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Look before you leap out of your big global funds

One reason not to be tempted by hot small rivals is they may soon expend their Warholian 15 minutes of fame, ROB CARRICK writes

Almost $20.5-billion sits vegetating in name-brand global equity funds, which performed so poorly over the past five years that clients would have done much better in a money-market fund.

This nugget of information came to light during some research to see if there are any signs of green in the desert-like global equity category. The short answer: It depends.

Few of the most widely held funds have done anything special this year, even while Canadian equity funds enjoy boom times. Strangely, the successful global equity funds this year are almost all a bunch of no names that have attracted a negligible amount of money from investors.

Upon hearing this, the temptation for some will be to invest in those hot-performing no-names, either with new money or by selling their disappointing big funds.

If you feel such an impulse coming on, resist. While the disappointing big funds will probably regain their touch at some point, some of the small funds now atop the performance charts will soon expend their Warholian 15 minutes of fame and return to oblivion. In the global equity fund category, stay with what's proven.

The list of the largest global equity funds by assets is replete with familiar names that have been crushing disappointments in recent years. There's the $5.6-billion Templeton Growth Fund, which has a five-year compound average annual return of 0.98 per cent to July 31; the $3.6-billion AGF International Value Fund, with a five-year gain of 1.07 per cent; the $1.5-billion Fidelity International Portfolio, with a five-year average annual loss of 3.7 per cent. These funds are members of a select club of 14 big global equity funds with worse five-year returns than the country's largest money market fund, TD Canadian Money Market. The total amount that individual investors have entrusted to these laggards is about $20.5-billion.

So why would you want to stick with these funds as opposed to trying out the likes of Renaissance Global Opportunities, Capstone Global Equity and Dynamic Global Value Class, all of which are category leaders this year?

The long-term success of the big funds is one reason, while another has to do with the difficulty of running a successful global equity fund. Even for big fund companies with large research teams, it's a lot harder to shop the world for worthwhile investments than it is to run a fund holding Canadian stocks and income trusts.

Consider the long-term troubles that some major fund families have had in the global category. Scotia Securities' largest global equity fund, Scotia Global Growth, has a pathetically low 10-year compound average annual return of 1.2 per cent, while Phillips Hager & North has three awful global funds that offer a striking contrast to the firm's other excellent products. Many other fund companies have at least one dud in the global fund lineups.

Recent challenges for global fund managers have included spotty global stock market returns and a surge in the Canadian dollar that has diminished returns from U.S. stocks, which typically account for 30 to 50 per cent of a global fund's assets. Some big global funds have bogged down in this environment, whereas a lot of small funds have done quite well.

Don't buy one of these funds without taking a close look, though. AGF Aggressive Global Stock has notched an impressive 14.2-per-cent gain this year, but its compound average annual five-year loss of 11 per cent was much worse than the category average loss of 3.1 per cent. Tiny Capstone Global Equity has made 15.7 per cent in 2005, but its average annual five-year loss was 4.4 per cent and it made just 3.3 per cent a year over the past 10 years.

Renaissance Global Opportunities has superior returns over short- and long-term periods, but it has a boom-bust tendency that either ranks it among the very best funds in the global category or among the worst. As a unitholder, you might find that a bit disorienting.

Dynamic Global Small Cap Value is an especially interesting specimen. With just $20.4-million in assets, it has topped all global funds this year with a gain approaching 24 per cent. The three-year return looks great, too, but the longer term is troubling. That's because there isn't one -- this fund won't reach its fifth birthday until November.

A global fund shouldn't earn your business just because it's big and has a long track record. It just so happens that many funds with these attributes also happen to be solid choices.

You won't find a better example of this than the $2.8-billion Trimark Fund (the front-load SC version), which is up just 4 per cent this year. Worse, the fund has been markedly below average over the past one- and three-year periods, which means there have to be some restive unitholders out there.

Yes, there are much better performers of late than the Trimark Fund. But how many of them have produced returns that rank among the top 25 per cent of global equity funds over the past five-, 10- and 15-year periods, as the Trimark Fund has done?

Mackenzie Ivy Foreign Equity is stuck in a wicked slump right now that has left it with returns that rank among the worst in the global category, both recently and over the past three years. Still, the fund has a respected manager in Jerry Javasky who produced returns that rank in the top 25 per cent of his category over the past five- and 10-year periods.

Sometimes the argument in favour of big global funds over hotter small funds is more difficult to accept. Once a fund industry stud, Templeton Growth now looks pretty much average, while Fidelity International Portfolio has struggled for years now without a sustained rally. But even with big global funds like these, there are reasons to refrain from selling and then jumping into something small and flashy.

For one thing, Fidelity Investments and Franklin Templeton Investments cannot afford to let these funds fade slowly into irrelevancy because this would adversely affect the companies' reputation with investors and advisers. If the current cycle of mediocrity doesn't end soon for these funds -- the Fidelity fund has been gaining strength lately -- then measures will be taken to turn things around.

Another reason to stick with those struggling big global funds relates to the basic investing principle of buying low. When the beat-up Ivy Foreign Equity Fund and Fidelity International Portfolio get their mojo working again, there's potential for unitholders to enjoy a sustained rally.

Meanwhile, it's not unreasonable to believe that some of today's tiny dynamos in the global category are peaking. Give them your money today and you're setting yourself up to bail out in frustration at some future date, probably around the time that those lacklustre global fund giants are well into their recovery.

Global equity fundamentals

Recent struggles, long-term success

The 10 largest global equity funds by assets

FundAssets ($billion)YTD return5-year return10-year return
1Templeton Growth Fund5.565.32%0.98%5.53%
2Trimark Select Growth5.353.465.287.82
3MD Growth3.775.75-0.217.28
4AGF International Value3.61-
5Mackenzie Cundill Value 'C'2.944.5610.16N.A.
6Mackenzie Ivy Foreign Equity2.780.993.28.55
7Trimark Fund-SC2.773.985.788.75
8Brandes Global Equity2.461.91N.A.N.A.
9Fidelity Int'l Portfolio-A1.556.39-3.725.91
10Templeton Global Smaller Co.1.51.7210.129.65

Score one for the little guys

The top 10 performing global equity funds this year

FundAssets ($million)YTD return5-year return10-year return
1Dynamic Global Small Cap Value20.423.60%N.A.N.A.
2Renaissance Global Opportunities124.418.9-2.747.86
3Capstone Global Equity1.415.76-4.423.32
4Dynamic Global Value Class8.54.23N.A.N.A.
5AGF Aggressive Global Stock99.514.16-11.02N.A.
6Dynamic International Value167.413.73-0.97.61
7SEI International Synthetic-P1.213.04N.A.N.A.
8Dynamic Prot International Value10.712.64-2.1N.A.
9Investors Retirem't High Growth185.212.16N.A.N.A.
10Renaissance Global Sectors5311.82-4.79N.A.


© 2007 The Globe and Mail. All rights reserved.

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