Some of the worst-performing mutual funds of 2005 could be good choices for 2006.
Templeton Global Smaller Companies is a prime example -- it's on track to post a small loss this year after five superb years in a row. Stellar in the bear market earlier this decade, Beutel Goodman Canadian Equity is having a year that is best described as something between mediocre and disappointing. Integra Bond's decline is less dramatic, but there's no denying that its 2005 returns don't measure up to its longer-term results.
Consider these and the other funds because they're having a bad year? You bet. Faced with a choice between two funds with similar long-term records of success, you're better to choose the laggard over the leader.
Think of it as buying low. This concept is well understood with stocks, yet with funds there's often a tendency to buy whatever is hottest at the moment. In reality, hot funds of any type are vulnerable to a downturn, while quality funds in a slump have turnaround potential.
For this week's Portfolio Strategy column, we present the second annual Buy Low list of quality mutual funds that you now have a chance to buy at bargain prices. The past year hasn't been kind to these funds, which means you've got an ideal entry point.
If you're patient, that is. As the funds on last year's Buy Low list show, the road to recovery can be a long and winding one. There were nine funds on that list and eight of them have been laggards again in 2005.
This year's Buy Low list was compiled by using the filter function on Globefund.com to find the worst performers in the Canadian equity, Canadian equity (pure), Canadian dividend, Canadian balanced, global equity and Canadian bond categories. These dregs of 2005 were then evaluated on how their annual returns compared with their respective category averages over the past seven years.
The easiest way to do this was to look at quartiles, where funds in a category are divided into four groups. First quartile is best, second quartile is above average, third quartile is below average and fourth quartile is rock bottom. Naturally, all the funds on the Buy Low list were in the third or fourth quartile this year.
Establishing that a fund was terrible in 2005 is easy. The more difficult task is to determine whether its longer-term performance is good enough to make the Buy Low list. To earn that distinction, a fund had to have had first- or second-quartile returns in five of the seven years from 1998 to 2004.
In other words, funds on the Buy Low list have dropped below average only twice in the past seven years.
This is a good test of a fund's consistency because it factors in returns during the last gasp of the '90s bull market, the full extent of the ensuing bear market and the resurgence of the past couple years.
Templeton Global Smaller Companies is in many ways a definitive Buy Low fund. After staggering along with fourth-quartile returns in the technology-driven markets of 1998 and 1999, it took off on a five-year run in which it annually ranked in the top 25 per cent in the global equity category. If manager Brad Radin was a professional athlete, he'd be paid millions a year for this kind of consistency.
Global equity funds have been generally abysmal in the past five years or so, in part as a result of a combination of their exposure to U.S. stocks and the decline in the U.S. dollar against our currency. Yet Templeton Global Smaller Companies made a compound average annual 9.4 per cent in the five years to Oct. 31, while global equity funds on average lost 3.3 per cent.
For 2005, the fund is down a little more than 2 per cent (as of midweek), which puts it among the 10 worst funds in the global equity category this year. It's not a pretty picture, but that's life when you buy low.
Beutel Goodman Canadian Equity's year-to-date gain is about 11.5 per cent, which is more than satisfactory when viewed in isolation. But in the strong markets of the past year, the fund has ranked among the more sluggish performers in the Canadian equity category.
Rather than alarming you, this weakness should reassure you about this fund and the people who run it as a sideline to managing pension funds and the portfolios of high-net-worth individuals. The attraction of Beutel Goodman Canadian Equity is consistency -- the fund averaged 10.8 per cent annually over the past 10 years and 10.9 per cent a year over the past five years, an especially trying period of up-and-down markets that left the average Canadian equity fund with an average annual return of just 3.9 per cent.
Beutel Goodman Canadian Equity won't be a front-runner in a hot market like we've had recently or like we had in 1998 and 1999, but it is a candidate for investors who want a Canadian equity fund they can buy and comfortably ignore for a couple of decades.
Two other funds focusing on the Canadian market made the Buy Low list even though they haven't been around the requisite eight years. The reason is that they're slumping this year after pulling off the highly impressive feat of annually ranking among the best of the best in their peer groups over the past six years.
Both funds focus on small- and medium-sized companies and they're related in that they're managed by the same person, Ted Whitehead, and have almost the same portfolio holdings. Elliott & Page Growth Opportunities has a five-year compound average annual return of 16.5 per cent, compared with 3.9 per cent for peer funds, while R Canadian Smaller Companies has a five-year return of 16.7 per cent.
With interest rates on the rise, there's reason to dismiss the idea of buying bond funds right now. But if you're in the market for a bond fund as a way of diversifying your portfolio, then Integra Bond is a buy low opportunity worth looking at.
This fund is third quartile this year, which means it's below average but not catastrophically bad. What's notable is that prior to 2005, the fund had not fallen below average for seven consecutive years.
Trimark Canadian Bond is an alternative buy low choice with returns that compare closely with Integra Bond. Trimark's advantage is a management expense ratio that comes in a 1.27 per cent, lower than Integra Bond's 1.60 per cent.
A Buy Low fund that requires something of a leap of faith is Mackenzie Ivy Growth & Income, which is in the Canadian balanced category. Virtually the entire Ivy family is in a ferocious slump, but this fund meets the requirement of delivering below-average returns only twice in the seven years prior to 2005. The five- and 10-year returns from Ivy Growth & Income are solidly above average and the shorter-term numbers are bound to improve when Ivy's conservative investing style starts to click again.
A couple of other Ivy offerings, Ivy Canadian and Ivy Enterprise, were on last year's Buy Low list and they highlight the risks of buying a struggling fund. Both have been abysmal in 2005 and there's little or nothing in their short-term results to suggest a turnaround is at hand.
Sometimes, a slump can last years. If you're patient enough to wait, chances are good that you'll be better rewarded than the investor who chases today's top funds.
A chance to buy low
This concept is well understood with stocks, yet with funds there's often a tendency to buy whatever is hottest at the moment. Here is our second annual Buy Low list of quality mutual funds that you now have a chance to buy at bargain prices.
As of Oct. 31, 2005......................................................................................................Quartile rankings*
|Fund name||Asset class||Management expense ratio (%)||Minimum Investment||Year-to-date||2004||2003||2002||2001||2000||1999||1998|
|AIM Global Theme Class||Global equity||2.91||500||4||1||2||2||3||4||1||1|
|Beutel Goodman Canadian Equity||Canadian equity pure||1.44||10,000||4||2||1||1||1||1||4||3|
|Elliott & Page Growth Opportunities||Canadian equity pure||2.80||500||4||1||1||1||1||1||1||-|
|Fidelity Canadian Growth Company-A||Canadian equity||2.51||500||3||1||1||3||2||2||2||1|
|Integra Bond||Canadian bond||1.60||5,000||3||2||1||1||2||1||1||1|
|Mackenzie Cundill Canadian Security 'C'||Canadian equity||2.48||500||3||2||2||1||2||1||3||-|
|Mackenzie Ivy Growth & Income||Canadian balanced||2.20||500||4||2||4||1||1||1||4||2|
|Mavrix Dividend & Income||Canadian dividend||2.41||500||4||1||1||1||1||1||3||4|
|R Canadian Smaller Companies||Canadian equity||2.96||500||3||1||1||1||1||1||1||-|
|RBC O'Shaughnessy Canadian Equity||Canadian equity||1.57||1,000||3||1||1||1||1||2||2||3|
|Templeton Global Smaller Co.||Global equity||2.71||500||4||1||1||1||1||1||4||4|
|Trimark Canadian Bond||Canadian bond||1.27||500||3||1||1||1||1||1||2||3|
|Trimark Canadian Endeavour||Canadian equity||2.14||500||4||1||2||1||1||2||3||4|
*A quartile ranking of 1 says a fund was among the top 25 per cent of its peers for one-year returns, a quartile ranking of 2 says a fund was above average, a ranking of 3 means below average and 4 means returns are among the bottom 25 per cent of peer funds.
© 2007 The Globe and Mail. All rights reserved.
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