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Going global may be the RRSP answer

Investors picking funds for registered retirement savings plans might want to rev up the foreign content, CAROLYN LEITCH writes

Canadian investors have become so enamoured of the gains in their domestic stock funds that many seem oblivious to the fact that global markets suddenly sprang to life in the third and fourth quarters of last year.

Investors picking funds for their registered retirement savings plans this season might want to rev up the foreign content, analysts say.

"It's always tough to convince people to invest in an area right around the time they should be considering it," says Raynor Burke, an analyst at National Bank Financial.

And while the S&P/TSX composite index beat many of the world's major indexes last year, it does rely in no small part on the heavily cyclical resource sectors.

"For years, you couldn't get a Canadian to buy a Canadian fund," Mr. Burke said. He added that the runup in commodity prices and the strengthening Canadian dollar have combined to produce strong returns in the domestic equity funds of many portfolios.

"We're kind of spoiled, in a way."

Meanwhile, many portfolio managers running global equity funds posted double-digit gains last year with the help of a surge late in the year. That performance is particularly good, Mr. Burke said, up against the strength of the loonie.

"If you're solely investing in Canada, there will be a day that you've missed some upside in global markets."

Mr. Burke noted that global equity funds are pretty much in a class of their own when it comes to complexity. A good money manager has to be familiar with the interplay of accounting, tax issues, transaction costs and currency factors in dozens of markets.

"That's a pretty daunting task."

Too daunting for most individual investors, in his opinion.

"Some funds are losers because of poor management."

Mr. Burke said some portfolio managers lack discipline, while others get pulled into the herd mentality and, all in all, buy when they should sell and sell when they should buy. Picking the right fund, therefore, is crucial.

Mr. Burke pointed to the Fidelity NorthStar Fund, for example, which is co-managed by Alan Radlo and Joel Tillinghast. Mr. Burke said the two have great skill at picking up under-rated stocks, such as Anglo Irish Bank Corp. PLC.

Another major theme Mr. Burke sees is the re-emergence of Japan.

There, he said, legendary investor Peter Cundill is "Mr. Japan."

While Mr. Cundill appears to be finding less to buy now for his Mackenzie Cundill Value Fund, he said, the fund should continue to benefit from the rise of names he picked up at fire sale prices in the past.

Mr. Burke said investors in the mood for something a bit more aggressive might look to the Dynamic Power Global Growth Class Fund and manager Noah Blackstein of Goodman & Co.

"He plain out wants the fastest-growing companies in the world."

He added that the manager thoroughly researches somewhat arcane areas. "He's one of the few people I know who knows a lot about Chinese Internet stocks."

Mr. Burke also said that funds with a growth tilt may outperform those focused on value in the next few years.

"It looks like more and more investors will be willing to pay for quality growth companies."

Looking at sales figures from the mutual fund industry, numbers show net redemptions from foreign equity funds reached $576.1-million in January alone. But analyst Peter Loach of BMO Nesbitt Burns said most of that money is flowing out of a few heavyweight funds as investors who bought into the funds with a deferred sales charge are able to redeem their units without cost after a few years.

Mr. Loach believes Canadians still have an appetite for foreign investing.

His top pick is the Capital International Global Equity Fund, which performs rigorous research and takes a team approach to stock picking.

"They're the furthest thing from indexing," he said.

CIBC Wood Gundy analyst Scott Barlow sees three themes driving global stocks in the coming years:

The pulse of the global economy is increasingly tied to China's blazing growth -- Japan, Latin America and many emerging markets have been feeding that country's seemingly insatiable demand for iron ore, metals, consumer electronics and construction equipment, among other things. The pace of that growth will have a greater impact on the world -- for better or worse.

Small-capitalization stocks have outperformed large ones for four or five years; Mr. Barlow believes that trend could be set to a reverse course. The weakening U.S. dollar means that large U.S. players should see more resilient sales than smaller ones because the big names export more to Europe, Asia and other regions, for one thing. That bodes well for multinationals such as Microsoft and General Electric, for example.

"There are more and more people starting to talk about large cap."

Mr. Barlow sees a sea change coming as U.S. corporations -- their balance sheets awash in cash -- become more inclined to pay that money out in the form of dividends to shareholders. At the same time, Mr. Barlow expects more U.S. investors to seek out high dividend stocks, as more conservative Canadians have been doing for the past few years.

The analyst said one fund that might do well as dividend stocks generate more widespread interest is the Clarington Global Equity Fund, led by Bill Wilby of Oppenheimer Funds.

Mr. Barlow also likes the Brandes Global Equity Fund, managed by the value-oriented team at Brandes Investment Partners.

"It has never turned out that it was a bad time to buy Brandes."

The analyst said the fund offers lots of downside protection.

"They start to sell stuff when it even starts to get expensive and then they sell and reload again."

Another top pick for Mr. Barlow is the Trimark Global Endeavour Fund, which has a knack for finding mid- to large-cap companies with an unassailable market position.

Dan Hallett, president of Dan Hallett & Associates Inc. in Windsor, Ont., recommends that, as a general rule, investors keep about 50 per cent of the equity portion of their portfolio in foreign markets.

Mr. Hallett recommends the Trimark Fund, which has been a juggernaut in foreign markets for years. He also likes the Brandes Global Equity Fund for the value approach and long track record of firm founder Charles Brandes and his team. "They're perfectly willing to buy troubled companies as long as the price is right."

For a no-load fund, he points to the Saxon World Growth Fund under the guidance of Robert Tattersall from Howson Tattersall Investment Counsel Ltd.

Mr. Hallett also believes that Canadians, as a rule, have been pumping too many of their assets into the dividend and income sector and ignoring other areas.

"The time to build a position in foreign stocks is not after they've come back."

World view

While the S&P/TSX composite index beat many of the world's major indexes last year, it does rely in no small part on the heavily cyclical resource sectors. And Canada consists of only about 3 per cent of the global market. There's safety in diversification and many global equity funds are posting impressive gains.

To Jan 31, 2005Assets($million)Returns 1 yearReturns 5 years
Brandes Global Equity $2,020.0 1.27%-
Capital Int'l Global Equity-A 152.6 3.45-
Clarington Int'l Global Equity-A 143.7 1.18-2.56
Dynamic Power Global Grth Class 12.4 8.59-
Fidelity NorthStar - A 1,030.011.54-
Mackenzie Cundill Value-C 1,740.011.2511.66
Saxon World Growth 271.2 3.89 7.37
Trimark - SC 3,080.0 1.31 7.07
Trimark Global Endeavour 522.216.67 8.04

"It's always tough to convince people to invest in an area right around the time they should be considering it'

RAYNOR BURKE, ANALYST WITHNATIONAL BANK FINANCIAL

© 2007 The Globe and Mail. All rights reserved.

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