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Flighty investing decisions of 2000 may find modern parallel

There's only one thing worse than getting in late on an investing trend.

It's getting in on the trend late by dumping a proven performer in your portfolio that seems to have lost its touch. Example: Selling the Trimark Select Canadian Growth Fund in January, 2000, and buying some of the gimmicky junk the fund industry was peddling back then.

Trimark Select Canadian Growth went on to generate average annual returns over the next five years of 9.6 per cent, whereas the five top-selling funds of January, 2000, posted average annual losses ranging from 0.4 per cent to 21 per cent.

Are there parallels between the bad decision making of investors in 2000 and today's flood of money into income-oriented mutual funds? Mutual fund company AIC Ltd. suggests that there could be, in some data it prepared for internal use recently. The information was passed along by a financial adviser who correctly thought it would make a good column.

AIC drew up lists of 20 funds with the highest and lowest net sales in January, 2000, which was at the peak of the technology stock boom, and the same month in 2005. In both years, there's a clear pattern of investors piling into the hot fund categories of the moment while also selling blue-chip funds with a demonstrated ability to deliver good long-term results.

The 20 best-selling funds of January, 2000, included five sector funds, most in tech and biotech, as well as two tech-heavy Canadian equity funds. Others on the list included some global equity funds that were hot at the moment and miscellaneous other equity, bond and balanced products.

The average five-year return for funds on the list was a compound average annual loss of 4.3 per cent. The worst performers were Trimark Discovery RSP, which posted net sales of $85-million and lost an average 21.9 per cent a year; Investors Global Science and Technology, with net sales of $142.3-million and annual losses of 21 per cent; BPI Global Equity, with net sales of $97.5-million and losses of 9.9 per cent a year; and CI Global Biotechnology Sector Shares, which had net sales of $121.8-million and losses of 9.4 per cent a year.

The 20 funds with the highest net redemptions in January, 2000, made an average 6.3 per cent a year over the next five years, which isn't spectacular. However, the list of funds included several mortgage and bond funds with characteristically modest returns. Among the most shunned funds were Trimark Select Canadian Growth, which had $194-million in net redemptions and annual gains of 9.6 per cent; RBC Dividend, with $65.8-million in net redemptions and annual gains of 13.1 per cent; Trimark Select Growth, with net redemptions of $134-million and annual gains of 6.3 per cent; and Mackenzie Ivy Canadian, with $186-million in net redemptions and annual gains of 7.8 per cent.

Now, flash ahead to January, 2005, where the most redeemed funds included Ivy Canadian, and Trimark Select Growth, as well as a group of other stalwart funds that included Templeton Growth, Templeton International Stock and AGF Canadian Large Cap Dividend. There are three AIC funds on the list of most redeemed funds, but whether they qualify as stalwarts is an open question because of a continuing multiyear slump.

On the hot side of the fund business in January, you'll find none of the silly stuff that ruled five years ago. What investors mainly sank their money into instead were monthly income funds, bond funds and dividend funds.

Whereas tech funds are a frill, bond, dividend and income funds are legitimate building blocks for investing. Own some, by all means, as long as you're not destabilizing your portfolio by selling essential building blocks like equity funds.

One of the most harmful investor frailties is the tendency to believe attractive investing trends will go on indefinitely. People thought the easy money in tech would go on, so they were still buying in as late as January, 2000. People think the income fund rally will go on, so they're still piling in as late as January, 2005.

There's little risk that the income investing trend will end even close to as badly as the tech boom. Bonds, income trusts and dividend stocks have too much long-term value and solidity for that to occur.

But if interest rates rise, if the overheated trust sector hits a rut or if some other trend supersedes income, then the people selling blue-chip equity funds today to load up on income funds will wish they hadn't.

Put another way, you're better off holding Templeton Growth, Ivy Canadian or Trimark Select Growth than you are selling them and buying income funds right now. In five years' time, this will be obvious.

© 2007 The Globe and Mail. All rights reserved.

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