Welcome to the big leagues, all you investors who have been leaping into global equity funds in hopes of finding the next big thing.
To make money investing outside Canada, you need to work harder and be smarter in choosing your mutual funds. The Canadian market has made us all a lot of money in the past few years, but in a global context it's strictly minor league.
Financial, energy and materials stocks make up a shockingly large 75 per cent of the S&P/TSX composite index, and all three sectors have been hot in the past few years. It's awfully tough for a mutual fund manager not to make money in a market where success requires nothing more than holding a lot of oil companies and banks.
Profiting in global markets is much harder, and nothing underscores this point than a comparison of the average returns from Canadian and global equity funds in recent years. Canadian funds made 7.9 per cent annually for the five years to July 31, global funds 1.5 per cent. Over the past three years, Canadian funds averaged 15.1 per cent and global funds 8.8 per cent.
With their much greater level of diversification through sectors and countries, global markets don't yield the kind of easy scores you got in Canada recently. Plus, there are currency issues to consider. A strong Canadian dollar cuts into returns from stocks listed on foreign exchanges, which explains why many global funds have been so disappointing in recent years.
Mutual fund industry sales figures show that gross sales of global equity funds soared by 42.8 per cent in the first seven months of 2006, the biggest gain of any fund category. The investors driving this trend are doing the right thing at a time when the Canadian market is looking stretched after a rally lasting 3½years. But to make their foray into global markets successful, these investors will have to show some big-league investing smarts. Here are some suggestions to help with this.
Size and experience matter
No doubt, there are some tiny, hidden gems in the global equity fund category. Maybe a future Portfolio Strategy will go prospecting for them. For now, though, investors would do well to focus on the largest and oldest global funds because they're often top-notch or at least above-average performers.
We used the advance fund screener on Globeadvisor.com to come up with a list of global equity funds that delivered returns in the top 25 per cent of the category (top quartile, in other words) over the past five and 10-year periods. Five funds came up, all of them old-timers that have been around for 17 years or longer and all but one of them ranked among the 25 largest global equity funds by assets (see the accompanying chart).
Well-established, successful global funds have their stock-picking strategies down cold and, while they rarely top the charts, they usually manage to offer a decent mix of returns and risk control. A perfect example is Saxon World Growth, which makes our list of top five- and 10-year performers. The fund has been managed for the past 20 years by Bob Tattersall who has managed a compound average annual return since then of 10.4 per cent.
It happens that some of the older, bigger global funds have been weak in the past year or so, Saxon World Growth among them. The fund lost 1.7 per cent in the past 12 months, while the average global equity fund made 5.4 per cent. Given the long-term track record here, there's reason to consider buying Saxon World Growth at today's discounted prices.
A beaten down global fund that has recently shown signs of life is Mackenzie Ivy Foreign Equity. After three consecutive years of below-average returns, this fund has jumped into the top quartile in 2006. Risk-averse investors should definitely check out Ivy Foreign Equity because it's much less volatile than the average global fund and it came through the last bear market in fine shape.
Another global fund with excellent long-term results and below-average returns this year is Mackenzie Cundill Value, the second-largest fund in the category by assets. Two other funds that have slumped lately after good medium-term results are GGOF Global Small Cap Mutual, which has five-year returns that far exceed the global equity fund average, and Fidelity NorthStar, a newer fund that as of earlier this year had one-third of its assets in the Canadian market.
Don't bank on the banks
The mutual fund families of several of the big banks are first-rate in many areas, especially dividend and income funds that pay out cash every month. As a rule, though, the banks are lame at global investing.
In fact, bank global equity funds are so uniformly sub par that there seems very little risk in saying that they are to be avoided altogether, no matter what that friendly person in your bank branch tells you.
To their credit, investors seem to have grasped this. There's only one bank product listed among the largest 25 global equity funds, TD Global Select, and it has offered frequently below-average returns and higher-than-average volatility.
Given the shrewd minds running many of the bank fund families, it's hard to imagine that the global equity products from these companies won't improve at some point. Until then, look elsewhere for global content.
Think about hedging
A small number of global equity funds use hedging to partly or entirely eliminate the effect of currency fluctuations on returns, and some fund companies now offer funds in hedged and unhedged versions.
Hedging certainly makes sense for at least some of your exposure to the U.S. market, given the persistent weakness in the American dollar lately. But with a global fund, you're hedged automatically to a limited extent by having your investments over a variety of countries and currencies. Something else to consider is that the ups and downs in the value of your fund caused by currency movements tend to work themselves out over a period of 10 or more years.
If you're concerned about the Canadian dollar rising further and hurting your returns, consider putting at least some of your money in funds like Mackenzie Cundill Value or Franklin Templeton's Mutual Discovery that use hedging. Don't make too big a bet on hedging because you'll underperform when the Canadian dollar hits a slump.
Lsten to the analysts
We looked for the names that cropped up most often among the funds that receive a top five-star rating from the analysts at Morningstar Canada, an A grade from Fundata Canada Inc., and a top ranking from investment writer Gordon Pape. We also looked at funds that were recommended by analysts at TD Waterhouse, and the "heavy hitter" funds chosen by analyst Ranga Chand for fund portfolios sold through the on-line broker BMO InvestorLine.
There wasn't a ton of agreement on the best funds from these five sources, which reflects the subjectivity involved in rating funds. Still, a few names received multiple mentions. Among them are Mackenzie Cundill Value, which turned up on four of the five lists, and Capital International Global Equity, which turned up on three lists. The following funds turned up twice -- Altamira Global Small Company, Mackenzie Cundill Recovery, Mutual Discovery and Templeton Global Smaller Companies.
Global equity funds are popular these days, but investors will find that gains in this category are harder to come by than they have been in the high-flying Canadian market over the past few years. To help you make sound choices in the global equity category, we assembled two lists of funds worth further investigation..
FUNDS THAT MEASURE UP
Using the advanced fund screener on the Globeadvisor.com website, we looked for global equity funds that have delivered returns in the top 25 per cent for the category over both the past five- and 10-year periods. Here are the five funds we came up with.
|FUND||ONE-YEAR RETURN*||3-YEAR RETURN||5-YEAR RETURN||10-YEAR RETURN||SINCE INCEPTION|
|Dynamic Global Value Fund||+14.08%||+17.65%||+6.85%||+8.00%||+7.55% (Aug. '85)|
|Mackenzie Cundill Value A||+7.69||+14.75||+7.51||+9.87||+11.54 (April '67)|
|Saxon World Growth||-1.67||+7.72||+7.13||+7.95||+10.32 (Dec. '85)|
|Templeton Global Smaller Cos.||-1.86||+9.37||+8.49||+8.55||+10.02 (Jan. '89)|
|Trimark Fund-SC||+2.94||+5.33||+4.49||+8.50||+13.94 (Sept, '81)|
FUNDS THE ANALYSTS LIKE
We looked at funds that have received top rankings or recommendations from five sources: analysis firms Morningstar Canada and Fundata Canada Inc., investment writer Gordon Pape, investment dealer TD Waterhouse and fund analyst Ranga Chand. Here are the funds that were mentioned on two or more lists.
|Altamira Global Small Co.||+6.55||+16.1||+5.7||-||+10.4 (Aug. '96)|
|Capital Int'l - Global Equity A||+8.28||+11.13||-||-||+10.27 (Nov. '02)|
|Mackenzie Cundill Recovery C||+19.97||+20.68||+17.31||-||+16.35 (Oct. '98)|
|Mackenzie Cundill Value C||+7.34||+14.31||+7.09||-||+13.42 (Oct. '98)|
|Mutual Discovery||+10.14||+13.24||-||-||+12.44 (Feb. '03)|
* To July 31; Mackenzie Cundill Value A is closed, so investors must purchase the C version of this fund.
© 2007 The Globe and Mail. All rights reserved.
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