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Advisers devise risk-averse options

With economic slowdown looming, KEITH DAMSELL looks at three funds for darker times


Income trusts are losing ground, oil prices are declining and interest rates are rising. There are rumblings of inflation, an economic slowdown and political uncertainty.

These are uncertain times and the fund industry is working overtime when it comes to new and creative ways to separate you from your money. Here's a sampling of some of the product ideas your adviser may be touting in the weeks and months to come.

Life-cycle funds

A compelling asset class that plays off the success of popular fund wrap programs and an aging population's desire for investment security.

Each LCF is structured with a specific investment horizon, from five to 35 years. As the fund draws closer to maturity, the asset mix is shuffled to preserve capital and limit risk.

Fidelity Investments Canada Ltd. is the latest firm to enter the LCF business, bringing the number of offerings competing for attention this winter to six.

But buyer beware! The one-size-fits-all solution turns the adviser catechism of "know your client" on its head. The asset class is new to Canada so there is no performance record to consider.

And finally, LCFs are a till-death-do-you-part concept; in theory, investors are locking in their dollars forever.

Technology funds

The mutual fund success story of the 1990s is ready for its comeback. There's increasing sentiment that value-style investing may have run its course and tarnished growth stories in the tech sector may soon find an audience.

Howard Sutton, president of Toronto tech specialists Tera Capital Corp., expects investors will be prudent and favour the blue-chip giants, a list that includes Microsoft Corp. and Intel Corp. "Larger companies are throwing off cash flow and trading at lower evaluations," he said.


With the end of the cap on foreign content held in registered retirement savings plans and pension funds, investor attention is expected to shift to the so-called BRIC countries -- Brazil, Russia, India and China.

Why? As October has shown, the Toronto Stock Exchange can't go up forever.

And most important, a foreign equity fund with a hefty BRIC weighting captures the world's fastest-growing economies.

"It probably makes sense from a risk-management side to diversify yourself and get involved in some markets that are not perfectly correlated to the Canadian market," said Don Reed, president and chief executive officer of Franklin Templeton Investments Corp. and manager of the Templeton International Stock Fund.

Worth repeating

"I think you want companies that make the stuff, not the stuff. . . . Let me give you a really simple example. If oil goes from $70 [a barrel] (U.S) down to $50 and stays there for the next five years . . . that would be a very unhappy outcome for you if you buy a barrel of oil today.

"If you buy a share of Exxon . . . profits on day one will go down. On day two, it'll probably begin to go up and then go up a bunch because it generates a lot of free cash flow. . . . I believe that it actually is possible to make money in the commodity sector owning and holding the companies." -- Fred Sturm, chief investment strategist of Mackenzie Financial Corp., weighs in on the commodity craze at last week's Morningstar Investment Conference.

Investors redeem oil-light AIM

To the surprise of many, the Toronto mutual fund giant Aim Funds Management Inc. is losing investment dollars.

Last month, the crown jewel of Amvescap PLC reported net redemptions of $137-million (Canadian) and in August, $42-million went out the door. As of Sept. 30, total retail assets under management slipped to $44.6-billion, down from a July peak of $45.5-billion.

The crux of the problem is the company's out-of-favour global stock funds.

The Trimark Fund has shrunk to about $2.6-billion, down from a 2002 peak of $3.8-billion. Trimark Select Growth Fund sits at $5.6-billion, down from a record $6.6-billion three years ago. It's worth noting that the Trimark funds are not alone -- over the past 12 months, investors have yanked $4.4-billion out of the foreign equity fund category.

The strength of the Canadian dollar is behind fund redemptions, said Patrick Farmer, the company's chief investment officer. The Trimark fund, for example, returned 5.4 per cent for the 12 months ended Sept. 30; if currency were not an issue, it would have reported a gain of 16 per cent, a return "good enough to keep people interested," he said.

"Five years from now, a client's portfolio that takes advantage of the elimination in the foreign-property rule, and increases their exposure to world-class businesses, will be better off," Mr. Farmer said.

Compounding the problem is the AIM and Trimark brands having little to offer when it comes to this year's success story -- energy.

The fund company shuns commodities and, as a result, oil and gas stocks are rare holdings. As a result, the $3.6-billion Trimark Income Growth Fund has wracked up lacklustre short-term performance when compared to its yield-driven rivals with a hefty position in energy stocks.

The AIM Trimark team are sticking to their knitting and have no plans to alter their investing principles. And they may just be right -- crude oil futures hover at about $60 (U.S.) a barrel, down from an Aug. 30 high of $69.81.

© 2007 The Globe and Mail. All rights reserved.

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