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Mutual Fund News

Some options for a leery investor

Industry sales are in a tailspin, but KEITH DAMSELL says there are low-risk funds available that continue to outperform the competition

Mutual fund investors have lost a lot of faith.

Volatile markets have hurt returns, and new investment dollars are scarce. The Investment Funds Institute of Canada estimates that fund industry net sales tumbled in June to about $200-million, down dramatically from $1.8-billion a year earlier.

Investors are in a cautious mood, but there are some promising options for those willing to stick with funds. Here's a quick look at some low-profile, low-risk funds that continue to outperform the competition:

Dynamic FocusPlus Real Estate Fund: Oscar Belaiche is the self-effacing lead manager of this winning fund. The Dynamic team are strong stock pickers and hold a diverse mix of about 50 to 60 undervalued real estate-linked investments around the globe, including real estate investment trusts, mortgage brokers and real estate companies.

"Part of location, location, location is knowledge, knowledge, knowledge. . . . We have a very strong real estate platform in our organization," Mr. Belaiche said.

Long- and short-term returns of the $111-million fund handily trump its peers. The high-yield equity fund has the attributes of both stocks and bonds, offering income and capital appreciation.

Mackenzie Sentinel Corporate Bond Fund: Lead manager Dan Bastasic has two key criteria when looking at corporate debt: Is it affordable and will the issuer default?

"I don't think there is any real secret to it. It's having an approach that works, and sticking to it," he said.

And the Bastasic formula can work like a charm. A flood of 2005 auto sector debt issues scared him, and he wisely built his cash position. Recent successes include investments in Bombardier Recreational Products Inc. and Sherritt International Corp. For the five-year period ended May 31, the fund reported an annual average return of 6.1 per cent, compared with its peers within the high-yield bond fund group, which averaged 4.8 per cent. Short-term returns beat the competition, too.

National Bank Mortgage Fund: Easy access to a winning pool of mortgages drives the success of National Bank of Canada's mortgage fund, said Marc-André Lewis, vice-president of fixed income at subsidiary Natcan Investment Management Inc. The fund's long- and short-term returns beat averages posted by competing Canadian short-term bond and mortgage funds.

"We have the luxury of choice," Mr. Lewis said. "People are looking for yield elsewhere, and I think mortgages are the place to go."

The National Bank Mortgage Fund offers the security of a typical bond or money market fund, but with a sweeter return. The typical bond fund holds securities with a six- to seven-year maturity. In contrast, most mortgage pools held by the National Bank fund are higher-yielding two- to four-year fixed terms. Mr. Lewis said.

AIC gets CHUM windfall

AIC Ltd., billionaire Michael Lee-Chin's beleaguered fund company, got some rare good news this week, courtesy of Bell Globemedia.

The AIC Diversified Canada Fund holds about 1.6 million class B shares of CHUM Ltd., about 7 per cent of the broadcaster's 21.4 million non-voting shares. The $1.7-billion mutual fund began buying CHUM shares back in 1998. The fund's average purchase price for CHUM shares was about $25 apiece.

The investment paid off smartly on July 12, when BCE Inc.-controlled BGM, owner of the CTV television network and The Globe and Mail, unveiled a friendly $1.4-billion takeover of Toronto-based CHUM. Class B shareholders will receive $47.25 in cash a share, a heady 51-per-cent premium on the stock's July 11 closing price of $31.25 on the Toronto Stock Exchange.

The back-of-the-envelope math? A handsome $35.6-million profit for the AIC fund.

"We're happy," said Jonathan Wellum, chief investment officer for Burlington, Ont.-based AIC. "It's been a slow grind, but it's panned out."

Nevertheless, Mr. Wellum is "disappointed" by the bid's treatment of class B investors. Holders of CHUM's common shares -- the Waters family -- will receive $52.50 a share, an 11-per-cent premium to what is on the table for class B shareholders. For AIC, it works out to a shortfall of about $8.4-million.

"It's the principal," Mr. Wellum said. "You are talking about an organization [CHUM] that's left of centre, Queen Street, Speaker's Corner, the democratization of the little people . . . you want to demonstrate some fairness, something that maybe reflects that content with which you have made your money over the years."

Keith Damsell is editor of GlobeinvestorGOLD

© 2007 The Globe and Mail. All rights reserved.

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