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Mutual Fund News

Where are we heading? The pros weigh in

Scale back in Canadian funds and diversify, experts say. They give ANGELA BARNES their top picks

Left it to the last moment again this year? Your RRSP contribution, that is.

Welcome to the club. Every year, tens of thousands of us do just that, even though the experts urge us to get our contributions in early.

Many of the Johnny-come-latelys will opt for mutual funds. So here is how some mutual fund experts read the market, and here are funds that they particularly like.

Gordon Pape Publisher of Top 50 Funds for 2006 and the Internet Wealth Builder newsletter

Mr. Pape declined to specify which categories of funds will do well this year. He doesn't think individual investors saving for retirement should try to guess which sectors will be hot.

"I think that is a dangerous approach, particularly for ordinary investors," he said. Instead, he recommends people choose well-diversified funds with conservative management.

"The goal should not be to shoot the lights out in any given year but rather to achieve steady returns over the long term," he added.

Among the Canadian equity funds he singles out for special mention is CI Canadian Investment Fund, run by high-profile manager Kim Shannon since late 1996. Ms. Shannon employs a conservative buy-and-hold value approach.

"The real test of her investment acumen came during the bear market of 2000-2002," Mr. Pape said. The fund didn't lose money in any of those years, and it has continued to do well. Over the three years ending in November, it had an average annual compound return of 18.2 per cent, more than 3 percentage points above the category average. Yet the fund has a lower-than-average risk rating, he noted.

Another pick in the same category is the RBC O'Shaughnessy Canadian Equity Fund, which Mr. Pape describes as having everything you would want in a large-cap Canadian equity fund -- "a skilled and experienced manager," a relatively low management expense ratio, a transparent investment strategy and a "great record."

The fund, which is managed by star manager James O'Shaughnessy, author of What Works on Wall Street, has gained an average 14.1 per cent a year, more than double the average for that group, he said.

For investors seeking exposure in the U.S. market, Mr. Pape recommends Dynamic Power American Growth Fund run by Dynamic's rising star, Noah Blackstein. Mr. Pape added that despite the slide in the Canadian dollar, which trimmed returns for Canadian investors, the fund posted an average annual return of 12.8 per cent in the three years ended November. But he also said volatility with that fund is on the high side. The only negative he sees is the very high MER (management expense ratio). RBC O'Shaughnessy U.S. Growth Fund also caught his attention -- it's a specialty fund that includes a lot of small-cap stocks.

Investors looking for action outside North America should consider the Mackenzie Cundill Value Fund, which is managed by Peter Cundill and David Briggs, and the Mawer World Investment Fund, which Gerald Cooper-Key runs, Mr. Pape suggests.

The former fund has benefited recently from its heavy weighting in Japan. It gained 12.7 per cent in the year ended November and 9.9 per cent over five years. The Mawer fund has a much smaller stake in Japanese issues but it too did well in the year ended November as the 15.7-per-cent increase shows.

Mr. Pape likes Harbour Growth & Income Fund and Saxon Balanced Fund in the balanced fund group, Dynamic Focus Plus Diversified Income Trust Fund among the funds investing in income trusts, and BMO Monthly Income Fund in the balanced income category.

Dan Hallett President of Dan Hallett & Associates Inc.

Mr. Hallett suggests that investors scale back on their holdings of Canadian funds. Valuations in the Canadian market are high relative to foreign markets and Canada has led the recovery in major stock markets in recent years, he noted.

"Canadian managers . . . are having a difficult time finding bargain stocks," he said. "Another bad sign -- or at least it's been a bad sign historically -- is that investors are tripping over themselves to plow money into Canadian dividend, income trust, bond and balanced funds," Mr. Hallett said, noting that "historical data has shown over and over that fund flows tend to be a decent negative indicator."

So where should the investor be looking? Into foreign funds, Mr. Hallett said. He thinks GARP (growth at a reasonable price) managers are the ones to watch since they have had a harder time relatively during the recovery in the markets.

James Kedzierski Editor of the Canadian Mutual Fund Adviser

The Canadian market has done so well over the last few years that it is hard to see it continuing to post such gains over the next year or so, Mr. Kedzierski said.

For that reason, he recommends investors make sure the Canadian funds they choose are well balanced and diversified. Investors should also have some exposure to foreign markets.

"A lot of investors, particularly if they don't have much foreign exposure, should be getting that foreign exposure now when the Canadian dollar is relatively strong," he said. The strong dollar makes foreign assets cheaper to buy.

Among the global funds he likes is the Trimark Fund, which has been underperforming compared with other funds in its class in recent years because it didn't have as big a stake in energy issues as other funds did, Mr. Kedzierski said. He describes it as a good conservative and diversified fund that "tends to hold up well when markets head downwards."

Investors looking for a non-North American slant in their foreign investing could consider the Mawer World Investment Fund, he suggested. It has been a consistently good performer, having made the top half of its group in nine out of the past 10 years. In seven of those years, it produced a first-quartile showing.

For those desiring exposure to the U.S. market, Mr. Kedzierski recommends the McLean Budden American Equity Fund, a large-cap fund, but advises holders to watch movements in the Canadian dollar.

"Large caps in the U.S. have tended to underperform, so we think there is probably some value to be had there," he said.

Over the last 10 years, it has produced an average annual return of 9 per cent, which puts it in fourth among 52 such funds. Returns have held in well during periods of market weakness, he noted. Its management expense ratio, like that of the Mawer fund, is low, at 1.25 per cent (the Mawer fund's is 1.45 per cent).

On the domestic side, Mr. Kedzierski favours the CI Canadian Investment Fund and the RBC O'Shaughnessy Canadian Equity Fund.

When it comes to specialty funds, he isn't enamoured with resource funds or with gold and precious-metals funds, but he continues to like the health care field.

"The one thing we like about the health care sector is of course the demographics, specifically the aging population in North America," he said.

But the attraction also stems from the fact that as developing countries become wealthier, their demand for health care will rise.

His pick in that area is Talvest Global Health Care Fund. Over the last nine years, it has returned an average 17.9 per cent a year, but results have fallen in the last few years as health care issues, particularly the drug stocks, got hit hard, but judging from the 9.24-per-cent return in 2005 it appears to be staging a comeback. The fund is diversified across the health care field.

Peter Loach Fund analyst at BMO Nesbitt Burns Inc.

In terms of sectors or geographical areas, Mr. Loach favours Japan.

"The fundamental guys like it, the value guys like it, the technicians like it -- it makes a lot of sense," he said. And it doesn't rise and fall with North American markets, which is another plus. Further, there isn't the concern about possible weakness in the U.S. dollar that there is with a U.S. fund, he noted.

"If you want to take a certain portion of that ex-Canada equity component and put it in Japan, it makes a lot of good sense," Mr. Loach said.

His picks in that category include the Mackenzie Select Managers Japan Capital Class. He likes its multi-manager, multi-sector approach. Another pick in that group is TD Japanese Growth Fund.

Like Mr. Pape, Mr. Loach is hesitant to recommend that investors pile into the currently hot energy and precious-metals funds. He too feels investors would be better off with a diversified Canadian equity fund than a pure play. A diversified fund would have sufficient exposure to the energy sector and possibly precious metals as well, he said,

In the Canadian equity area, his choices are the CI Canadian Investment and the CI Harbour Funds for conservative investors, and the Synergy Canadian Class and the Sprott Canadian Equity Funds for the more growth-oriented or aggressive investor.

Mr. Loach likes the CI Harbour Fund for the prudent way its assets are invested and the fact that over time the fund has been a constant out-performer. The CI Canadian Investment fund got the nod for its disciplined approach to valuations. He also applauds the disciplined approach with the Synergy fund, while the Sprott fund offers "a completely different approach to investing" and it is run by a team of "proven, talented managers."

© 2007 The Globe and Mail. All rights reserved.

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