If things continue the way they have, 2006 could once again be the Year of the Hedge in the mutual fund world. The final numbers are still trickling in but as we cross the year's halfway point, 10 of the 20 best performing funds are hedge funds, while eight are precious metals funds -- often considered portfolio hedges.
In the entire universe of open-ended mutual funds with assets over $25-million, the best performer so far this year is the Salida Multi-Strategy Hedge Fund managed by Salida Capital Corp. The six-month return is near 50 per cent. As the name implies, the fund runs several hedge strategies including long/short, merger, arbitrage and systematic managed futures.
Like most hedgers, the management team at Salida keeps its cards close to its chest when it comes to strategy but president Gary Ostoich credits the strong performance with the ability to employ the right strategy to the right situation. "If you have different strategies, they'll act differently in different market environments," he said.
Mr. Ostoich says the fund is invested in several sectors that span the globe. Over half of the $74-million in assets is employed in a long/short strategy, with a bias toward the long side. The fund is currently shorting consumer discretionaries and taking long positions in energy. He says he doesn't expect that strategy to change in the second half of 2006.
"Right now we think natural resources are the place to be in the long term," he said.
The top performing precious metals fund so far this year is Sentry Precious Metals Growth, which has returned 36 per cent since Jan. 1. Three quarters of the fund's $126-million is invested in gold stocks and the rest is in base metals stocks. The majority of all holdings are Canadian small-capitalization firms. "Small caps have the most value," said fund manager Kevin MacLean of Sentry Select Capital Corp.
The first half of 2006 has been a wild ride for gold prices -- starting the year at $532 (U.S.) an ounce, topping $700 in May and sliding back to about $585. Mr. MacLean said that if interest rates stay in line with expectations, gold should climb back up to the $600 to $650 range, and the Sentry Precious Metals Growth Fund should continue its stellar performance in the back half of 2006 and beyond. "We're in the early stages of a long-term bull market in gold," he said.
This year is the year of the dog in the Chinese calendar, and there are plenty of dogs among mutual funds so far this year. The bottom of the heap is dominated by science and technology and Japanese equity funds.
Starting at the absolute bottom, the BMO Global Science and Technology Fund is down nearly 18 per cent in the first half followed by CI Global Biotechnology Corporate Class, which is down 15.3 per cent, and the Altamira Science and Technology Fund, which has sunk 13.6 per cent. All three funds have underperformed the Nasdaq composite, which has fallen 10 per cent since Jan. 1.
The year hasn't started out well for many Japanese equity funds either. The Franklin Templeton Japan Fund is down 17.3 per cent, followed by an 11.7-per-cent drop for the TD Japanese Growth Fund.
Other Japanese equity funds to take it on the chin include the Mackenzie Select Manager Japan Fund, down 11.6 per cent, and Fidelity Japan, down 11 per cent. Factoring in the Canadian dollar, the benchmark MSCI Japan index is down 8 per cent this year.
David Baskin, president of Baskin Financial Services Inc., said he's surprised that after a 10-year slump Japanese equities are still having trouble getting a foothold. "There are big opportunities in Japan for people looking for offshore exposure," he said. Baskin Financial manages $330-million on behalf of its clients and mutual funds of any kind are excluded from the investment plan. Mr. Baskin said the bull market in gold is dead and retail investors are being sold a myth that precious metals funds are an essential part of a portfolio. "It's not a currency. It's just another metal. Do you need aluminum? Do you need copper?" he said.
He also said that hedge funds are too risky for the average investor because their strategies vary from fund to fund. To him, the best way to reduce risk in hedge funds is to purchase what are considered funds of funds, which he considers too expensive anyway. "Buy fixed income for hedges and diversify your portfolio according to asset class, geography, company size and industry," he said.
In the back half of 2006 Mr. Baskin is advising his clients to go on the defensive -- investing in basics like energy, and food and clothing related stocks. "We fear a recession in the U.S. in early 2007," he said.
Dale Jackson is a producer at Report on Business Television.
© 2007 The Globe and Mail. All rights reserved.
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