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Benchmarks aren't the only gauge in manager's toolkit

For each of the past three years, TDK Resource Fund Inc. has rewarded unitholders with an average return of 37.4 per cent. That makes it the best performing natural resource fund in Canada over that period -- blowing away the benchmark Globe Natural Resources Peer Index.

A 27-per-cent annual hike for the index isn't too shabby either, but over the same period, the Matrix Explorer Fund lumbered along at 6.4 per cent, making it the poorest performing natural resource fund.

How can things go so right for one fund and so wrong for another? On the surface they have a lot in common -- open-ended, average management fees, focused on Canadian natural resource stocks, moderate asset bases.

Craig Langdon manages the TDK Resource Fund on behalf of Vancouver-based Deans Knight Capital Management Ltd. He chalks up his fund's success to diligent research. "We have a huge network of energy contacts," he said.

Mr. Langdon ranks companies individually from the bottom up until he finds the best values. As a result, the TDK Resource portfolio holds about 60 per cent of its assets in only 10 stocks -- many of them junior names. Top holdings include Paladin Resources Ltd., Kawarau Zinc Ltd. and Bear Creek Mining Corp.

"We don't compare ourselves to an index or a benchmark because you can't make money that way," he said.

The Matrix Explorer Fund, on the other hand, is almost entirely invested in the materials sector -- larger names including International Forest Products Ltd., Alcan Inc. and West Fraser Timber Co. Ltd. Portfolio manager and Matrix Fund Management Inc. president Melvin Spooner could not be reached for comment.

The difference between over- and underachievers tends to be largest among hedge funds. Over the past three years the Dynamic Power Hedge Fund F has returned an average 56.5 per cent annually versus 19 per cent for the S&P/TSX Total Return Index. At the other end of the spectrum, the AGF Managed Futures Fund has lost an average 32.6 per cent each year over the same period. The variation can be partly explained by the fact that hedge funds employ a vast array of investment strategies and objectives. Very few hedge fund managers even acknowledge a benchmark.

Dynamic Power Hedge Fund manager Orit Sega attributes his fund's strong returns to focused management.

"We spend a lot of time at the macro level and are good at spotting trends, and sticking to them," he says.

At the same time, the AGF Managed Futures Fund held simultaneous long and short positions in commodities futures including coffee, copper and corn. The poor results suggest the fund often went long when it should have gone short, and short when it should have gone long.

Other wide under/overachiever spreads are found in the Canadian Small Cap category.

The Matrix Strategic Small Cap Fund has a 39.3-per-cent average annual return over three years versus a 19.4-per-cent advance for the benchmark BMO Nesbitt Burns Canadian Small Cap Index.

The Canadian small cap laggard is Investors Canadian Small Cap Growth Class B, bringing up the rear with a 7.5-per-cent average annual return.

The top science and technology fund over the past three years is the TD Entertainment and Communications Fund.

It returned 15.9 per cent annually versus a 2.6-per-cent advance for the Nasdaq composite index. In contrast, the RBC Life Science and Technology Fund lost an average 4.8 per cent each year.

Among Canadian pure equity funds the top three-year performer is Altafund Investment Corp. with a 23.3-per-cent return.

Over the same period the S&P/TSX returned 18.9 per cent, and the worst performing Canadian equity fund was Floyd Growth-Net at 7.1 per cent.

Dale Jackson is a producer at Report on Business Television

© 2007 The Globe and Mail. All rights reserved.

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