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In hot market, equity funds cool

Yield-hungry investors may be missing out on bull market's best-performing class


Summer mutual fund sales have posted their best numbers in years, but you wouldn't know it from looking at the dismal demand for bread-and-butter Canadian equity funds.

Over the past three months, the fund industry has reported a stunning $5.5-billion in net sales, up fivefold from the $1.1-billion reported in the summer of 2004. While balanced, income and dividend funds have enjoyed the bulk of the industry's summer sales, demand for Canadian common equity stocks is down, with the fund class reporting $723.1-million in net redemptions over the last three months.

Compare that with the red-hot performance of the Toronto Stock Exchange. Since bottoming out in October, 2002, at 5,695 points, the S&P/TSX composite has climbed about 95 per cent in value and now hovers near the 11,000 mark. Meanwhile, the total value of Canadian common share funds have risen at about half this rate, climbing 55 per cent from about $82.7-billion in 2002 to $128.4-billion last month.

"Our experience is monthly income, dividend and bond funds have clearly been the big sellers over the past two to three years," said Edgar Legzdins, president and chief executive officer of BMO Investments Inc. The bank's retail fund arm oversees has about $23.2-billion in assets under management.

"I think it reflects people's more conservative nature. People learned a lot from the technology boom and bust, that they were further out on the risk curve than they thought they were and should have been. I think they've retrenched a little bit," Mr. Legzdins said.

Returns indicate many conservative, yield-hungry investors may have missed out on one of the bull market's best-performing fund classes. A strong Canadian dollar and rising commodity prices have meant heady returns for plain vanilla Canadian common stock funds, up an annual average of 13.7 per cent for the three-year period ended Aug. 31. That trumps the average returns of competing balanced and bond funds of 8.7 per cent and 6.2 per cent over the same period. Even the mighty dividend category falls short, returning 13.5 per cent over the same period.

Short-term returns show a starker contrast. The $4.1-billion CI Canadian Investment Fund is up 29 per cent for the 12 month period ended Aug. 31. In contrast, the $7.5-billion RBC Balanced Fund, the county's biggest fund in the category with a 60/40 asset split between equities and fixed income, is up 17 per cent over the past year.

And when Canadian equity funds fail to stick close to home, performance has suffered. The $5.3-billion Mackenzie Ivy Canadian Fund has 23.7-per-cent foreign content; it's up 13.7 per cent over the past year. The better-performing CI Canadian fund, meanwhile, has 11.5-per-cent foreign content.

"To some extent, people have missed the boat," said Dan Hallett, an independent fund analyst based in Windsor, Ont.

Like 1999's frenzy for pricey tech stocks, Mr. Hallett fears too many investors are buying Canada "late in the game," snapping up yield and income-generating funds at a premium, he said. Investors should take profits and hunt for a well-managed -- and undervalued -- international fund, Mr. Hallett said.

Indeed, it may be too late to buy Canadian; some asset managers are in a cautious mood. For example, the managers of Franklin Templeton Investments Corp.'s $5.5-billion private client group have shifted to a neutral market weighting in equities and income, a more conservative outlook when compared to last year's overweight position in equities and underweight in income.

Rising energy costs and a strong Canadian dollar may hurt exports, manufacturing and perhaps consumer spending, said Elizabeth Lunney, Franklin senior vice-president and portfolio manager in Toronto.

"We wouldn't be surprised to see a slowdown in earnings growth given the above average growth and returns we've had in the last two years," she said. "It's not a doom and gloom forecast, it's all about taking profits and focusing on downside protection."

© 2007 The Globe and Mail. All rights reserved.

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