Ivy Canadian Fund -- Canada's largest domestic stock fund and the darling of many financial advisers -- has become a laggard lately.
The $5.5-billion Canadian equity fund run by Toronto-based Mackenzie Financial Corp. gained 3.3 per cent for the year ended Oct. 31. But it trailed the average 14.1-per-cent return of its peers, and the 18.7-per-cent gain of the Toronto Stock Exchange 300 based on total return.
Still, the fund -- the assets of which have declined from last March's high of $6.1-billion -- has outpaced its peers over the past two years and longer. Over five years, Ivy Canadian has chalked up an average annual return of 12.3 per cent, compared with 10.6 per cent for the Canadian equity group.
Despite its longer-term outperformance, some fund watchers have soured on Ivy Canadian because of its high 30-per-cent cash weighting that is a drag in rising markets. Others continue to recommend the fund and are not bothered by it stash of cash.
Jerry Javasky, 46, has been at the helm of Ivy Canadian and Ivy Income & Growth -- its balanced fund sibling -- since June, 1997. That's when former manager Gerry Coleman was wooed to join rival fund company C.I. Management Inc. of Toronto.
Last spring, Mr. Javasky also reclaimed his spot as lead manager of Ivy Foreign Equity after Bill Kanko left to join Toronto-based Trimark Financial Corp. Mr. Javasky said he is not happy about the recent underperformance of Ivy Canadian but he attributed it to the fact his investment style prohibits him from buying the kinds of stocks -- resources and highly valued technology firms -- that have propelled the TSE 300 this year.
"It doesn't fit what we are trying to do," the 46-year-old manager said. "I think that what we do works in most market environments because the companies are continuing to grow. But it certainly hasn't worked in the past year."
Mr. Javasky looks for firms that have sustainable earnings growth that he can hold for the long term and are selling at attractive prices. His fund holds just more than 30 stocks, but he has a bias against deeply cyclical companies -- mainly resource stocks -- because they have generally been poor long-term investments.
The fund's largest weighting is in financial stocks, which represent 22 per cent of the total fund. Industrial product stocks make up 14 per cent of the portfolio; oil and gas, 10 per cent; and merchandising, 9 per cent. The fund owns no gold, pipeline or base metal stocks. Just less than 15 per cent is in foreign stocks.
Some stocks in the Ivy Canadian -- such as Great-West Lifeco Inc., Power Financial Corp. and George Weston Ltd. -- have experienced strong earnings growth but that has not been reflected in their performance, he said.
Mr. Javasky's biggest disappointment has been Fairfax Financial Holdings Ltd. He trimmed the stock to 2.5 per cent of his fund from 4 per cent in the first quarter after getting an inkling of the firm's operating difficulties. But he still expects Fairfax will correct its problems.
Dan Hallett, an analyst with Toronto-based Fundmonitor.com Corp., said he is not recommending Ivy Canadian now. "The fund has had terrific performance in down markets but it really hasn't delivered consistently on the upside," he said. "The huge cash weighting . . . has been a big drag."
Mr. Hallett argued that Ivy Canadian -- whose cash surged to a high of 40 per cent last March -- behaves like Mr. Javasky's balanced fund. Over five years, the Ivy Growth & Income Fund posted an average annual return of 12.7 per cent compared with 12.3 per cent for Ivy Canadian.
Mr. Javasky, however, says he has trimmed his cash weighting to its present level by adding to existing positions and buying new stocks such as Nortel Networks Corp., MDS Inc., Sears Canada Inc. and Progressive Corp.
Some cash has also gone to meet net redemptions but the lion's share of the outflows has made its way to Mackenzie's popular global stock funds, such as Ivy Foreign Equity and Universal Select Managers, a company official said.
Mr. Javasky, meanwhile, dismisses the comparison of Ivy Canadian with Ivy Growth & Income as a short-term phenomenon because the balanced fund's bond component has been weak lately. He expects Ivy Canadian will outperform Ivy Growth & Income because it has a higher stock weighting.
Peter Brewster, editor of the Canadian Mutual Fund Adviser newsletter, suggests that existing unitholders hang on to Ivy Canadian. But he is no longer recommending that investors put new money into it because he is worried about its size and whether it will be nimble enough to get in and out of stocks.
"It's a nice safe fund," Mr. Brewster said. But he said he is bothered by investors being charged a 2.3-per-cent management-expense ratio (MER) for a fund that has held a 30-per-cent cash position for seven years. "It tells me that there is too much money in the fund and they can't invest it all."
Mr. Javasky acknowledged the fund's size means he is potentially restricted to a smaller universe of stocks but he doesn't expect his fund will be capped.
Mr. Javasky said he doesn't believe that investors should be bothered by Ivy Canadian's MER but rather should concentrate on the fund's long-term performance. "Generally speaking, it has given above-average performance with very low variability and that is net of the expense ratio."
Meanwhile, Scott Barlow, mutual fund specialist at Merrill Lynch Canada Inc., said he still recommends Ivy Canadian and is not concerned by the short-term underperformance or the high cash position -- a cushion during volatile markets.
"We have always thought that Mr. Javasky has been a great stock picker," Mr. Barlow said.
Mr. Barlow is also not overly concerned by the fund's size. "I felt better about the size-of-the-fund issue after he jettisoned his CIBC position in early or mid-98," he said. "It was a gigantic position and he was able to unload it. [Size] is definitely an issue but it just means it takes more time to add or drop positions."
IVY CANADIAN FUND
Category: Canadian equity
Manager: Jerry Javasky of Mackenzie Financial Corp. since June, 1997.
Load status: Optional load
Total assets: $5.5-billion
Management expense ratio: 2.3%
Returns to Oct. 31, 1999
1-year simple rate of return: 3.3%
2-year compound annual: 3.6%
3-year compound annual: 9.1%
5-year compound annual: 12.3%
TOP 10 STOCK HOLDINGS
To Oct. 31, 1999
1. Berkshire Hathaway Inc 6.0% 2. Nortel Networks Corp 5.2 3. Suncor Energy Inc 4.5 4. Imperial Oil Ltd 4.2 5. Bank of Montreal 4.0 6. Omnicom Group Inc 3.9 7. Royal Bank of Canada 3.7 8. George Weston Ltd 3.3 9. DuPont Canada Inc 2.4 10. Thomson Corp 2.4
© 2007 The Globe and Mail. All rights reserved.
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