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The great Canuck mutual fund debate

End to limits on foreign content sparks argument about true asset mix


What is a Canadian equity fund?

The definition of the core mutual fund holding is the subject of debate across the industry. The recent end of foreign content limits in registered retirement savings plans has thrown the previous benchmark of 30-per-cent U.S. and international exposure in the fund class out the window. There are some deep divisions as to what is the appropriate asset mix for the pool of $126-billion held in Canadian common share mutual funds.

"It's a hot-button issue . . . it's a debate being watched with keen interest," said Rudy Luukko, editor of website and chairman of the Canadian Investment Funds Standards Committee. The CIFSC, an independent research firm that defines and classifies funds, is canvassing members on what the right foreign mix should be in Canadian equity funds.

The summer passage of the federal budget ended foreign content limits. The immediate impact was the end of dozens of so-called "clone" funds, RRSP-eligible funds that duplicate returns of international funds. The next industry-wide overhaul is expected to start in May, when the CIFSC concludes its work and sets new parameters for Canadian equity funds, the most widely held fund class in this country. The definition will determine how fund performance is measured and compared, key differentiators that affect how funds are marketed and sold to investors.

Two camps are emerging. A conservative group, dominated by the fund operations within the Big Six banks, supports a nearly pure Canadian asset mix composed 95 per cent of Canadian equities.

"We believe in truth in labelling," said Edgar Legzdins, president and chief executive officer of BMO Investments Inc. "While we would favour a small per cent [of foreign content] . . . that the manager could tactically move in and out of the Canadian marketplace, a substantial weighting in non-Canadian equities we don't think should be called a Canadian equity fund."

Meanwhile, some fund companies are pushing for greater flexibility in the purchasing powers of their Canadian fund teams. Despite the Canadian market's strong performance in recent years, the country's equity exchanges make up a slender 2 per cent of the global equity stage, and are largely skewed to finance, energy and resources stocks. Global mergers are further limiting options, too. For example, widely held Canadian brewer Molson Inc. is now Molson Coors Brewing Co. of Denver and Montreal.

"Additional choice, additional flexibility by a portfolio manager to invest in companies from around the world instead of specifically Canadian would be in the best interests of Canadian investors," said Dwayne Dreger, vice-president of communications for Toronto-based AIM Funds Management Inc.

David Feather, president of Mackenzie Financial Services Inc., says the Toronto fund company's Canadian equity team is "intrigued" by the concept of owning more foreign content than the CIFSC's current 30-per-cent definition. "Over all, the quality of investment improves with broader mandate," he said.

It's a complex debate that Daniel Chornous, chief investment officer of RBC Asset Management Inc., says drives home the need for strong financial advice. He expects the end of the foreign content cap will ultimately mean stronger sales for global managed portfolios that deftly juggle assets, geographies and currency exposure.

To date, buying preferences of Canadian investors indicate mixed results. Canada's best-selling national equity funds have a broad range of foreign exposure. For example, the $2.4-billion MB Canadian Equity Fund has no foreign assets, while MD Equity Fund has a 29.7-per-cent interest in U.S. and international markets.

The foreign content debate has just begun, and is widely expected to intensify as the CIFSC's decision deadline approaches next spring.

"What is a Canadian equity fund? Is it all Canadian? Is it really just a global fund that's run by a previous Canadian equity manager? I don't know the answer," said Bill Holland, chief executive officer of Toronto-based CI Fund Management Inc.

Canadian eh?

The definition of the core mutual fund holding that makes up a Canadian equity mutual fund is the subject of debate across the industry. The recent end of foreign-content limits in registered retirement savings plans has thrown the previous benchmark of 30-per-cent U.S. and international exposure in the fund class out the window.

Fund NameNet assets1-year return3-year return5-year returnForeign content
Mackenzie Ivy Canadian$5.35-billion13.0%7.4%5.9%23.7%
RBC Cdn Equity4.01-billion22.416.05.38.9
CI Canadian Investment3.82-billion24.916.113.011.5
Trimark Select Canadian Growth3.81-billion14.912.39.421.8
CI Harbour3.27-billion24.913.010.829.0
AGF Canadian Large Cap Dividend2.75-billion24.915.16.715.9
MD Equity2.60-billion23.116.98.629.0
CI Signature Select Canadian2.51-billion25.415.612.629.7
Bissett Canadian EquityÐA2.46-billion22.213.1-5.7
MB Canadian Equity 2.36-billion20.917.79.20.0

© 2007 The Globe and Mail. All rights reserved.

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