It was another champagne-popping year for mutual fund investors but money managers are urging investors to enjoy the bubbly while they can.
"There's one thing you can count on. There will be volatility next year," said Jamie Colliver, a principal with Putnam PanAgora Integra Canada of Oakville, Ont. "I think 2006 is likely to be challenging simply because of all the highs achieved [in 2005]."
There was a lot to like over the past year. The Canadian market enjoyed a third year of strong gains. The biggest beneficiaries were yield-generating funds and their sellers.
Assets under management in balanced, bond, dividend and income funds climbed a staggering $53-billion in the first 11 months of the year. A stunning 32 of 34 fund asset classes tracked by Globeinvestor.com reported gains during the period.
A group of large and small players met the call for investment income and enjoyed tremendous double-digit sales gains last year.
Among the major firms, Toronto-Dominion Bank, Royal Bank of Canada, CI Financial Inc. and Dynamic Mutual Funds led the sales parade with top-performing funds that delivered on the yield front.
Meanwhile, the explosion of interest in income trusts benefited many boutique players, including Acuity Funds Ltd., Sentry Select Capital Corp. and Mavrix Fund Management Inc.
There is some optimism that the gains will continue through 2006. Paul Harris of Avenue Investment Management Inc. sees no sign on the horizon that global growth, including intense demand for natural resources, will slow any time soon.
"I don't see too many massive things on the horizon that will really hurt the economy," said the Toronto portfolio manager.
"You will continue to see demand for natural resources . . . and that will benefit Canada, Australia and other resource-rich economies."
Indeed, Frank Hracs of research firm Canadian Mutual Fund Analyst forecasts fund sales in the coming registered retirement savings plan season will reach about $13.5-billion, up a heady 40 per cent from the $9.5-billion reported in the three-month sales period in 2005.
Nevertheless, there's increasing sentiment that investors should be defensive in 2006. Markets ape the law of gravity: What goes up, must come down.
"The big call for a lot of investors is what does the economy do and what do commodities do from here on," said Dan Bastasic, fund manager and vice-president of investments at Mackenzie Financial Corp. in Toronto.
He believes the North American economy is "on firm footing" but describes the commodity market, the linchpin for resource-rich Canada, "a tough one to call."
Overvalued income trusts are a source of concern. The S&P/TSX capped income trust index has climbed 23 per cent in value so far this year and the trust fund asset class is up about 14 per cent during the first 11 months of 2005.
Expectations for trusts, and energy trusts in particular, "are very high and that historically has not been good," said Bill Holland, chief executive officer of CI Financial.
"I think it's time for investors to take a little bit off the table," said Don Reed, president and chief executive officer of Franklin Templeton Investments Corp. and manager of the Templeton International Stock Fund.
About 75 per cent of the value of the S&P/TSX composite rests in three of its 10 major indexes: financials, energy and materials, he said.
A December survey by Russell Investment Group found 64 per cent of investment managers are bullish on non-Canadian equities.
"Managers are bearish on prospects for energy, utilities and industrials," said Tim Hicks, chief investment officer of Russell Investment in Toronto.
The Canadian market in 2005 was "supercharged" by four asset classes: oil, natural gas, gold and income trusts, Mr. Colliver said.
"Clearly with big, big performers you need to rebalance," he said. "I think if there's any time to be diversified, it's looking in to 2006."
Drilling for yield
It was a banner year for natural resources and income-generating funds as investors hedged their big bets on global growth with stable payouts.
|Best performing funds|
|Average return year-to-date||Average 3-year return||Average 5-year return|
|Emerging Markets Equity||+26.22||+25.08||+11.63|
|Canadian Equity (Pure)||+16.12||+17.7||+6.41|
|Canadian Income Trusts||+14.35||+21.7||1+ 7.11|
|Worst performing funds|
|Canadian Money Market||+1.46%||+1.76%||+2.15%|
|Canadian Short Term Bond and Mortgage||+1.4||+3.12||+4.16|
|Labour-Sponsored Venture Capital||- 1.99||- 2.92||- 8.99|
|Foreign Bond||- 7.43||- 1.00||+2.61|
Average Return as of Nov. 30, 2005
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