Investors who have learned the hard way how stupendous gains can magically melt away in just a few weeks may now wonder what mutual funds might be best suited for markets that seem to be waking up cold sober after a long party accompanied by plenty of "irrational exuberance."
One place to find some answers is in the newest round of mutual fund guidebooks about to flood store shelves.
For a sneak preview of what the experts like, we asked several authors to recommend funds that this year have been elevated to their highest ratings. They each offer two picks that might well suit your portfolio in the wake of the market's turmoil.
The experts include:
Gordon Pape, author of Gordon Pape's 1999 Buyer's Guide to Mutual Funds (Prentice Hall Canada Inc.);
Riley Moynes, co-author with Michael Nairne of The Money Coach Guide to Top Funds 1999 (Addison-Wesley Longman Publishers Ltd.);
Eric Kirzner, co-author with Richard Croft of The Fundline Advisor, 1999 edition (HarperCollins Publishers Ltd.);
Duff Young, author of Duff Young's Fund Monitor 1999 (Prentice Hall Canada Inc.);
Ranga Chand, author of Chand's World of Mutual Funds, 1999 edition (Stoddart Publishing Co. Ltd.);
Stephen Kangas, co-author with Jonathan Chevreau of The Financial Post Smart Funds, 1999; A Fund Family Approach to Mutual Funds (Key Porter Books Ltd.);
Thomas Box, co-author with Mark Newsome of The Canadian Mutual Fund Bible: A Complete Guide (Macmillan Canada Ltd.); and
Gordon Stenner, co-author with William Annett of Stenner on Mutual Funds: The Complete and Authoritative Guide to Mutual Fund Investment in Canada (Harper Collins Publishers Ltd.)
Here are their fund choices:
GORDON PAPE
BPI Dividend Income Fund
Mr. Pape says his top "four-dollar-sign" ranking is "a rating I'm very stingy with. Only a handful of funds qualify each year."
One of those that's just received the promotion is the $600-million BPI Dividend Income Fund. "It's one of the few true dividend funds available, and ideal for risk-averse investors," Mr. Pape says.
With two-thirds of its portfolio in preferred shares and only one-third in common stock, it survives market downswings far better than most others in its category, which are largely invested in common shares.
The fund is also ideal for investors who are looking for income, Mr. Pape adds. Monthly distributions currently yield about 4.4 per cent annually which, thanks to the dividend tax credit, equals about 5.8 per cent in interest on an after-tax basis.
Fidelity International
Portfolio Fund
Another newcomer to Mr. Pape's winner's circle this year is the $3.5-billion Fidelity International Portfolio Fund. "If you're looking for a top-notch international fund, this one has just moved up there with the Templeton Growth Fund; in fact, it's actually outperformed Templeton in recent years," he says.
Mr. Pape says it has been impressively managed by a Fidelity team led by Richard Habermann for the past five years. The broadly diversified fund has recently been concentrating in North America and Europe, where markets have stood up better than those in other parts of the world.
"The managers have consistently produced superior returns and low volatility, even in sharp corrections," says Mr. Pape. For example, the fund's 3.9-per-cent gain for the year ended Sept. 30 puts it well ahead of the average loss of 7.2 per cent for its group.
RILEY MOYNES
Chou Associates Fund
This small, unsung fund in the U.S. equity category has made it to Mr. Moynes' "Top Funds" list because of its consistent, long-term performance and because it's also proved to be an impressive survivor in down markets, Mr. Moynes says.
"This is a little company that almost no one has heard of -- they don't spend any money on marketing -- but the fund has had terrific returns and low volatility," he says. "It's been a consistent first- or second-quartile performer for the past 11 years -- and that's a very tough record to match."
But the $11-million fund, which is invested 60 per cent in the United States and 40 per cent in Canada, may be out of bounds for many small investors because of its stiff $25,000 minimum entry fee.
"A lot of people may avoid it because of the minimum and that's a shame, because it really is an undiscovered gem," Mr. Moynes says.
C.I. Emerging Markets Fund
Emerging markets players have been hard hit of late. But even though the $199-million C.I. Emerging Markets Fund has suffered along with the rest, it still made it into the Top Funds list this year because it has long been a solid outperformer. "It's been an outstanding performer within its category," Mr. Moynes says.
The fund lost money in just two calendar years out of the past six, a period that's seen some tough years for this sector, he says. More recently, it was a first-quartile performer in 1997 and the first half of 1998.
"Presumably, every balanced portfolio should have some exposure, say, 5 per cent, to emerging markets," Mr. Moynes says. "If you don't have anything in this sector, this is probably a great time to buy, after it's been so badly kicked around."
ERIC KIRZNER
Ivy Canadian Fund
Jerry Javasky, manager of the $5-billion Ivy Canadian Fund, is an uncompromising value investor who stood his ground when markets were flying high, refusing to buy expensive stocks and keeping as much as 35 per cent in cash.
His stubborn cautiousness paid off. The fund's 2.5-per-cent loss for the year ended Sept. 30 was way below the 18.1-per-cent hit taken by the average Canadian equity fund during that period.
No wonder it has earned itself a position on Mr. Kirzner's list of "Best Bets."
"This fund is well-suited to today's uncertain climate, since it makes comfortable profits when markets rise and holds up far better than most in downturns," he says.
Altamira Bond Fund
Not a new entry, but also ranking high among Mr. Kirzner's Best Bets for the current market is the $471.4-million Altamira Bond Fund. Managed aggressively by Altamira's Robert Marcus since 1991, it's been a first- or second-quartile performer for the past four years and ranks No. 1 in its category for the past 12 months.
"Richard Croft and I have been recommending this fund since March of 1995 and we recommend it again this year for the fixed-income part of a portfolio," Mr. Kirzner says.
But he cautions that the fund has been volatile in the past. "It hasn't always been consistent. For example, it was first in its category in 1995, after being right near the bottom in 1994. But for the past four years, it's been a stellar performer."
DUFF YOUNG
Fidelity Canadian
Asset Allocation Fund
Mr. Young says the $3.1-billion Fidelity Canadian Asset Allocation fund, a new entry for his recommended list this year, is his top-rated balanced fund.
Why? Veteran Fidelity manager Dick Habermann and his team have the latitude to make wide swings in asset allocation to adapt to changing market conditions.
For example, equities could make up as little as 20 per cent or as much as 90 per cent of the fund. Right now, Mr. Young says the fund's managers are taking a relatively conservative stance, with 49 per cent in equities, 34 per cent in bonds and 17 per cent in cash.
"One of their strengths is out-of-this-world stock picking," Mr. Young says. "They actually find companies with strong growth rates that are selling at reasonable prices, but they've scored impressively on their asset allocation decisions, too."
Leith Wheeler Canadian
Equity Fund
A new addition to his small list of Canadian equity funds -- he recommends only 13 of the 292 available -- is the $9.6-million Leith Wheeler Canadian Equity Fund.
Here's another little-known fund. Leith Wheeler is primarily an institutional investment manager, but it has a small family of mutual funds that all boast low management fees and solid records.
The equity fund has consistently beaten the Toronto Stock Exchange 300 total return index over the past three years -- a record that few can match, Mr. Young says. Another plus: it has done well in both up and down markets, he adds.
But here's another case when the price of admission is pretty steep: a minimum $50,000.
Nevertheless, "we think this is a timely fund for these markets, because the manager uses a strict value approach and it should outperform if markets turn down again," Mr. Young says. "No matter what the market does, if you're looking for a solid core holding, this is a good candidate."
RANGA CHAND
Atlas Canadian
Large Cap Growth Fund
To make Mr. Chand's list of "Heavy Hitters," a fund must consistently score first- or second-quartile performance over the past one, three and five years. One new addition that makes the grade: the $540-million Atlas Canadian Large Cap Growth Fund.
The Atlas fund was a limping performer until it was taken over in 1995 by its current manager, Fred Pynn of Calgary-based Bissett & Associates Investment Management Ltd.
But since then, the fund has been a first-quartile performer every year until this past one, when it ranked in the second quartile, Mr. Chand says.
In addition to its strong performance, he likes the fund for today's erratic markets, because "it falls within the lowest 20 per cent of all Canadian equity funds in terms of risk," he says.
Standard Life Balanced
Mutual Fund
Another of his new Heavy Hitters is the $20.8-million Standard Life Balanced Mutual Fund. It's been a first- or second-quartile performer for the past four years under the management of a solid team at Standard Life Portfolio Management Ltd., a company that has produced many other heavy hitters, Mr. Chand says.
"Given the tremendous volatility recently, many investors are looking for lower risk and the risk here is below average relative to other balanced funds," he says.
With more than 50 per cent in bonds and 40 per cent in stocks, it weathered the recent market downdraft well, losing just 2.3 per cent in the year ended Sept. 30. That was well below the 6.8-per-cent average loss for the balanced fund group.
THOMAS BOX
Trimark Canadian Fund
To earn a recommendation from Thomas Box and co-author Mark Newsome, a fund must have posted superior performance for at least 10 years. "Five years isn't enough, because you don't get to see a fund under a variety of market conditions," Mr. Box contends.
With that criterion, his first choice among Canadian equity funds is the $1.8-billion Trimark Canadian Fund, a first-quartile performer over the long term, with average annual compound gains of 10 per cent over 10 years and 10.9 per cent over 15 years.
From 1995 through 1997, the fund disappointed investors, ranking in the bottom half of its category. However, in the last few months, the tide appears to be turning. For the nine months through Sept. 30, the Trimark fund lost 9.7 per cent versus a 15.2-per-cent loss for the TSE 300 total return index. In September alone, it gained 4.4 per cent -- exactly double the return of the average Canadian equity fund.
Manager Vito Maida sticks to a disciplined value-investing approach that doesn't shine in red-hot markets, Mr. Box says. "But those frothy, overpriced markets don't last forever -- we're seeing that now," he says.
"I think we'll see a reaffirmation of the fact that a consistent, disciplined approach pays off in the long term," he adds. "At these levels, the fund represents a great buying opportunity for investors."
Templeton Growth Fund
Another top choice is the $9.2-billion Templeton Growth Fund, which Mr. Box calls the ultimate in global equity funds. "It has an average annual compound return of more than 15 per cent over 40 years -- no other fund can say that."
The fund is another venerable performer that's recently lost its lustre. It fell by 11.1 per cent in the year ended Sept.30, while the average fund in its category lost 7.2 per cent.
But Mr. Box isn't discouraged. In the fund's long history, periods of underperformance have always been followed by periods of superior performance, he says. Manager Mark Holowesko is a rigorous value investor who scours the world for bargains; Mr. Box says investors should take a leaf from his book.
"Given their history and consistent approach, I have every confidence in this fund. I think this is a good opportunity for investors to buy it at a bargain price," he says.
STEPHEN KANGAS
Maxxum American Equity Fund
In making their picks, Mr. Kangas and co-author Jonathan Chevreau focus on the performance records of managers, rather than funds. It's the record of Denver-based Janus Capital Corp., which has managed the $33.6-million Maxxum American Equity Fund since its 1995 inception, that helped Maxxum become a new addition to the authors' "Smart Funds" list.
"Janus is regarded as one of the most successful mutual fund managers in the United States," Mr. Kangas says. Last year, Forbes Magazine named it the top fund company among those managing more than $25-billion (U.S.) in assets. The Maxxum fund is no slouch, either. Its 26.2-per-cent gain for the year ended Sept. 30 is miles ahead of the U.S. equity fund group's average increase of 2.4 per cent for that period. And its 27.7-per-cent average annual compound gain over two years also outpaces the group's 17.1-per-cent average.
Though he concedes that the U.S. market is pretty expensive -- the Standard & Poor's 500 index now trades at about 23 times its earnings -- Mr. Kangas still believes the U.S. market is the place to be now and for the next five years.
"At this point, I don't think we'll see huge gains there. But this is the biggest market in the world and the U.S. has the best monetary policy, the best work force and the strongest economy in the world," he says. "It's the best safe haven right now."
Scudder Global Fund
For those who want international exposure, another new Smart Fund is the $43.2-million (Canadian) Scudder Global Fund. It's just two years old, but the authors recommend it on the basis of Scudder's long-term performance record down south.
"The fund has outperformed its peers convincingly since its inception." Its 8.3-per-cent gain in the year ended Sept. 30 is way ahead of the average 7.2-per-cent loss for the international equity fund group. Its two-year average annual compound gain of 16.7 per cent also handily beats the 6-per-cent average gain for its category.
Scudder manager Nicholas Bratt uses a top-down approach, first identifying broad themes, then sectors and finally stocks in those sectors, Mr. Kangas explains. He's currently got half of his money in Europe with another 35 per cent in North America.
Mr. Bratt's management style is the opposite of bottom-up funds like the ever-popular Templeton Growth Fund. So the Scudder fund would perfectly complement any of them, Mr. Kangas adds.
GORDON STENNER
Universal World Tactical
Bond Fund
Mr. Stenner doesn't compile lists or award stars, but his book recommends favourites for 1999, two of which he believes should fit into almost any conservative portfolio.
One recommendations is the $69.2-million Universal World Tactical Bond Fund, sponsored by Toronto-based Mackenzie Financial Corp.
Some investors have forsaken the bond market, but Mr. Stenner thinks that's a mistake. He likes bond funds because he thinks the recent market move could be a "dead cat bounce" and he still sees a lot of risk in equities.
The fund, managed by John Ricciardi at Britain-based Cursitor-Eaton Asset Management, gained 29 per cent for the year ended Sept. 30 -- more than twice the 11.8-per-cent average increase for the category. That made Universal the No. 1 player in its category for the period.
It invests in high-quality bonds and keeps to large established markets, Mr. Stenner says. Its holdings are spread about equally among the United States, Britain, Japan, France and Germany.
He forecasts still lower interest rates -- and thus higher bond prices -- in North America and especially in Europe. "I'm more defensive than I have been in a long time, but I always believe that some portion of a portfolio should be kept in bonds," he says.
Fidelity European Growth Fund
For the equity portion of a portfolio, Mr. Stenner recommends the $2-billion Fidelity European Growth Fund, managed out of Britain by Fidelity's Thierry Serero.
"I do have a bias toward Europe right now, because there aren't the investment and consumption excesses that we see in North America," Mr. Stenner says.
The Fidelity fund is invested largely in France, Italy, Switzerland and Britain, and has holdings in defensive sectors such as utilities, food retailing and media stocks.
"This European fund is my favourite because it has wide diversification and the upcoming European Monetary Union should give these countries a shot in the arm," Mr. Stenner says.
BPI Dividend Income Fund
Assets ($million): $603
Compound average annual returns (to Sept. 30)
1-year: +1.9%
3-year: +14.8%
5-year: +12.7%
10-year: +9.2%
15-year: +8.6%
"It's one of the few true dividend funds available, and ideal for risk-averse investors."
******
Fidelity International Portfolio Fund
Assets ($million): $3,494
Compound average annual returns (to Sept. 30)
1-year: +3.9%
3-year: +15.6%
5-year: +12.9%
10-year: +13.7%
15-year: --
"The managers have consistently produced superior returns and low volatility, even in sharp corrections."
Chou Associates Fund
Assets ($million): $11
Compound average annual returns (to Sept. 30)
1-year: +12.6%
3-year: +25.4%
5-year: +18.4%
10-year: +15.4%
15-year: --
"This is a little company that almost no one has heard of but the fund has had terrific returns and low volatility...It really is an undiscovered gem."
******
C.I. Emerging Markets Fund
Assets ($million): $199
Compound average annual returns (to Sept. 30)
1-year: -19.9%
3-year: +1.4%
5-year: +0.8%
10-year: --
15-year: --
"It's been an outstanding performer within its category...If you don't have anything in this sector, this is probably a great time to buy, after it's been so badly kicked around."
Ivy Canadian Fund
Assets ($million): $5,025
Compound average annual returns (to Sept. 30)
1-year: -2.5%
3-year: +13.3%
5-year: +12.1%
10-year: --
15-year: --
"This fund is well-suited to today's uncertain climate, since it makes comfortable profits when markets rise and holds up far better than most in downturns."
******
Altamira Bond Fund
Assets ($million): $471
Compound average annual returns (to Sept. 30)
1-year: +18.3%
3-year: +16.3%
5-year: +12.3%
10-year: +12.9%
15-year: --
"For the past four years, it's been a stellar performer."
Fidelity Canadian Asset Allocation Fund
Assets ($million): $3,141
Compound average annual returns (to Sept. 30)
1-year: -1.5%
3-year: +16.2%
5-year: --
10-year: --
15-year: --
"One of their strengths is out-of-this world stock picking."
******
Leith Wheeler Canadian Equity Fund
Assets ($million): $10
Compound average annual returns (to Sept. 30)
1-year: -14.9%
3-year: +14.0%
5-year: --
10-year: --
15-year: --
"No matter what the market does, if you're looking for a solid core holding, this is a good candidate."
Atlas Canadian Large Cap Growth Fund
Assets ($million): $540
Compound average annual returns (to Sept. 30)
1-year: -15.2%
3-year: +13.8%
5-year: +11.3%
10-year: +8.0%
15-year: --
"It falls within the lowest 20 per cent of all Canadian equity funds in terms of risk."
******
Standard Life Balanced Mutual Fund
Assets ($million): $21
Compound average annual returns (to Sept. 30)
1-year: -2.3%
3-year: +11.9%
5-year: +9.7%
10-year: --
15-year: --
"Given the tremendous volatility recently, many investors are looking for lower risk and the risk here is below average relative to other balanced funds."
Trimark Canadian Fund
Assets ($million): $1,792
Compound average annual returns (to Sept. 30)
1-year: -15.6%
3-year: +6.9%
5-year: +8.2%
10-year: +10.0%
15-year: +10.9%
"I think we'll see a reaffirmation of the fact that a consistent, disciplined approach pays off in the long term. At these levels, the fund represents a great buying opportunity."
******
Templeton Growth Fund Ltd.
Assets ($million): $9,188
Compound average annual returns (to Sept. 30)
1-year: -11.1%
3-year: +8.6%
5-year: +10.4%
10-year: +12.5%
15-year: +12.9%
"Given their history and consistent approach, I have every confidence in this fund. I think this is a good opportunity for investors to buy it at a bargain price."
Universal World Tactical Bond Fund
Assets ($million): $70
Compound average annual returns (to Sept. 30)
1-year: +29.0%
3-year: +12.7%
5-year: --
10-year: --
15-year: --
"I'm more defensive than I have been in a long time, but I always believe that some portion of a portfolio should be kept in bonds."
******
Fideltiy European Growth Fund
Assets ($million): $2,047
Compound average annual returns (to Sept. 30)
1-year: +17.6%
3-year: +20.8%
5-year: +18.3%
10-year: --
15-year: --
"This European fund is my favourite because it has wide diversification and the upcoming European Monetary Union should give these countries a shot in the arm."
MAXXUM American Equity Fund
Assets ($million): $34
Compound average annual returns (to Sept. 30)
1-year: +26.2%
3-year: +27.1%
5-year: --
10-year: --
15-year: --
"Janus is regarded as one of the most successful mutual fund managers in the United States."
******
Scudder Global Fund
Assets ($million): $43
Compound average annual returns (to Sept. 30)
1-year: +8.3%
3-year: --
5-year: --
10-year: --
15-year: --
"The fund has outperformed its peers convincingly since its inception."
Source: Globe HySales