Volume 14, Number 12
December, 2008
Single Issue $15.00
{} CHINA FUNDS. Several readers have written to ask about the performance of China funds in general and Excel China Fund in particular. I'm not surprised. The Canadian and U.S. stock markets have been bad but China's has been horrendous. It's as if a pin were stuck in China's balloon as soon as the Olympics ended and it has been deflating ever since.
Over the past 12 months, almost every mutual fund that invests in China and related markets such as Taiwan and Hong Kong is down more than 50%. Excel China has been the worst of the group, with a loss of 61.2% (year to Oct. 31). It's no wonder that investors in this and other China funds are wondering whether to hold on or bail out. The answer depends on whether you are a short or long-term investor.
No one doubts that China is on the way to becoming an economic superpower. But there are always bumps in the road of economic ascendancy and the country has hit a big one. It seems unlikely China will slip into recession but a dramatic slowdown in the growth rate is almost as bad. So in the short term, there may be more downside in Chinese-related stocks. When the world economy recovers - and no one knows when that will be - China will be back at the forefront of growth and its stocks will soar. But at this point, owning units in any China fund is a risky proposition. If you are already in such a fund, you may want to grit your teeth and hang on. But I would not recommend buying more until the world economic situation stabilizes.
As for Excel China specifically, investors need to understand the basic strategy. Whereas most China funds hold the bulk of their assets in large-cap securities listed on the Hong Kong Exchange, the Excel managers take a different approach. The Hamon Investment Group (which handles 90% of the portfolio) focuses on small to mid-cap stocks listed on mainland China exchanges. As a result, the fund has large holdings in China B shares. These are shares in companies incorporated in China that are traded in the Shanghai and Shenzhen markets.
Those exchanges were especially hard-hit this year and the damage was compounded by the fund's exposure to the Taiwan market, which also experienced a sharp decline. So by its nature, this fund will tend to be more volatile than China funds that are more oriented to Hong Kong. That means it may have more upside potential but there is also more downside risk. You have to decide if you're willing to live with that.
{} 2009 PRICES. Effective Jan. 1, the annual membership fee for Mutual Funds Update will increase by 2.9%, to $69.95, plus tax. This increase will partially offset increased costs for software and hardware upgrades, delivery services, and a range of other expenses. The two-year rate will move to $129.90 plus tax.
Regardless of expiry dates, members can lock in the current rate by renewing before Jan. 1. This can be done on-line at www.buildingwealth.ca/Renew/Main.cfm or by calling Customer Service toll-free at 1-888-287-8229.
{} TFSA WEBSITE. Initial demand for the new Tax-Free Savings Accounts (TFSAs) is surprising even financial professionals, especially in light of current economic conditions. Although TFSAs cannot be officially set up until Jan. 1, banks are reporting big advance sign-ups. In an article in Tuesday's Globe and Mail, personal finance columnist Rob Carrick said that ING Direct has already received almost 170,000 requests to open plans and quoted the president of ING Canada, Peter Aceto, as saying the company is "a little bit surprised by the overwhelming response".
However, judging by the TFSA questions that are pouring in to our Q&A box, it appears that many people are still unclear about how exactly these accounts work and how to use them to best advantage. That inspired us to create a new website specifically devoted to TFSAs, which can be found at www.TFSAbook.com.
The website offers a variety of free information including excerpts from my new TFSA book, TFSA questions and answers, news about TFSAs, links to other useful sites, and more. You can also pre-order my book, which will be published by Penguin Canada in January. The title is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich and it's available on the site at 27% off the suggested retail price.
{} QUIZMAS TIME. Readers who celebrate Christmas can add some fun to the holidays with my Quizmas series of books, which are on sale again this holiday season. The books are co-authored with my daughter Deborah Kerbel.
The original Quizmas book offers a collection of more than 700 multiple-choice holiday trivia questions. There are brain teasers for both children and adults so the whole family can play together.
In Family Quizmas we retell seven classic Christmas stories for reading to young children, such as A Christmas Carol, The Nutcracker, and our own version of the tale of the Three Kings. The final book of the trilogy is Quizmas Carols, which contains more than 400 carol-themed questions plus 40 fascinating background stories about the origins of our holiday season music.
All the books are available at discounts to suggested retail prices at our Best Books page at http://astore.amazon.ca/buildicaquizm-20
You're also invited to visit the Quizmas website at www.quizmas.net
And with that, best wishes to all for the holiday season. - Gordon Pape
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No one is going to be sorry to see 2008 ushered out the door at the stroke of midnight on New Year's Eve. It has been a miserable year for investors and unless all your money was in cash or bonds, you've probably suffered some losses, perhaps serious ones.
If so, we have some tips that could ease the sting a bit. There are several tax strategies that may enable you to recover some of your losses or escape paying tax unnecessarily. But you have to act quickly to take advantage of these opportunities. When the clock runs out on 2008, these tax breaks will turn into pumpkins. And in some cases, you need to move much sooner than that.
Here are four suggestions. See if any apply to your personal situation.
Avoid distribution taxes. In the November issue, we wrote about the possibility of being taxed on fund distributions even though the units have lost value during the year. This happens when a fund manager realizes capital gains by selling assets from the portfolio. Because most mutual funds are set up as trusts, net capital gains must be paid out to unitholders before year-end and these payments are taxable when received in non-registered accounts.
The primary concern is equity funds where managers have taken profits on some stocks during the year or have been forced to sell to raise cash for redemptions. If the amount of the resulting distribution is only a few pennies, it may not create a serious tax problem. But if the payout is a large one, the resulting tax bill may come as a shock to investors already reeling from their losses.
Some fund companies have given advance indication of the amounts they expect to distribute in December. These are not final figures but they won't be far off the mark.
Phillips, Hager & North calculates that investors in the PH&N Dividend Income Fund are looking at a cash payout of $1.89 a unit, of which 78c will be treated as capital gains for tax purposes while the rest is fully taxable. Anyone holding the PH&N Canadian Equity Fund will get $1.44 a unit, all of which will be taxable at their marginal rate.
This means that if you hold 1,000 units of the Dividend Income Fund, you'll receive a cheque for $1,890 (or an equivalent amount of new units if you have a reinvestment plan). Either way, that amount must be declared on your 2008 income tax return if the units are in a non-registered account. As of the end of November, the fund was down 29.4% year-to-date so it's understandable that investors won't be happy about paying tax on top of that.
Investors in the Canadian Equity Fund will get $1,440 for every thousand units, with the entire amount fully taxable. The fund was down 32.8% in the first 11 months of this year.
You should also be careful if you own any units of the PH&N Overseas Equity Fund. The payout itself isn't large: just 30c per unit, all fully taxable. But it represents 3.75% of the fund's net asset value, which was $7.99 a unit at the end of November.
You can eliminate the tax hit by temporarily switching out of a fund that is about to declare a big distribution and parking the cash in a money market fund. Once the distributions have been declared, you can buy back into the original fund if you wish.
However, this manoeuvre will trigger a capital gain or loss. Check the consequences before you place a sell order; if you have held the units for a long time you could end up with a taxable capital gain that would far exceed the amount of the distribution. For example, despite the recent losses the PH&N Dividend Income Fund showed a 10-year average annual compound rate of return of 8.35% to the end of October. Anyone who has been in for that long should not sell now just to avoid the taxable distribution. If you were planning to sell anyway, that's another story, of course.
Also, remember that if a sale creates a capital loss, you cannot buy back the units for 30 days.
We do not have a comprehensive list of all fund distributions but here are a few examples of anticipated large payouts. It's important to note that the amount of the payment may vary considerably among different units of the same fund so check with your financial advisor or the fund company.
AGF Canadian Balanced Fund: $1.35 per unit, all capital gains.
Brandes Emerging Markets Equity Fund: 87c (A units), $1.14 (F units), $1.59 (L units), $1.62 (M units).
Fidelity Global Financial Services Fund: 66c (A units), 68c (B units), 83c (F units).
Fidelity Canadian Asset Allocation Fund: 19c (A units), 23c (B units), 43c (F units).
GGOF Canadian Equity Fund: 69c (Mutual units)
Manulife Dividend Fund: 75c (A units), 80c (F units)
TD Canadian Equity Fund: 58c (A units), 56c (F units), $2.67 (I units).
TD U.S. Large Cap Value Fund: 33c (A units), 19c (F units), 30c (I units).
Although all the distributions will be paid before year-end, each company has its own date. For example, Fidelity's payments will be made to everyone who holds units as of the close of business on Dec. 18.
You do not lose any money by selling before the distributions. Once a payment is made the fund's NAV drops by a corresponding amount. So if a distribution of $1 per unit is declared and the fund's NAV is $10 at that point, it will drop to $9 once the payment is made. Your total stake is still $10 only now $1 is in taxable cash.
As you can see, there is much to consider when implementing this strategy and if a lot of money is involved you should talk to a financial advisor and/or a tax practitioner first.
Tax-loss selling. If you sold any funds at a profit before the markets crashed or had to pay capital gains taxes in any of the past three years, you might want to consider taking some losses before year-end. Capital losses can be used to offset capital gains so if you're planning on making some portfolio changes you should act now rather than waiting for January.
Tax-loss selling provides a great opportunity for portfolio rebalancing. For example, suppose you currently have an asset mix that is 60% in equity funds and 40% in bonds/cash. You don't like the prospects for 2009 so you want to reduce your stock market exposure. Go through your list of equity funds and see which ones are showing a market value that is less than book value. These offer a tax break so they should be at the top of your sell list. Remember you cannot repurchase them for 30 days after the sale or you lose the taxable loss.
Don't make the mistake of contributing losing funds to an RRSP. If you do, any capital loss will be disallowed. Sell the fund units first and contribute cash.
Get ready for TFSAs. If you do any tax-loss selling, don't rush to reinvest your cash. Keep some in reserve and open a Tax-Free Savings Account (TFSA) when they come into effect in January. The contribution limit is $5,000 per person annually so a couple can shelter up to $10,000 in 2009. All investment income earned within a TFSA is tax-free and no tax is assessed on withdrawals.
You are allowed to make contributions-in-kind to TFSAs in the same way as RRSPs, so having cash is not a prerequisite. However, it provides more flexibility in deciding what type of plan to open and where to invest the money.
Adjust December RRIF withdrawals. In his ill-fated economic statement of Nov. 27, Finance Minister Jim Flaherty announced that mandatory RRIF withdrawals will be reduced by 25% for 2008 only. A notice of ways and means to implement the measure, along with other budget-related provisions, was introduced in the House of Commons the next day. Given the machinations taking place in Ottawa right now, there is no way of knowing whether that bill will actually pass however it has been customary for the Canada Revenue Agency to apply new tax policies as soon as they are announced.
Many people delay their mandatory RRIF withdrawals until year-end. If you have a payment due in December and don't need the money immediately, instruct the financial institution that administers your RRIF to adjust the payment so as to take advantage of the new policy. For example, if you receive a single payment each year, have the amount reduced by 25%. If you get four equal payments annually, you can eliminate the December payment entirely.
Even if you need the cash, consider delaying the payment until January. That way, the income will be taxable in the 2009 tax year, meaning full payment won't be required until April 30, 2010. If your marginal tax rate is higher than the withholding tax rate applied to your payment, you'll have the use of that extra cash for 16 months.
The Bottom Line: Tax savings will only recover a small percentage of your losses but it's better to get something back if you can.
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The big problem with exchange-traded funds (ETFs) is that when their benchmark index collapses, so do they. Unlike actively-managed funds, which can retreat to cash if the manager believes it to be appropriate, ETFs must stay fully invested no matter what. So it should come as no surprise that the equity ETFs on our Recommended List are looking rather sick these days.
There really isn't much that dedicated ETF investors can do about this except to suck it up and wait. Exchange-traded funds were devised as a simple and easy way to invest in stocks without the hassle and expense of trading individual securities. They are classic buy-and-hold funds and the rationale for their existence is based on the assumption that stock markets will always rise over time. You can certainly dispute the veracity of that belief; a look at the chart of the Dow Jones Industrial Average reveals that it is at about the same level now as in 1997-98. So is the TSX, despite the boom in commodity prices that ended during the summer.
But true ETF believers dismiss this as an aberration, pointing out that even at the current depressed levels the S&P/TSX Composite Index is still double where it was 20 years ago. Be patient, they counsel.
Of course, patience is not easy when the value of a portfolio is being eaten away daily. So let's take a closer look at how the ETFs on our Recommended List have been performing. Results are to Oct. 31.
iShares CDN Bond Index Fund (TSX: XBB). This fund tracks the performance of the DEX Universe Bond Index, which includes a broad range of Canadian government and corporate bonds. Somewhat surprisingly, it lost a little ground (1.6%) in the six months to Oct. 31 as the spreads between corporate bonds and government bonds widened, driving down the price of corporate issues. We aren't particularly concerned by this as we believe the fund will more than recover this small loss as spreads gradually return to normal. We still rate this ETF as a Buy.
iShares CDN Composite Index Fund (TSX: XIC). This fund was hammered in the past six months, dropping 28.8%. But believe it or not, that result slightly better than average for the Canadian Equity category. We don't recommend adding new units at this time. The rating moves to Hold.
iShares CDN S&P 500 Index Fund (TSX: XSP). Over the past six months, the returns from this fund have been so bad that no one wants to look at them. The fund lost 32.6% for the period but it wasn't all the fault of the stock market. The fund is hedged back into Canadian dollars which means that when the loonie dropped suddenly, investors took a double hit: a currency exchange loss on top of the stock market drop. This is an example of why hedging is a double-edged sword; the unhedged U.S. equivalent of this fund fell 29.3% in the same period. That's not great either but it is more than three percentage points better.
iShares CDN MSCI EAFE Index Fund (TSX: XIN). We saw a similar situation with this fund: stock market losses compounded by currency losses because of the hedging back to the Canadian dollar. The decline of 33.3% over the past six months is pretty hard to take but it is about average for the category as a whole. The fund is a Hold.
iShares CDN Short Bond Index Fund (TSX: XSB). This is the safest ETF on our list. Not only does it protect your capital but it actually made a decent profit of 6.3% over the 12 months to Oct. 31. You can't ask for better than that in times like these. It is still a Strong Buy.
Diversified Preferred Share Trust (TSX: DPS.UN). This supposedly low-risk closed-end fund keeps falling in price and readers, quite rightly, wonder why. Blame it on the credit crunch and the impact it has had on the major banks. Financial institutions are strengthening their balance sheets and one of the ways to do that is by raising what is known as Tier 1 capital. (Tier 1 is essentially a total of retained earnings plus common shares plus non-cumulative preferred shares expressed as a ratio to risk weighted assets. In effect, it's the hard core equity shown as a percentage of the bank's assets.)
Preferred shares are being used increasingly to raise Tier 1 capital because they don't dilute common equity. In order to attract investors at a time like this, dividend rates on new issues keep ratcheting higher. Last week, for example, Royal Bank closed a new issue of preferreds at 6.25% and Bank of Montreal came out with an offering that pays 6.5%. Every time this happens, it drives down the market value of older preferreds that pay lower dividends.
It may seem counter-intuitive for preferred share dividends to be rising at a time when interest rates are falling but we are living in strange times. As long as this pattern continues, the market price of this fund will come under pressure.
At the recent price of $14.25, the shares yield 8.4% based on a quarterly distribution of 30c a share. That looks good on the surface but since none of the preferreds in the portfolio has a yield that high, it means that some of the payment amounts to a return of capital, which will further erode the net asset value and, by extension, the share price.
In these circumstances, we are recommending investors sell their positions now. Assuming the shares are held in a non-registered account (which they should be so as to benefit from the dividend tax credit), selling before year-end will create a capital loss which can be applied against any gains you have booked in 2008 or paid tax on within the past three years. You may wish to use the proceeds from the sale to invest directly in one of the attractive new issues of bank preferreds.
Claymore CDN Dividend and Income Achievers ETF (TSX: CDZ). This fund has been hurt by its top-heavy weighting in financial stocks (slightly more than half the portfolio). The financial sector will eventually recover and in fact it made a big move up last week. The fund pays a monthly distribution of 7.35c per share (88.2c a year) for a yield of 6.4% based on the Nov. 28 closing price of $13.82. The fund's net asset value per share is $1 higher than the market price and that gap should narrow over time. Hold current positions.
Here is the MFU ETF Recommended List quarterly summary.
MFU ETF/CLOSED END FUND RECOMMENDED LIST
| FUND | FIRST |
RESULTS (to Oct. 31) |
COMMENTS |
ACTION |
| Exchange-Traded Funds (ETFs) | ||||
| Claymore Dividend & Income(CDZ) | Sept/08 |
- 30.9% (3 mo.) |
Hurt by financials |
Hold |
| iShares CDN Bond Index (XBB) | Dec/07 |
- 1.6% (6 mo) |
Slight hiccup |
Buy |
| iShares CDN Composite Index (XIC) | Dec/07 |
- 28.8% (6 mo) |
Better than average! |
Hold |
| iShares CDN S&P 500 Index (XSP) | Dec/07 |
- 32.6% (6 mo) |
U.S. stocks weak |
Hold |
| iShares CDN MSCI EAFE Index (XIN) | Dec/07 |
- 33.3% (6 mo) |
Painful |
Hold |
| iShares CDN Short Bond Index (XSB) | Aug/04 |
+ 4.3% (3 yr) |
Load up on this one |
STRONG BUY |
| Diversified Preferred Share Trust (DPS.UN) | Jan/04 |
- 7.3% (3 yr) |
New bank issues hurt |
SELL |
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It's time for a fresh look at the MFU Passive ETF Portfolio. This was originally set up in December 2007 as a "couch potato" approach to ETF investing. It is suitable for those with long time horizons who are prepared to ride out bear markets. The key to success with portfolios like this is staying the course through good times and bad. The whole philosophy of couch potato investing is defeated if an investor attempts to trade in and out of the securities.
The portfolio is made up of four iShares funds as follows:
Bond Index Fund (XBB): 40%
Composite Index Fund (XIC): 30%
S&P 500 Fund (XSP): 15%
MSCI EAFE Fund (XIN): 15%
The initial portfolio value was $10,024.68 (due to rounding to eliminate fractional shares) and tracking began on Jan. 1, 2008. Here is the latest report, with results to the close of trading on Nov. 28.
| Fund | Shares |
Weight |
Book |
Market |
Cash |
Return |
|
|
|
|
|
|
|
XBB |
140 |
40% |
$4,019.40 |
$3,995.60 |
$140.00 |
+2.9% |
XIC |
140 |
30% |
$3,015.30 |
$2,027.20 |
$55.05 |
-30.9% |
XSP |
82 |
15% |
$1,489.94 |
$902.00 |
$10.36 |
-38.8% |
XIN |
55 |
15% |
$1,500.40 |
$888.25 |
$19.25 |
-39.5% |
Totals |
|
100% |
$10,024.68 |
$7,813.05 |
$224.66 |
-19.8% |
Comments: Well, it could be worse! The 40% bond weighting in the portfolio cushioned the blow of the stock market plunge. As a result, the portfolio as a whole is down about 20% in its first 11 months, which is a better return than the major stock indexes have produced. Looking ahead, stock market losses should moderate in 2009 while we expect bonds to have a good year.
The Bottom Line: The results so far reflect the inherent weakness in the couch potato approach: there is no place to hide in bad markets. This type of investing is based on the assumption that the long-term trend of stocks is up, which is why anyone using this model must plan to stay in for the duration.
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Ex-Trimark heavyweights reunite
to offer five new investment choices.
Earlier this year, some of AIM Trimark's (now Invesco Trimark) key managers bolted the firm and joined forces with Bob Krembil, one of the co-founders of the original Trimark Funds. They created a company called EdgePoint Investment Group and since then investors have been waiting to see what type of products they would be offering. Now we know.
Last month, EdgePoint unveiled five new investment options for people to consider: one exchange-traded closed-end fund and four mutual funds. Now the big question is whether to buy into any of them during a time of economic turmoil.
The closed-end fund, known as Cymbria Corporation, was the first out of the gate. On Nov. 4, EdgePoint completed an initial public offering (IPO) for Cymbria shares that raised an astounding $234 million at a time when new IPOs are almost non-existent. That tells you a lot about the respect the market has for EdgePoint's principals, which include money managers Geoff MacDonald and Tye Bousada and fund company executive Patrick Farmer.
Cymbria is unlike any other closed-end fund we've seen in Canada. Its main asset is a 22% stake in EdgePoint which gives investors an opportunity to participate in the success (or, more unlikely, the failure) of the management company. The balance of the fund will be invested in 25 top companies from around the world. As of Nov. 21, the company reported that 74% of the cash in the fund had been invested with the balance expected to be deployed by the end of next week.
Cymbria trades on the Toronto Stock Exchange under the symbol CYB. The shares were originally issued at $10 and were trading at exactly that price as of mid-day Tuesday, Dec. 2. However, according to the EdgePoint website the net asset value of the units as of the close of trading on Dec. 1 was only $8.59, meaning that the market is ascribing a premium of 16.4% to the shares. This looks excessive in the context of the current situation so we recommend deferring any Cymbria purchases until the spread between the NAV and the market price narrows considerably.
The mutual funds, of course, are bought and sold at NAV so they represent better value for investors who want to put some money into the hands of EdgePoint's team. We expect that, over time, these funds will perform well for two reasons: the company's proven managerial talent and the once-in-a-lifetime timing advantage they enjoy because stocks are currently the cheapest they have been in a decade. Here is a summary of the four funds, all of which are now operational. In all cases, the initial unit value was $10.
EdgePoint Canadian Portfolio. This fund invests mainly in Canadian stocks although up to 10% of the assets may be in foreign securities. It is an all-cap fund and will hold about 35 positions. It is run by MacDonald and Bousada - in fact, they are listed as the managers for all four funds. NAV as of Dec. 1: $9.65.
EdgePoint Canadian Growth and Income Portfolio. This is a balanced fund that invests primarily in Canadian stocks and fixed-income securities, with a small foreign component. The initial asset mix is about 70% equities to 30% fixed-income, reflecting what the managers see as extraordinary opportunities in the stock market. That ratio may change over time but the fund will never become heavily overweighted in one asset class. Distributions will be made quarterly but there is no target for the amounts to be paid out so income-oriented investors may want to wait for a clearer picture on that score before signing on.
One intriguing aspect about this fund is that MacDonald and Bousada are both regarded as equity experts, without a lot of fixed-income experience. EdgePoint does have a fixed-income expert, Patrick Farmer, as its chairman of the board but he will not be involved in day-to-day securities selection. Company spokesman Geoff Goss said that the fixed-income side of this fund (and the companion Global Growth and Income Portfolio) will consist of investment-grade corporate bonds which will be held to maturity. Apparently, there will be no active bond trading so the fixed-income portfolio of the fund will be passive in nature. NAV as of Dec. 1: $9.66.
EdgePoint Global Portfolio. As the name implies, this fund will invest in stocks from around the world. There are no targets for geographic distribution. The fund will hold approximately 25 positions, which have already been purchased. The names of the stocks had not been announced at the time of writing but Goss said they would be posted on the company's website within a few days. The link is www.edgepointwealth.com. NAV as of Dec. 1: $10.13.
EdgePoint Global Growth and Income Portfolio. This is the global equivalent of the Canadian Growth and Income Portfolio and will be managed in much the same way. NAV as of Dec. 1: $9.76.
The Bottom Line: EdgePoint has a strong core of managers although only two, MacDonald and Bousada, are actively involved in securities selection. Bob Krembil is a major shareholder in the company but is not directly involved in operations or portfolio management. Patrick Farmer looks after the business side but also is not involved in the portfolio management.
While we have great respect for Bousada and MacDonald, we wonder if they have taken on too much. Between them, they must select both Canadian and international stocks for the portfolios as well as oversee the fixed-income side. We'll wait to see how the funds progress before making any formal recommendations.
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We answer queries about labour funds, PH&N Vintage Fund, and monthly income funds.
Labour-sponsored funds
Q - Many of your 'long time' subscribers might appreciate you commenting on labour sponsored funds as eight years has now past. - Alan H.
A - Obviously, the performance of the labour funds has been pretty bad. They showed a great deal of promise at the beginning but a combination of indifferent management in some cases, a narrow mandate, and bad markets has resulted in the significant losses, especially in recent years. However, many investors may still be ahead of the game thanks to the generous tax breaks they received at the time of purchase.
Not all of these funds are losers. The Covington Strategic Capital Funds both have three-year average annual gains in excess of 14%. Among funds that have been around longer, there are three that are marginally in the black over 10 years: the Dynamic Venture Opportunity Fund, the Quebec Solidarity Fund and the Working Opportunity Balanced Fund, Series 1. But these are exceptions on what is otherwise a bleak board.
The reader's eight-year reference is the holding period required after one of these funds is purchased. If they are sold before that time, all tax credits must be repaid. Generally, I advise selling any units in these funds as soon as the holding period is over. The exception would be some of the Covington funds, which are performing extremely well. - G.P.
Vintage Fund
Q - What gives with the Phillips, Hager & North Vintage Fund? A few months ago I redirected some of my PH&N holdings to it after it was re-opened to investors. Much to my dismay, the bottom has fallen out of this fund after so many years of success. - Bob T.
A - I've also been very disappointed with the performance of this fund, so I asked Chris Dotson, vice-president of PH&N, to respond to this question. Here is an edited version of his reply:
"The Vintage Fund is PH&N's most aggressive Canadian equity fund - a fact we emphasized when we re-opened the fund in June 2008. At that time, the fund had come through a period of quite strong returns (Series A units returned 22.6% on an annualized basis for the two-year period ending June 30, compared to a 14.5% return for the S&P/TSX Composite Index). Unfortunately, since June it has declined alongside the broader market - and, in fact, to a greater degree than the S&P/TSX.
"It is important to recognize that the Vintage Fund has always differed from PH&N's 'core' Canadian equity funds in important ways. For example, the investment strategies state that it may emphasize small-capitalization securities and that a larger portion of the fund may be invested in non-Canadian securities. The fund targets long-term capital growth and dividend income rather than short-term returns.
"It is not to be unexpected that portfolio like the Vintage Fund - which is more concentrated and contains some smaller-capitalization stocks - may have higher volatility than a broadly diversified fund or index. This can result in periods of stark underperformance and other periods of strong outperformance relative to the market. A main driver of the fund's performance over the past few months has been the collapse of energy and materials stocks, which have fallen out of favour amid fears of a global economic slowdown. This has been a function of the investment climate more than a reflection of the Vintage Fund's investment philosophy.
"There is no denying that the fund's recent performance has been disappointing. However, we believe that the fund is now well positioned to benefit as credit spreads normalize and investors regain their appetite for risk. We urge unitholders of the fund not to be discouraged by short-term results in this very unique market environment, which we expect to deliver exceptional long-term opportunities for a nimble and flexible vehicle like the Vintage Fund." - Chris Dotson
Monthly income funds
Q - What are the disadvantages of putting all our retirement money into a monthly income fund such as RBC Monthly Income, TD Monthly Income, or CIBC Monthly Income and live mainly on the distribution of these funds? Is there something wrong with this plan? - T.V.
A - RBC Monthly Income is not eligible for registered plans and since you refer to "retirement money" you may be thinking about RRSPs or RRIFs. You could use other monthly income plans in registered plans. But remember that the distributions are not guaranteed and they could be cut at any time. - G.P.
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NEWCOMER
National Bank Monthly Secure Income Fund $$$
This fund does not have a three-year track record but it is so well-suited to the current investment climate that we are rating it now. The twin goals of the management team are steady cash flow and capital preservation, which is exactly what many investors are seeking these days. About one-third of the portfolio is invested in the low-risk National Bank Mortgage Fund and a third is in cash. Another 7.2% is in the National Bank High Yield Bond Fund while the balance is in a mix of bonds and preferred shares. The fund lost 2.2% over the year to Oct. 31 which looks very good when compared with what has happened to the markets generally. Distributions are paid at a rate of about 3.4c a month so there is excellent cash flow. The MER is a reasonable 1.46% and there are no sales commissions. All-in-all, this is a good choice for conservative income-seeking investors. Debuts at $$$.
MOVING UP
Mackenzie Ivy Global Balanced Fund $ to $$$
We are impressed by the recent performance of this fund, which is managed by the very conservative Jerry Javasky and his associate Paul Musson. Astoundingly, this fund showed a one-year gain of 1% to Oct. 31 compared to an average loss of 22.4% for the peer group. The fund has a 15% cash position but over 75% of its assets are in stocks so this has not been a case of Javasky sitting on a huge mound of cash while the markets crashed and burned. Currency gains certainly helped - the fund has more than 40% of its assets in the U.S. - but the low-risk nature of the portfolio was the main factor in preserving investors' capital. Although this fund has $169 million in assets under management, it is not well-known to most investors. It would be a good choice at this time for anyone wanting to dip a toe into global markets without assuming a high level of risk. Rating moves up to $$$.
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Gordon Pape’s Mutual Funds Update is published monthly.
Copyright 2008 by Gordon Pape
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