The stock market's gone squirrelly, and that's no bull.
Commodity prices are suddenly shaky after epic increases and an old enemy, inflation, is making threatening noises. What a downer for Canadian investors after three of the fattest years you'll ever see for stocks.
And yet, life goes on. Whether the bull market is suffering from a mere cold or mad cow disease, investors must still invest. The question is, where?
In today's Portfolio Strategy column, we examine four options for the investor who wants to put money to work right now but also play some defence. None of these choices will make you rich if the markets rally again, but they will limit your downside if the declines of the past week or so worsen.
1 Cash-heavy mutual funds: Positioned for bargain hunting
Forget about the criticism that equity funds holding cash aren't delivering full value for the fees they charge. Stockpiling cash is a legitimate strategy for a fund manager in that it, first, eases the pain of falling stock prices and, second, permits the purchase of bargain-priced stocks that may appreciate over time. This explains why some of the funds with a lot of cash right now are above-average performers over the long term.
The advanced fund filter on the globeadvisor.com website found several funds that have significant cash holdings and above average returns over the past five years or more. Here are some of them.
CI Harbour Growth and Income, with almost 35 per cent of its assets in cash, and CI Harbour, with a cash weighting of about 17 per cent.
Mackenzie's Cundill family, with large cash weightings of as much as 31 per cent.
RBC Select Growth, a global asset allocation fund (stocks, bonds and cash) that has about 34 per cent of its assets in cash, and RBC Balanced Growth, with about 22-per-cent cash.
AIC Canadian Focused, with about 20-per-cent cash.
Synergy Extreme Canadian Equity, with a little more than 17 per cent of its assets in cash (and a heavy weighting in commodity stocks).
LOOKING FOR STABILITY IN A CHOPPY MARKET
We ran a screen for equity and balanced funds that, first, had more than 25 per cent of their assets in cash as of their most recent reporting date and, second, had above average returns over the past five years. Here's what we came up with.
|Fund||Asset class||Assets ($million)||MER||Cash weight|
|CI Harbour Growth and Income||Cdn. Balanced||$4,026.0||2.36%||34.80%|
|Dynamic SAMI||Specialty or misc.||7.9||3.94||37.2|
|Ferique International||Global equity||39.4||1.27||42.3|
|Mack. Cundill Cdn. Balanced C||Cdn. balanced||1,652.40||2.46||31.4|
|Mack. Cundill Cdn. Security C||Cdn. equity||2,496.90||2.46||28.6|
|Mackenzie Cundill Value C||Global equity||4,977.20||2.52||30.5|
|Northwest Specialty Innov.||Science & tech.||50.7||2.8||26.1|
|RBC Select Growth||Global balanced||1,324.90||1.67||33.7|
|& asset allocation|
2 Safe sectors: Consumer staples and utilities
With interest rates on the rise, utilities have been the worst-performing sector on the TSX this year. When the index began to fall late last week, though, utilities stocks were back in favour because of the solidity of their earnings and high dividend yields.
It's a somewhat similar story for the consumer staples sector -- as commodity stocks fell, investors gravitated to a sector selling products such as food that are perpetually in demand.
Drilling down into the S&P/TSX composite using the tools in globeinvestor.com's indexes area shows us that Maple Leaf Foods Inc., Connor Bros. Income Fund and Rothmans Inc. are among the leaders in the consumer staples sector this month.
Atco Ltd., Fortis Inc., TransAlta Corp. and Canadian Utilities Ltd. have been the top-performing utilities stocks.
If you're a fund investor, you might consider mutual funds that have emphasized consumer staples stocks or utilities and thus have demonstrated a conservative bent.
Globeadvisor.com's advanced fund filter found several funds with more than 10 per cent of their assets in consumer staples, including Bissett Canadian Equity, the Brandes global and U.S. equity funds, Mackenzie Ivy Canadian, Mutual Discovery and Trimark Canadian, Canadian Endeavour and Select Balanced.
One of the few equity funds with a heavy utilities weighting (13.7 per cent) is IA Canadian Conservative Equity, a venerable fund that has long combined good returns and solid safety.
3 Health care: A sector poised to explode?
If oil and gas stocks are falling, health care is a good place to be because the sector's ups and downs are not much correlated to energy. But there may be an added attraction to health care right now. According to the Calgary-based advisory firm McLean & Partners Wealth Management, health care today could be what energy stocks were back in 1999 -- overlooked, unloved and poised for a major rally.
In a commentary issued this week, McLean said the United States spent $1.2-trillion (U.S.) on health care in 2005, about 16 per cent of gross domestic product. An aging population is expected to increase this amount to $4-trillion by 2015, representing 20 per cent of GDP. So why have health care stocks fallen so far out of favour that their price-earnings multiples have almost been halved since mid-2002?
McLean lists three reasons: Health care has been overshadowed by energy and commodity stocks, drug patents at major companies have been expiring and concern has set in about whether U.S. budgetary deficits will lead to cuts in Medicare spending.
"Our response to the above is, So what!" the firm said its commentary.
"Demand for health care is about to explode, and the above uncertainty is now fully reflected in the health care stocks. Health care could be the next big play in the stock market."
Even if health care isn't the next energy, it's still a safe haven when commodity stocks are falling. Example: When commodity stocks led the S&P/TSX composite index to a drop of 206 points this past Monday, the biggest health care mutual fund in Canada, Talvest Global Health Care, made 1.88 per cent.
McLean & Partners has researched the correlation between the Canadian energy sector and health care in the U.S. market and found that health care either gained a bit or fell much less than energy during each major energy sector correction from 1999 to the present.
ENERGY VERSUS HEALTH CARE
When oil stocks drop, health care stocks tend to perform a lot better. Here's a comparison of how the S&P Health Care Composite Index has performed during sharp down periods for the S&P/TSX capped energy index since 1999. Results for the health care index have been converted into Canadian dollars.
|Jan 15, 1999 - March 5, 1999||- 9.33%||versus||7.78%|
|Sept. 9, 1999 - Feb. 24, 2000||- 22.11||versus||- 10.92|
|June 5, 2001 - July 18, 2001||- 17.36||versus||- 3.35|
|March 4, 2005 - March 30, 2005||- 8.18||versus||- 2.49|
|Sept. 22, 2005 - Oct. 21, 2005||- 12.72||versus||- 2.53|
|Feb. 6, 2006 - Feb. 14, 2006||- 10.31||versus||2.36|
|April 19, 2006 - May 15, 2006||- 9.80||versus||- 2.61|
SOURCE: McLEAN & PARTNERS WEALTH MANAGEMENT LTD.
4 Bonds: An all-weather strategy
Volatile stock markets drive money into the bond market, which is why BMO Nesbitt Burns fixed-income strategist Michael Herring expects bonds to rally at least a little bit over the next three to six months. He said four- to five-year bonds are the most attractive in this environment and believes investors should be able to get yields of 4.1 to 4.5 per cent, with the lower end of the range applying to Government of Canada bonds and the higher end to corporate bonds.
Mr. Herring said investors looking for a mix of safety and yield should consider Canada Housing Trust bonds, which are issued to stimulate the residential mortgage lending market and have federal government backing. The appeal of these bonds is the combination of Ottawa's triple-A credit rating and the fact that they offer yields that can be roughly 0.1 of a percentage point above government bonds. "For these bonds to be trading at a spread relative to government bonds is kind of like finding nickels lying around on the ground," Mr. Herring said.
Mr. Herring thinks inflation will become more of a concern, and that long-term bonds should be avoided. Investors who want an auto-pilot bond portfolio should use a ladder where equal amounts are invested in terms ranging from one to eight years. "Something like that would be a pretty good all-weather strategy for their bond component for what could be the next 10 or 20 years," he said.
© 2007 The Globe and Mail. All rights reserved.
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