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Bulletproof investments must pass bear market test

There's no such thing as an equity fund that is impervious to turmoil, ROB CARRICK writes, but the ones that have proved resilientare your best bets to ride out the war

It was war out there in the stock markets even before the firing started in Iraq.

Now, who knows what fresh disasters await? If there was ever a time for bulletproof equity funds, this is it.

Of course, there's no such thing as an equity fund that's impervious to stock market turmoil. All funds lose money from time to time.

And yet, there are some funds that have shown great resilience in the bear market of the past three years while delivering good longer-term results as well. With equity funds, this is as close to bulletproof as you get.

Take a look at the Trimark Fund (the SC or front-load version). It had a compound average annual return of 4.6 per cent a year for the three years ended Feb. 28, a time when the average global equity fund lost 15.5 per cent. Its five- and 10-year returns are vastly better than average as well, achievements that were managed while delivering much less volatility than most peer funds.

Another example is CI Signature Dividend Income, which has an excellent three-year compound average annual return of 10 per cent and better-than-average long-term numbers as well.

To qualify as bulletproof, a fund must first have made money in the past three bear market years. If an equity fund has stayed in the black over this period, it stands a reasonable chance of holding its own amid any future market difficulties.

A positive performance in the previous three years is no small achievement, by the way. The average return in most major equity fund categories is a loss over this period.

A second attribute of a bulletproof fund is above-average compound average annual returns over the past five- and 10-year periods. Decent returns in the recent past are great, but a truly good fund will have shown the ability to make money long term as well.

Finally, a bulletproof fund must have the lowest possible Globefund.com volatility rating for its category. These ratings are based on a measure called beta, which looks at how volatile a fund is, compared with its benchmark stock index.

To qualify for a low Globefund.com volatility rating, a fund needs a three-year beta that ranks among the lowest 25 per cent for its particular category. The Trimark Fund, for example, has a three-year beta of 0.75, compared with 0.89 for the average global equity fund and 1.0 for the MSCI World Index, which is the category's benchmark.

Now, let's look at the list of bulletproof equity funds, as well as some balanced funds. To help you navigate the various choices, the comments of two fund analysts have been included.
Canadian equity

Chou RRSP, Saxon Stock, Co-operators Canadian Conservative Focused Equity, Mackenzie Cundill Canadian Security C, Beutel Goodman Canadian Equity, Trimark Select Canadian Growth, Mackenzie Ivy Canadian and Northwest Growth.

If you're looking for funds that have breezed through the bear market of the past three years, then check out Chou RRSP, Saxon Stock and Co-operators Canadian Conservative. Each has averaged more than 10 per cent annually over the period, while the average Canadian equity fund lost 4.4 per cent a year.

This trio offers the best risk-adjusted returns of the Canadian equity funds listed here, according to Suzane Abboud, president of the analysis firm Fundscope.

"Chou is most consistent of the three -- it achieved above-average results 80 per cent of the time," Ms. Abboud wrote in an analysis.

Two drawbacks to Chou RRSP are that it has a minimum up-front investment of $10,000, and it's not available from all brokers and advisers (nor is it sold in all provinces). Ms. Abboud said the most accessible funds on the list for small investors are the Trimark and Mackenzie funds.

Research from Mark Warywoda, director of analysis at Morningstar Canada, shows Ivy Canadian had the least severe worst-ever 12-month decline of all the Canadian equity funds on the bulletproof list -- 10.3 per cent.

Next was Co-operators Canadian Conservative at 11.5 per cent. The fund on the list with the worst 12-month drop was Northwest Growth at 19.1 per cent.

Mr. Warywoda said some additional Canadian equity funds to consider for their combination of reliability and downside protection are CI Harbour, Bissett Canadian Equity Class F and Standard Life Canadian Equity A.
Canadian dividend funds

CI Signature Dividend Income.

Dividend funds have done much better than Canadian equity funds in the past several years, which isn't surprising when you consider that they focus on companies stable enough to pay dividends.

That said, only this CI fund qualified as bulletproof. Its worst ever 12-month loss was a quite reasonable 4.4 per cent, while its compound average annual gain over the three years to Feb. 28 was 10 per cent.
Global equity

Mackenzie Ivy Foreign Equity, Mackenzie Cundill Value A, Templeton Global Smaller Companies, Trimark Fund (SC version).

The surprise here is the inclusion of Templeton Global Smaller Companies, and not the higher profile Templeton Growth and Templeton International Stock funds. Both these latter funds are much larger in terms of assets, but they didn't even come close to making the bulletproof list.

Ms. Abboud said the Trimark Fund has an advantage over the other bulletproof global funds listed here because of its low management expense ratio (MER) of 1.63 per cent.

"Templeton Global Smaller Companies has done well, partly on the back of the strength in small caps in general," she wrote. "However, by definition, small-cap funds are higher risk."

Mr. Warywoda found that the Trimark Fund had the most severe worst-ever 12-month decline -- at 22 per cent -- of the global funds listed here. Templeton Global Smaller Companies was just behind at 20.8 per cent, while Ivy Foreign Equity was best with a loss of 16.6 per cent.
U.S. equity funds
Chou Associates, Investors U.S. Large Cap Value.

Given the pitiful state of the U.S. market in the past few years, it's no surprise that just two funds met the bulletproof criteria.

Ms. Abboud said she prefers Chou Associates of the two because the MER on Investors U.S. Large Cap Value is high at 2.96 per cent.

Still, she noted that the Investors fund has done well in terms of risk and return.

Mr. Warywoda suggested a few alternative U.S. equity funds, including two from the RBC Funds family -- O'Shaughnessy U.S. Value and O'Shaughnessy U.S. Growth -- as well as Mutual Beacon, ABC American Value and Mawer U.S. Equity.
Canadian balanced funds
Mackenzie Income, Investors Income Plus Portfolio, TD Balanced Income, Renaissance Canadian Balanced.

"I like all these funds except Investors Income Plus Portfolio, which has the highest MER (at 2.64 per cent)," Ms. Abboud wrote. "This puts it at a significant disadvantage."

Renaissance Canadian Balanced has the highest risk-adjusted return, she said.

Mr. Warywoda said some alternative funds to consider are Mawer Canadian Balanced RSP, Leith Wheeler Balanced and Bissett Canadian Balanced Class F.

It's worth reiterating that bulletproof funds can still take a hit now and again, even while delivering good short- and long-term numbers. "If you look at some of the Canadian equity funds on the list, they've lost 16, 18 even 19 per cent in a one-year period," Mr. Warywoda said.

"But as long as you've got your eye on the ball for the long term, these funds are very adequate for most environments."
Bulletproof mutual funds

Here's a list of funds that combine good short- and long-term returns with low volatility. The funds in each category are the ones with the highest returns over the bear market of the past three years.

Canadian equity

...................................Worst

...................................12-month...Three-year..10-year

Name...............................return.....return*.....return

Chou RRSP..........................-15.7%.....+24.6%......+16.2%

Saxon Stock........................-18.3......+12.2.......+12.8

Co-Operators Canadian

Conservative Focused equity.......-11.5......+10.2.......+12.7

Canadian balanced

Mackenzie Income Class A............-8.9%......+8.0%.......+7.7%

Investors Income Plus Portfolio.....-5.5.......+5.2........+6.8

TD Balanced Income..................-9.9.......+4.1........+7.2

Global equity

Trimark Fund (SC)..................-22.0%......+4.6%......+11.6%

Mackenzie Cundill Value C..........-18.2.......+4.3........+9.6

Mackenzie Ivy Foreign Equity.......-16.6.......+3.3.......+10.1

U.S. equity

Chou Associates....................-17.1%.....+21.0%......+16.8%

Investors U.S. Large Cap Value.....-22.2.......+3.9.......+12.1

- *Compound average annual return to Feb. 28

SOURCE: MORNINGSTAR.CA, GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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