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Mutual Fund News

Stepping back into funds

The market rally that's perking up your portfolio statement could also make this summer the ideal time to get back into mutual funds. CAROLYN LEITCH asks four fund analysts - optimistic and bearish - for their recommendations.

It's bound to happen sooner or later: Canadian will return from their boats and cottages and vacations in the French countryside and notice that stock markets have been on a bit of a tear.

The rally has wilted a bit in the summer heat, to be sure, but anybody who hasn't opened a portfolio statement in four months is likely to be shocked. Pleasantly shocked, at last.

In Canada, the S&P/TSX composite index has jumped 14 per cent in the past four months, while the broad measure of the U.S. market, the Standard & Poor's 500-stock index, has also gained 14 per cent.

But so far this year - and despite the rather stunning stock rebound that started in March - Canadians would prefer to spend their money on almost anything but mutual funds. Investors pulled nearly $3-billion from their funds in the first half of 2003.

Bond and income funds and a few other categories are still attracting a smattering of cash but, over all, many people would simply rather renovate.

But for those who like to stay ahead of the trends, this summer may mark a good time to step back into funds. Many market professionals are predicting that eye-popping performance numbers are going to gain some attention and inspirer some interest in funds among Canadians again in the fall.

Then again, for those who still see treachery in the markets, there are plenty of portfolio managers and analysts who share that viewpoint, too.



Dan Hallett says many investors have become so risk-averse in the past few years, they've lost sight of their long-term goals and allowed some portions of their mutual fund portfolio to swell disproportionately.

"Right now, their tolerance for risk is probably zero.

At the moment, people might be sitting on a boat-load of cash, for example, or they may have been plowing money into bond or income trust funds. Bonds and income trusts are often sensitive to interest rate movements, and investors may suffer if rates suddenly climb, he points out.

And while some portfolios are designed to churn out income, "I know a lot more than just income portfolios have moved that way," Mr. Hallett says.

But Mr. Hallett is viewing stocks with caution after the run-up in the market.

"If you look at markets as a whole, equity valuations don't look all that attractive."

He recommends that investors select funds carefully and not rely on a rising tide lifting all boats. Among Canadian stock funds, Mr. Hallett favours the Mawer Canadian Equity fund. The $45.3-million fund is a no-load fund with terrific management and a good investing process, he says.

"The fees are dirt cheap" he says. Its Calgary-based managers, Martin Ferguson and Jim Hall blend value and growth, he adds, as they seek stocks that offer "growth at a reasonable price". He says that the managers invest 100 per cent of the fund's assets in Canada, which investors may view as an advantage or disadvantage.

In the international arena, Mr. Hallett points to the Trimark Fund, which also offers a great management team, strong record and low fees.

Among specialty funds, Mr. Hallett has strong praise for the CI Emerging Markets fund and its manager, Nandu Narayanan of Trident Investment Management LLC.

"In emerging markets, the macro picture is so important and he has such a handle on that," Mr. Hallett says.



Scott Barlow believes the growth style of investing may soon find favour again - but only if the stocks come at a reasonable price. He advises investors to tread carefully and avoid the 1990's mantra: growth at any price.

"It's definitely not a time to be rolling the dice with the highest-beta [stocks] you can find," says Mr. Barlow. (Beta is a measure of a stock's price volatility.)

The analyst stresses that he is not making a call on an economic rebound - 2003 marks the third straight year in which markets have been looking for a recovery in the second half, he notes - but he does believe that businesses are gaining benefits as a result of restructuring. "Companies have become a lot more efficient during the bear market."

Mr. Barlow recommends the $2-billion AGF Canadian Large Cap Dividend fund. The managers became aggressive in their stock-picking a little bit too soon in the current climate, in Mr. Barlow's opinion, but ultimately their strategy proved correct, he adds.

Among global equity funds, Mr. Barlow points to the $88.9-million Synergy Global Growth fund. The analyst says the fund's Denver-based managers have an excellent track record for undertaking in-depth research and finding interesting investments that are off the radar screens of many other portfolio managers.

"I was struck by the fact that the ideas are really well thought-out," Mr. Barlow says.

Mr. Barlow also likes the Mackenzie Cundill Value 'C' fund and the opportunistic stock- picking of the management team. Because the managers are so good at buying beaten-down stocks, the fund offers downside protection, he says. Meanwhile, if Japan's fortunes improve, this fund's heavy weighting in that country will provide stellar returns.



Raynor Burke is optimistic that the current stock rally has legs, and he advises investors not to wait for a pullback before jumping in.

Mr. Burke acknowledges that some gains have already been made. Nothing goes up in a straight line, the analyst says, and he does expect the market to retreat at times, but over the next two to three years he anticipates that stocks will climb.

Retail investors often make the mistake of waiting for a downturn, and therefore they miss out on some of the gains, he warns. "Greed wants all the upside," says Mr. Burke. "It's kind of unfortunate if people hold their breath and wait and miss that run-up."

Mr. Burke finds it heartening that investors have favoured dividend-paying stocks and the funds that invest in them of late.

His top pick in the Canadian equity group is the $39.1-million GGOF Monthly Dividend fund. Mr. Burke points to the acumen of manager John Priestman, who invests the fund's assets in high-quality preferred shares and income trusts.

Among global equity funds, Mr. Burke likes the $501.3-million Mackenzie Cundill Value 'C' fund and its veteran value manager, Peter Cundill. The fund has a fairly hefty weighting of about 43 per cent in Japan, he notes, which could offer strong returns in an economic recovery.

Investors seeking a more specialized fund might look at the $68.4-million Clarington Canadian Small-Cap fund, Mr. Burke suggests.

"These people really understand what they invest in," he says of manager Leigh Pullen and his firm, QVDG Investors Inc.

Mr. Burke notes that this fund will also appeal to investors seeking yield. "For to long, I think people invested on future earnings potential. I think that game has been played."


Steve Kangas prefers funds with solid stock picking and a consistent, long-term track record.

That type of investing could serve investors particularly well now, he says, because markets may be choppy for a while.

"I'm thinking we're not back in a roaring bull market."

Mr. Kangas's top pick in the domestic equity arena is the $732.6-million CI Canadian Investment fund. He says manager Kim Shannon offers a value-investing style that favours good companies at a very attractive price.

If markets rise, he says, investors will participate in the upside. If stocks suffer setbacks, the fund provides downside protection.

"She consistently makes you money," the analyst says of Ms. Shannon.

Another solid fund, in his opinion, is the $3.4-billion Trimark Fund.

The fund's returns have held up quite well through the bear market, he notes, because of the managers' conservative investing style and value tilt toward stock picking.

"It's going to be there as things turn around and improve," he says.

Among specialty funds, Mr. Kangas likes the $821.1-million Talvest Global Health Care fund.

The analyst has put his children's education savings into this fund, because he believes demographic trends will lead to more spending on health care.

The fund offers exposure to all areas of the industry, including big pharmaceuticals, services and specialty plays, Mr. Kangas adds.

But he also warns that the fund will be more volatile than many others and therefore should be limited to a relatively small portion of a portfolio, depending on the investor's time horizon and goals.

© 2007 The Globe and Mail. All rights reserved.

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