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Mutual Fund News

Tuesday's wobble is a reminder to get your balance

Even mild-mannered mutual funds bit their owners in this week's one-day stock market plunge.

We're talking here about popular, conservatively run mutual funds suitable for the masses, and not risky sector funds investing in the likes of emerging markets, precious metals or technology. Take a look at these declines and then imagine how they could be magnified in a prolonged market downturn. If you don't like what you see, then it's time to pare back your exposure to the stock markets through equity funds.

According to a list of the 50 most widely held funds of all types, the $2.9-billion TD Canadian Equity Fund lost 3.38 per cent on Tuesday, the $6.4-billion Trimark Select Growth fund lost 3.21 per cent, the $5.3-billion Templeton Growth Fund lost 2.86 per cent, the $4.1-billion CI Signature Select Canadian Fund lost 2.81 per cent, the $4.7-billion RBC Equity Fund lost 2.75 per cent and the $4.7-billion CI Harbour Fund lost 2.33 per cent.

One-day moves likes these are, when viewed in isolation, pretty much meaningless. The key for investors should be long-term results, a measure by which the funds listed above have generally done quite well. Right now, though, a fund's one-day performance on Tuesday does matter.

The reason is that this week's market plunge was a warning of more trouble to come at some point. While a measure of stability did return to the markets yesterday, there's no getting around the fact that we're coming off a multiyear rally that will -- and must -- give way to a downturn.

Remember the year 2000? The markets delivered a scare during the early part of the year, then rallied to new heights before a decline that, for Canada's S&P/TSX composite index, didn't end until March, 2003. There's no telling when a sustained correction will come again, but it's certain that markets won't keep rising forever.

To get ready, look at your portfolio's exposure to stocks and see if it's sensible. The way stocks have outperformed bonds recently, it's quite possible that you're more tilted to equities than you set out to be in the beginning. Precious metals and emerging markets funds have done especially well. Whereas you started with a sensible 5-per-cent weighting in these categories, you may now have doubled your holdings.

Now it's time to pare back. Where should your money go? The list of the 50 most widely held funds offers some ideas.

TD Canadian Bond, the country's largest fund of its type with $8.5-billion in assets, made 0.53 per cent on Tuesday. The $3.6-billion Bissett Bond Fund made 0.54 per cent and the $3.2-billion RBC Bond Fund made 0.41 per cent. With the interest rate environment neutral to potentially lower in the months ahead, there's a good fundamental underpinning for holding bonds or bond funds. If the stock markets fall, then you'll see bonds favoured as a haven as well.

Several money market funds rank among the largest funds, but their unit prices don't fluctuate from day to day. These funds offer a yield in the area of 3.5 per cent right now, which is good enough to claim at least a small portion of a safety-conscious portfolio.

Monthly income funds, with their mix of income trusts, dividend stocks and bonds, had an okay time of it on Tuesday, comparatively speaking. The $8.7-billion RBC Monthly Income Fund and $5.7-billion BMO Monthly Income Fund both lost 0.94 per cent, while the $6.7-billion CIBC Monthly Income Fund lost 1.13 per cent. In a down market, losses like these would be offset by the monthly distributions of cash these funds offer.

The results for the most widely held balanced funds suggest they're not an ideal place to put money if you're reducing your exposure to the stock markets. Balanced funds hold a blend of stocks and bonds, but their performance on Tuesday was much closer to that of equity funds than bond funds. The $8.7-billion RBC Balanced Fund lost 1.82 per cent, the $4.9-billion CI Harbour Growth & Income Fund lost 1.47 per cent.

More adventurous investors may wonder if this week's market decline offers a buying opportunity, especially in China and other emerging markets. Don't bite unless you're fine with 3- to 7-per-cent declines that emerging markets funds delivered on Tuesday.

The point in shifting money around in reaction to this week's market events is to get back to the mix of stocks and bonds that's right for you in terms of your age, risk tolerance and such. Selling some of your winning Canadian and global equity funds will be tough to do, but it's the right approach.

Look at it this way -- you can voluntarily rebalance and move money into other areas, or you can leave it to the markets to burn your equity funds down indiscriminately. Your choice.

© 2007 The Globe and Mail. All rights reserved.

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