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Mutual funds find much to like in world beyond Canada

For Canadian stock fund manager Eric Bushell, the world is becoming his oyster.

Without the cap lifted on the foreign holdings of Canadian mutual funds, he has boosted non-domestic stocks to about 45 per cent in his CI Signature Select Canadian Fund.

"For the time being, this gives us more flexibility than we've ever had," said Mr. Bushell, who is also chief investment officer of Toronto-based CI Investments Inc.'s Signature group of funds.

Mr. Bushell is among the growing number of Canadian managers who have aggressively jumped on Ottawa's decision in 2005 to scrap the 30-per-cent foreign property limit on Canadian funds.

Their love affair with foreign stocks comes as mergers and takeovers in Canada increasingly reduce their universe, and they are finding better value on similar securities elsewhere around the globe.

Burlington, Ont.-based AIC Ltd. this week became the latest fund company to file prospectus changes to let it raise the foreign limit on its Canadian funds to 49 per cent.

Takeovers and mergers are not just happening in Canada's hot energy sector, said Mr. Bushell. "It's about the hotel sector and the steel industry ... How do you add value if there is no choice?"

He owns stocks such as Belgian-based InBev SA and Mexico's FEMSA because the options in Canadian beverage industry have dried up. Names like Seagrams, Molson, Vincor, Lakeport, and Sleeman are gone, while Cott Corp. is talking to potential buyers.

For managers like Mr. Bushell who run major large-capitalization funds, the problem is compounded by the fact that he can only find about 60 quality companies with a high trading volume that are listed on the Toronto Stock Exchange. "It is forcing everyone to own the same small number of Canadian stocks," he said.

In fact, Mr. Bushell is predicting the death of the Canadian equity fund. "In three to five years, don't expect to see any pure Canadian funds - especially large-cap funds," he said. In fact, he has jettisoned the TSX benchmark in favour of a blended TSX-global index.

David Taylor, a manager with Toronto-based Goodman & Co., has also jacked up the foreign content of his Dynamic Value Fund of Canada, but will keep it at 40 per cent or below.

"We have found better value outside of Canada and we wanted to diversify geographically ... to reduce some of the risk, Mr. Taylor said.

Several years ago, he recalls buying the stock of Jakarata-based PT International Nickel Indonesia instead of parent Inco Ltd., which was taken over last year by Brazilian giant Companhia Vale do Rio. PT was cheaper and it didn't have a union which reduced the risk of a strike, he said.

Geoff MacDonald, a manager with Toronto-based AIM Funds Management Inc., said he tends to keep foreign stocks in the 40- to 46-per-cent range in his co-managed Trimark Canadian Endeavour Fund.

"I find that when I go above 30 names [in the Canadian market] I am taking more risk," said Mr. MacDonald, who describe his investment style as "growth at a value price."

Given that Canada represents just over 3 per cent of the world's market capitalization, "I have always been able to find better opportunities outside than the limited universe that is here," he said.

But Mr. MacDonald, who also has a global perch from running the Trimark Global Endeavour Fund in recent years, is now gearing up to run a North American stock fund in the near future.

The offering will give investors some Canadian stock exposure, but has the ability to increase the foreign content through U.S. names to as high as 75 per cent.

"It's for those investors who want to get their feet wet if they want to invest globally just outside our borders in names that we are all familiar and comfortable with," Mr. MacDonald said.

Canadian funds with high foreign content

More Canadian stock funds have been on a global spending spree after Ottawa lifted restrictions in 2005.

Net asset value ($million)1-year return3-year return5-year returnMER% of foreign content in equity*
Brandes Canadian Equity$233 11.27%5.20%-2.70%34.57%
CI Signature Select Canadian$4,237 15.18%20.78%13.51%2.33%45.80%
Dynamic Value Fund of Canada$679 16.26%29.17%17.84%2.56%38.19%
Mackenzie Growth$490 12.00%15.20%12.59%2.42%44.11%
Trimark Canadian Endeavour$1,993 18.54%13.68%11.23%2.12%41.76%

* Last portfolio reported anytime from Feb. 28 to April 30.


© 2007 The Globe and Mail. All rights reserved.

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