods, with a three-year average annual gain of 4.1% to April 30, well above the category average of 2.7%. Longer-term results out to 10 years are also above average. Plus, the safety record is unblemished. This fund has never gone through a calendar year with a loss, and shorter-term volatility is lower than normal for a mortgage fund. Distributions are paid monthly and totalled about 40¢ a unit for the 12 months to May 25. The minimum initial investment is $500 and there are no sales commissions. This is a worthwhile option if you’re looking for a mortgage fund, but don’t expect it to make you rich in these times of still-low interest rates. What you'll get is safety plus a decent return, which for many people is a perfect combination. Rating: $$$$.

National Bank Quebec Growth Fund . We normally aren’t fans of regional funds, but this one has done quite well for its investors although it experienced a very weak year in 2005 when it gained just 1.6%. The fund’s mandate is to invest in companies that have their head office in Quebec or which do a substantial part of their business there. Current top holdings include a few familiar names, like Jean Coutu Group, but most of the companies will be unfamiliar to investors who live outside the province, such as Logibec Groupe Informatique. There are now about a half-dozen Quebec funds available to investors. This one has the best three-year record, with an average annual gain of 24.8%. That's actually better than the average for the Canadian Equity (Pure) category for the same period, even though Quebec has no oil industry to boost returns. Risk is slightly below average despite the fund's regional nature. Rating: $$$.

Also worth noting: National Bank Monthly Income Fund. This fund hasn’t been in existence long enough to earn a formal rating but we like what we have seen so far. The portfolio offers a well-diversified mix of common and preferred shares, income trusts, and high yield bonds which combine to generate decent cash flow (55.5c per unit in the 12 months to May 25). Performance has been well above average with a one-year gain of 19% to April 30. National Bank customers who want good cash flow with moderate risk should certainly add this one to their portfolios.

HSBC has expanded from its west coast base in recent years and now has branches in all provinces except Prince Edward Island . It is not present in any of the Territories.

The company offers a modest line-up of no-load funds as well as several funds in a new Advisor series that are available on a load basis. You won’t find much that’s exciting here but neither will you encounter any disasters. HSBC funds take a middle-of-the-road approach with few surprises. Clients of the bank can build a respectable portfolio with them but HSBC does not offer the range and performance of its larger competitors.

HSBC AsiaPacific Fund . This fund invests throughout the Far East and Australia . The portfolio is well diversified geographically, however it is heavily weighted (about one-third) towards the financial services sector. Returns over one, three, and five years are all above average for the Pacific Rim Equity category, with the three-year average annual compound rate of return standing at 25.1% as of April 30. There are better Asia funds available but this one isn't bad. The risk level is on the high side. Rating: $$$

HSBC Canadian Bond Fund. This is a very serviceable bond fund – nothing flashy but dependable. The portfolio used to favour government bonds but is now made up of 37.3% federal bonds, 36.2% corporate issues, and 20.5% mortgage-back securities, with the rest in cash. This provides a low-risk mix and the fund's performance reflects that – it has not lost money over a calendar year since 1999. Performance has been better than average over all time periods, even in the 12 months to April 30 when it gained just 1.6% as higher interest rates cut into returns. Average annual compound rate of return for the last five years was 5.7%, making this a very decent performer. One big plus is the monthly distribution policy which provides good cash flow for income-oriented investors. That makes this fund an especially good choice for a RRIF. It would also be a comfortable fit for an RRSP. Rating: $$$.

HSBC Mortgage Fund . This fund offers relatively low risk and decent returns in a low-paying fund category. Average annual compound rate of return for the five years to April 30 was 3.6%, just slightly above par for the peer group. However, the latest one-year return at 1.6% and three-year average annual return of 2.9% were quite a bit above average. Cash flow is excellent with distributions paid monthly. That makes this a useful fund to hold in the income section of an RRSP or RRIF, as long as you don’t expect big profits from it. Rating: $$$.

One fund that intrigues us is the relatively new HSBC Chinese Equity Fund. Its primary mandate is to invest in companies listed on a Chinese exchange or in Hong Kong although it may also hold companies “ that have a significant business or investment link with China ”. The fund does not have a three-year track record so we have not yet given it a rating. However, it has been performing very well recently with a gain of 31.9% in the last six months. Investors who can handle the risk involved and who are interested in increasing their exposure to Chinese securities may want to look at it. HSBC is well-connected in the region (the initials stand for Hongkong and Shanghai Banking Corporation). The company, which was founded in 1865, is based in London and maintains 693 offices in the Asia-Pacific region.

Bottom line : The Big Five offer more choice and better quality mutual funds, especially Royal’s RBC line and TD Funds. However, you can build decent portfolios using either National Bank or HSBC and each offers a few genuine star performers.

Q – I was wondering if you still recommend Dynamic Focus Plus Diversified Income Trust Fund, now that Ned Goodman is leaving the fund. Do you feel Oscar Belaiche can run the fund on his own, or should I sell this fund? Your Buildingwealth.ca website has helped my portfolio generate positive returns.

A – Oscar Belaiche is regarded as one of the rising stars at Dynamic and in fact he has been responsible for the day-to-day management of this fund from the outset. I expect there will be no change in the fund’s strategy and we continue to recommend it. – G.P.

Q –With my non-registered accounts, I have been able to shift the cash portion to higher interest holdings. However, the cash in our RRSP accounts has less flexibility and we cannot divert it to the likes of ING et al. What do you recommend for large cash positions within a registered account? Thanks for the great articles you write. – A.G.M.

A – Try Altamira Cash Performer, which you should be able to acquire for your RRSP (I have it in my RRIF). See last month’s MFU for more details. – G.P.

The Bissett Income Fund has reopened for new investments. Franklin Templeton, which owns the Bissett funds, made the announcement on May 29, just as we were about to go to press with this issue.

We originally recommended the fund to Mutual Funds Update readers on Nov. 9, 2002 in a Special Bulletin sent three weeks before it was capped. Since that time, the fund has performed well, although it is not one of the leaders in the Canadian Income Trusts category with a three-year average annual compound rate of return of 20.8%. We like the style of manager Leslie Lundquist and are reinstating our Buy recommendation for the fund.

Manager Brad Bondy employs a variety of techniques in choosing securities for this bond fund including interest rate anticipation, yield curve trading, sector rotation, and foreign exchange rate anticipation, all the while ensuring that the issuing corporations meet the fund's standards for socially-responsible investing. Perhaps it's too much for one person to be juggling but whatever the reason this fund has been an indifferent performer. The one-year return to April 30 was only 0.46%, more than a full percentage point below the category average, and results for longer periods are also sub-par. A relatively high MER of 1.99% doesn't help.

This fund got off to a very bad start, losing more than 20% in 2002, its first full calendar year. That helps to explain why the longer-term numbers are sub-par. It has looked better recently under the guidance of a team from Thornburg Investment Management of Santa Fe, New Mexico. The fund focuses on large-cap growth stocks and the managers can invest around the world outside the U.S. , although there is a 20% cap on emerging markets holdings. Like all Meritas funds, this one follows socially-responsible guidelines but with a difference – Mennonite principles are the main force which means there is a strong emphasis on human rights, responsible behaviour, charitable giving, and the environment. From a geographical perspective, Europe and the U.K. account for about half the assets with Japan and the Pacific Rim representing close to 30%. The fund gained 17.8% in the 12 months to April 30, almost bang on the category average.

This is an index fund with a difference. Its benchmark is the Jantzi Social Index which tracks the performance of selected Canadian companies that meet certain standards of social responsibility. Top holdings include all the major banks, several of the big energy companies, Sun Life, CN Rail, BCE, and Brookfield . Although the performance has been slightly below the category average, it has nonetheless been rewarding for investors with a three-year average annual compound rate of return of 20.8% to April 30. If you are looking for a socially-responsible equity fund for your portfolio, this is a decent choice.

This fund has been a disappointment right from the start. Since its launch in 2001, it has never made a profit over a calendar year. In an effort to turn things around, Meritas decided last fall to bring in a new management team, Christopher Davis and Kenneth Feinberg of Davis Selected Advisors, a money management firm with offices in New York and Tucson . The change-over took effect on Jan. 1 and shortly after Morningstar named the company Domestic Manager of the Year in the U.S. Their strategy is to seek out undervalued mid to large-cap stocks. We are giving the fund a $ rating for now but we will be quick to upgrade it when we see improvement.

Mutual Funds Update
Editor and Publisher: Gordon Pape
Circulation Director: Kim Pape-Green
Customer Service: Katya Schmied, Laur Corner

All rights reserved. Reproduction in whole or in part without written permission is prohibited. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers and distributors of Mutual Funds Update assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. Contributors to the MFU and/or their companies or members of their families may hold and trade positions in securities mentioned in this newsletter. No compensation for recommending particular securities or financial advisors is solicited or accepted.

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In this issue:

What's New

Triple-digit swings have become the norm on the TSX and fund investors are seeing the effect on their valuations. How can you get off the roller-coaster?

10%

10%

10%

10%

10%

10%

15%

10%

National and HSBC don’t rank with the Big Five but they offer some funds that are worth a look.