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One-star funds worth waiting out

Fund managers advise clients to think long term about investments

MUTUAL FUNDS REPORTER

Stay the course, anxious investor. That ugly mutt in your mutual fund portfolio may one day be the best in show.

That's the advice from fund managers and advisers when asked about the long list of losers out there.

According to Globefund.com, a whopping 445 funds have a dismal one-star rating, a group that includes multiple fund classes, segregated funds and pooled funds. The fund website of The Globe and Mail tracks the performance of about 3,400 mutual funds.

There are some common elements among the weak performers. Out-of-favour sectors dominate the group. A strong Canadian dollar has hurt the returns of U.S. and international equity funds; meanwhile, science and technology funds have yet to stage a comeback.

Investment style is a factor too. Growth-oriented Trilogy Advisors LLC of New York manages a handful of one-star funds on behalf of CI Fund Management Inc.

"Admittedly, I have not had a very good year," said Rhonda Dalley, manager of the TD U.S. Equity Fund.

The $314-million fund invests in U.S. equities across 10 sectors. Only two of the 10 -- energy and utilities -- showed gains last year.

"This was not a very good year for breadth of performance," she said. Undervalued stocks that make up the bulk of her portfolio "typically take time. . . . The catalysts that we feel are still in place just did not play out this year."

Similarly, the in-house team that managed the U.S. Equity Fund for Phillips Hager & North Investment Management Ltd. "was frankly out of sync with the U.S. market," said John Montalbano, president of the Vancouver fund manager.

A mix of currency issues and a growth-oriented bias left the $1.1-billion fund "swimming upstream," he said.

Fixing the U.S. fund was a key driver behind PH&N's July acquisition of Toronto's Bona Vista Asset Management Ltd. The fund has been significantly overhauled and now mirrors the portfolio of the well-regarded Bona Vista U.S. Equity Fund managed by Carl Lytollis, Mr. Montalbano said.

The fund management change, coupled with a new team managing PH&N's less-than-stellar foreign funds, "are very positive," he said. "There is a real hop in our step."

The Trimark Global Balanced Fund was quick to dismiss Globefund.com's one-star rating. The website emphasizes three-year returns when calculating ratings; competing service Morningstar.ca places greater weight on long-term returns.

The Trimark fund receives a coveted five-star rating from the Canadian arm of the U.S. mutual fund investment website.

"We really take a five- to 10-year view on the companies that we invest in," said Bruce Harrop, co-manager of the $691-million global fund. "It doesn't make any sense whatsoever to have ratings of funds done on a short-term basis."

Financial advisers preach patience. An investor's long-term goals should overrule short-term concerns, said Sam Febbraro, executive vice-president of the Investment Planning Counsel of Canada Ltd.

"If it's a long-term strategy it's a long-term strategy," he said. The decision to sell a fund "has to come back to the client's financial plan and make sure you are properly diversified."

Room for improvement

One-star funds - largest by assets under management.*

Fund nameNet Assets ('000) 1 yr. return %3 yr. return %5yr. return %
Phillips Hager & North Investment Ltd. U.S. Equity-A1,066,448-1.3-1.5-9
Trimark Global Balanced691,2213.511.98.1
Mackenzie Univ Future572,8141.89.2-3.7
CI Global Boomernomics Corp Class544,85655.4-8.5
CI International Balanced534,1905.14.9-4.2
Templeton Canadian Stock377,8587.79.64.5
MD U.S. Large Cap Growth352,541-0.5-2-12.1
Investors Global Sci & Tech-A332,242-4.8--
TD U.S. Equity313,6021.41-8.6
CI Global Bond 299,024-5.1-2.71.3

*Table shows largest retail mutual funds by assets under management with a one-star rating from Globefund.com. Funds rated must have a minimum two-year history.

Segregated funds and pooled funds are not included.

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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