Brace yourself for mutual fund statement shock, version 2.0.
That's where you check on your fund holdings and find that they aren't doing anywhere near as well as the overall stock market has lately. It's sad but true. While the markets have come to life in 2003 after three dismal years, returns from many equity funds haven't kept up.
The average gain from Canadian equity funds for the six months to June 30 was 3.3 per cent, less than half the 6.7 per cent of the S&P/TSX composite index, including reinvested dividends. The average fund return over the past 12 months was a loss of just about 5 per cent, while the index was down 0.3 per cent.
What's especially dismaying is that the laggards include several funds that did an outstanding job of protecting investor capital during the worst of the bear market. We're talking here about some of the most widely held funds in the country, including Mackenzie Ivy Canadian, CI Harbour and Investors Canadian Equity.
Ivy Canadian, the largest Canadian equity fund by assets at about $5.1-billion, has a three-year compound average annual return of 1.9 per cent to June 30. If that seems unimpressive, consider that the average fund lost 4.9 per cent over the same period.
Yet Ivy Canadian has struggled recently, so much so that it actually lost a little money in the past six months. The fund ranks among the bottom 25 per cent of performers this year after a three-year run in the top quartile.
The $1.9-billion CI Harbour Fund has suffered a very similar fall, while the $1.9-billion Investors Canadian Equity Fund has slipped into the basement after a couple of years in the second quartile.
All three funds look especially limp when their returns in 2003 are compared to their benchmark stock index, the S&P/TSX composite.
It's the same story with some big equity funds in other categories, notably the $2.1-billion Investors U.S. Large Cap Value Fund. It dropped to the bottom 25 per cent of funds in the U.S. equity category this year after three years in the top quartile. The $710-million AIC Value Fund is in a similar position after three years in which it compared very well with its peers.
What should you do with these laggards? Nothing, of course.
Fact is, it's the destiny of these funds to disappoint in a hot market as a result of the very investing approach that helped them outperform so decisively in the past few years.
It was mentioned earlier that Ivy Canadian had three straight first-quartile years prior to 2003. The year before that run began -- this would be 1999 -- the fund was a stiff that ranked among the bottom 25 per cent of performers.
In the long run, funds like CI Harbour and Ivy Canadian have shown an ability to deliver above-average returns. When the stock markets are on a tear, though, these funds may falter.
One reason for this is the fact that Ivy Canadian had just over 21 per cent of its assets in cash at June 30, while CI Harbour had almost 31 per cent cash and cash equivalents.
Holding money in cash is a drag on performance right now, but it's a great strategy for cushioning unitholders from the worst of a bear market and it also allows for the opportunistic bargain hunting these funds do.
So your conservative equity funds are a disappointment these days. Really, this shouldn't bother you.
Even if there's been the odd bad year along the way, Ivy Canadian's 10-year compound average annual return of 8.9 per cent clearly trounces the average fund's 7.1 per cent and the S&P/TSX composite index's 7.9 per cent.
And yet, it's hard after three grindingly tough years for stocks to watch the markets hit their stride and not participate through your funds. That's human nature.
So here's a suggestion. While you hang onto those conservative funds that did so well for you in the dark days, consider adding either some index funds or some growth funds that excel in a fast-rising market.
An example of the latter is Mackenzie Universal Future, a fund that soared in the bull market years of 1998 and 1999 and then got savaged by the bear. Under the new stewardship of growth manager Ian Ainsworth, the fund has made just under 12 per cent in the past three months, well above the average Canadian equity fund and better than the S&P/TSX composite index as well.
Index investing, of course, would give you the very same returns, give or take a little, as the index itself. Exchange-traded funds are the best way to put indexing to work for you, but you'll need a brokerage account.
But don't read this endorsement of indexing as a market-timing call. Some stock-watchers think share prices have got ahead of themselves and are ripe for a pullback during the traditionally weak months of August through October.
Still, there's no question that with index funds in your portfolio, you'd have booked pretty much the same impressive gains this year as the major stock indexes. That's just the thing to take care of mutual fund statement shock, version 2.0.
© 2007 The Globe and Mail. All rights reserved.
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