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Mutual Fund News

Industry sees sense in currency-hedged products

Many new offerings available for clients, but be aware of risks and keep it simple, KEITH DAMSELL writes

The mutual fund industry is betting investors will want to make a wager of their own on the future of the Canadian loonie.

There has been a flood of new investment products that hedge currency, a tool that allows Canadians to invest in U.S. and international markets without exposing themselves to currency losses from a strong Canadian dollar.

On July 5, Phillips Hager & North Investment Management Ltd. launched the Currency-Hedged U.S. Equity Fund and the Currency-Hedged Overseas Equity Fund. Clients of the Vancouver fund company were leery of the overheated Canadian equity market and wanted to invest overseas but sought to mitigate currency risk, said PH&N president John Montalbano.

The PH&N funds follow the June launch of a trio of currency-hedged funds by Toronto's Criterion Investments Ltd., an affiliate of VenGrowth Assets Management Inc. And over the past year, Dynamic Mutual Funds and Mackenzie Financial Corp. have marketed new currency-hedged products to investors. Industry sources report that a handful of fund companies are poised to launch more currency-linked products in the weeks and months to come.

It's hard to argue the merits of currency hedging, especially when looking at the short-term performance of the U.S. market. The S&P 500 has had a nice ride since 2003 but returns have been eaten up by currency losses. For example, look at the well-regarded Dynamic Power American Growth Fund. For the three-year period ended May 31, the Canadian dollar version has an average annual return of 12.8 per cent; over the same period, the U.S. dollar version is up 21.2 per cent.

Financial advisers are wrestling with the issue. Some advice:

Currency hedging is a complicated, risky business.

"It's a double-edged sword," said Adrian Mastracci, a Vancouver adviser. "There is a cost to hedging something and you may miss the opportunity for a higher return. On the other hand, if you are right, you may protect some of the capital."

When considering hedging, take into account liabilities and current currency holdings. Hedging may make sense for retirees who spend a lot of time in the United States. Toronto adviser John DiNovo urges clients to finance their cost of living over a five- to seven-year period with Canadian dollar investments.

"I think it is really a function of what foreign content is as a percentage of the overall portfolio and moreover how this foreign content and exposure are achieved," said Adam Felesky, president of BetaPro Management Inc. For example, the bulk of global equity funds and exchange-traded funds are overweight in the U.S. dollar and exposed to further erosion in its value, he said.

Invest for the long term. If you buy and hold a good U.S. or international fund for 10 to 15 years, currency fluctuations may be a wash. "The best defence long term is not necessarily hedging currency risk but maintaining a well diversified portfolio and rebalancing it on a regular basis," said Chris Reynolds, president of Investment Planning Counsel Inc. of Mississauga.

Keep it simple.

"Buy good, profitable businesses at attractive prices, and hold them through market and currency fluctuations," said F. Blaine Dickson, branch manager of Capri Intercity Financial in Kelowna, B.C. "Small investors have enough trouble maintaining commitment to their simple investment goals, never mind trying to have them commit to watching complicated, daily changes in currency."

Tsakok to pay $50,000 fine

The manager of a now defunct Vancouver mutual fund company has agreed to pay a total of $50,000 in penalties and fines to the British Columbia Securities Commission.

In a settlement agreement, Raoul Tsakok of Sagit Investment Management Ltd. admitted to compliance deficiencies and the violation of securities regulations. Sagit ran 16 mutual funds between 1986 and 2003 before the company was merged with Toronto's Mavrix Fund Management Inc. Funds were marketed under the Cambridge and Trans-Canada brands.

Mr. Tsakok, a well-known figure on Vancouver's Howe Street, admitted that he contravened securities rules by holding multiple roles of a reporting issuer while registered as an advising director of Sagit. The 56-year-old executive was Sagit's principal shareholder and made all investment decisions for the funds.

A compliance review by BCSC staff in 2002 found that Sagit's policies and procedures were incomplete, out of date and inadequate. As part of the settlement, Mr. Tsakok will not apply for registration as an advising or trading officer of a registrant.

It's a sad denouement for Mr. Tsakok. Born on the island nation of Mauritius, he completed his university education in Canada. A flair for finance got him a job at Confederation Life Insurance Co., and later, Bolton Tremblay Inc. In 1986, he bought Vancouver's Cambridge Funds and Sagit was created.

Mr. Tsakok made big bets on red-hot resource stocks and by 1994, the firm was managing more than $200-million in retail accounts. The sector fell from favour and by 2002, assets under management had fallen to about $11-million.

Keith Damsell is editor of GlobeinvestorGOLD

© 2007 The Globe and Mail. All rights reserved.

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