Before you buy a mutual fund, it's a good idea to meet the family.
An upstanding fund family doesn't guarantee a profitable investment opportunity but it is a strong indicator of a commitment to quality. Some families go through the motions, others produce results.
Unfortunately, it's not easy to tell the difference. The halo effect of a good fund or two can elevate an otherwise indifferent family while a consistently high-quality family can labour in obscurity because it doesn't spend a lot on marketing.
That's the case with Saxon Funds, winner for the second straight year of the annual Globe Investor Monthly ranking of the best mutual fund families.
Saxon is a small, no-load company that offers consistent quality throughout its lineup. There have been ups and downs in its funds over the years, but the net result over the long term is excellent.
The rest of the Top 10 fund families in this year's ranking are Mawer Mutual Funds, Mackenzie Financial Corp., Phillips, Hager & North Investment Management Ltd., MD Funds Management Inc. (tied for fourth), Franklin Templeton Investments, Empire Financial Group, National Bank Mutual Funds, AGF Funds Inc., RBC Funds Inc. and Dynamic Mutual Funds Ltd. All in all, it's aninteresting mix of small, medium and large players.
Ranking the fund families is a rigorous screening process that humbled some fund companies and excluded others for not meeting the criteria.
To start with, only core equity funds with a 10-year track record were considered. In other words, the various Canadian equity categories were examined, as well as U.S., global, international and European equity funds.
Specialty funds were left out because some families have them and others don't. Families without technology funds would look a lot better than those that offer them, while just the opposite is true with precious metals funds. Also omitted were U.S.-dollar versions of other funds.
As for the inclusion of just equity funds, that's an easy one. Equity funds are where most of the bright minds in the fund business are found, and they're also where most fund industry assets lie.
A final criterion was that a fund family had to have at least three equity funds with a 10-year record. Remember, this analysis is about family-wide consistency, which is tough to measure over a shorter time frame than 10 years.
Unfortunately, the three-fund rule caused some noteworthy fund companies to be struck off the list.
The two funds offered by Chou Associates Management Inc. averaged an amazing compound annual 16.5 per cent over the 10 years to Feb. 28, including 16.8 per cent for Chou Associates, the top U.S. equity fund over the past decade. The only ABC Funds product with a 10-year record, ABC Fundamental Value, averaged 18.7 per cent over the decade.
AIC Ltd. also didn't make the cut. It only has two equity funds with a 10-year record, AIC Advantage and AIC Value, which together delivered a 10-year compound average annual return of 11.1 per cent.
Another excluded fund company with good numbers is Northwest Mutual Funds Inc., which had two funds averaging 12.3 per cent over the past decade.
As for those that did make the grade, Saxon's three equity funds with a 10-year history averaged a compound average annual return of 12 per cent, well ahead of runner-up Mawer's 10.2-per-cent average for four funds.
The picture of fund consistency is Saxon World Growth, which has a 10-year compound average annual return of 10.3 per cent, a 15-year return of 9.8 per cent and a return since its January, 1986, inception of 9.8 per cent.
The fund beat the average return for its category over pretty much every time frame measured on Globefund.com.
Saxon Stock, a Canadian equity fund, has a 10-year return of 12.8 per cent, while Saxon Small Cap's comparable number is 13 per cent. The average Canadian equity fund return was 7.6 per cent over the same time; the average small-cap fund return was 6.3 per cent.
The fact Mackenzie made the top 10 is especially impressive when you consider it had 11 funds included. The more funds a family has, the harder it is to maintain consistently good performance.
Just ask CI Mutual Funds. It had 18 funds included in this analysis and their 10-year return averaged 6.5 per cent.
CI's story is that its best funds -- CI Canadian Investment, with a 10-year return of 10.9 per cent and CI Signature Dividend Income at 10.5 per cent -- were overwhelmed by lesser products.
Dynamic Mutual Funds Ltd. is an example of a fund family that managed a higher rating with a diverse lineup -- 12 funds in this case. Dynamic would have done better than its 7-per-cent average equity fund return if not for the inclusion of funds from the StrategicNova family, which Dynamic bought last year.
The biggest fund families by assets tended toward middling or worse results in this year's ranking, not a surprise given their breadth of product.
Investors Group, Canada's largest fund family by size of assets, had a compound average annual equity fund return of 6.5 per cent for its 11 funds with a 10-year record.
The second-largest family, RBC Funds Inc., posted an aggregate return of 7.3 per cent and third-biggest CIBC Securities Inc. was at 5.7 per cent.
The worst fund company according to its average 10-year core equity fund returns was Sagit Management Ltd., with a combined average annual loss of 8 per cent.
Manulife Financial and Altamira Investment Services Inc. were next worst, with average compound annual equity fund gains of 3.6 per cent and 4 per cent, respectively.
Besides Saxon, the other top five family to have earned the same distinction last year is Mawer. Mackenzie moves up from last year's tie for seventh with AIM Funds Management Inc., the combined Aim/Trimark family of funds that fell in the rankings this time out.
AIM had an excellent record of 10.9 per cent last year; this year, the comparable number for eight funds was 6.9 per cent.
The problem with AIM/Trimark seems to have come mainly from the AIM side of the family. If you average out only Trimark funds with a 10-year record, you get a 10-year average return of 9.4 per cent, which would have meant a top-five finish.
Another big family name to slide this year was Fidelity Investment Canada Ltd., the fifth-place finisher last year with a 10-year average equity fund return of 11.3 per cent.
For 2003, Fidelity was well down the list with a return of 6.6 per cent. What went wrong? Nothing dramatic, just bad years for funds such as Fidelity Growth America.
There's an interesting statistical wrinkle in all of this. While you'd think a 10-year time horizon would provide a sturdy basis for an investigation of a fund's long-term performance, it turns out that 10-year results can still be reasonably fragile.
Fidelity Growth America had a sterling compound average annual return of 12.4 per cent in the 10 years to Feb. 28, 2002. But after losing 28.6 per cent in the past 12 months, its 10-year return fell sharply to 7.1 per cent. What a difference a year makes.
Saxon's total family return fell as well from last year's 14.4 per cent, while Mawer was down from 11.8 per cent.
Mackenzie's 9.4-per-cent average 10-year equity fund return came reasonably close to matching last year's 10.9 per cent, a possible result of the fact that the new rating system included 11 of its funds as opposed to 14 last year.
Another family that slipped over the past year was Phillips, Hager & North, last year's No. 2 finisher with a return of 13.2 per cent. In 2003, PH&N fell to fourth place with a return of 9 per cent.
Top fund families
Here are the top 10 mutual fund families (there's a tie for fourth place) as measured by the compound average annual return of their core equity funds over the 10 years to Feb. 28.
1. Saxon Funds..............12.0%..........3
2. Mawer Mutual Funds.......10.2...........4
3. Mackenzie Financial.......9.4..........11
4. PH&N Investment...........9.0...........7
4. MD Funds Management.......9.0...........4
5. Franklin Templeton........8.9...........8
6. Empire Financial Group....8.2...........5
7. National Bank.............7.8...........4
9. RBC Funds.................7.3...........6
10. Dynamic Mutual Funds.....7.0..........12
© 2007 The Globe and Mail. All rights reserved.
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