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Coping with a stock fund identity crisis

As Canadian funds increase overseas investments, make sure your portfolio doesn't lose its balance

Bissett Canadian Equity Fund has 100 per cent of its equities invested in Canadian stocks. CI Harbour Fund, however, has only 54 per cent and Mackenzie Ivy Canadian Fund has about 50 per cent wrapped in the Canadian flag.

Welcome to a new era for Canadian stock funds.

Now that the federal government has lifted the 30-per-cent limit on foreign stocks, these staple funds are going through an identity crisis with more loading up on non-domestic holdings.

With managers embracing the world because merger mania has shrunk their universe, investors should check under the hood of their Canadian funds to make sure their asset allocation mix is not out of whack, and they are not taking on more currency risk, analysts warn.

"The important thing is that they are digging a little bit to see what it is that their funds are investing in," Dan Hallett, a fund analyst based in Windsor, Ont., said. "We are in this transitional phase, and a lot of these Canadian funds are going to be less Canadian than they have ever been."

Rising foreign content could cause investors to be offside in their portfolio weightings in stocks for Canada versus the United States and globally, he said. "If you have more U.S. exposure in a fund, maybe you might want to decrease your U.S. [exposure] elsewhere to balance it out," Mr. Hallett added.

But a bigger concern is the sharply rising Canadian dollar against the U.S. greenback, and whether a fund manger has hedged part or all the currency on foreign holdings, Mr. Hallett said. "If a Canadian fund is now dipping further into that [American] market, maybe you want to reduce your U.S. exposure elsewhere [in your portfolio]."

Peter Loach, fund analyst at BMO Nesbitt Burns Inc., said some fund managers' desire to increase foreign holdings is understandable given that 75 per cent of the stocks on the Toronto Stock Exchange are in financials or resource-oriented stocks. But that creates "an additional exercise" for investors to "double-check" the foreign content of their Canadian stock funds when building a portfolio, Mr. Loach said.

"You can go to a lot of free online services to get a recent snapshot of the fund."

The lifting of the foreign content limits in 2005 spurred the Canadian Investment Funds Standards Committee - whose members include fund data suppliers and industry groups - to reclassify Canadian fund categories last summer.

A Canadian "pure" equity category and a Canadian "focused" equity category, for funds with higher foreign content, were added to the traditional Canadian equity classification. But committee chairman Chris Adair said investors could be confused because some funds with a lot of foreign content could still be under the Canadian equity category.

Funds are not moved until there is 36 months of data reflecting the new classification, Mr. Adair said. "We don't want funds to be constantly moving categories."

Mackenzie Ivy Canadian Fund and its Canadian equity peers like CI Signature Select Canadian, Dynamic Value Fund of Canada and Trimark Canadian Endeavour Fund are poised to flip into Canadian "focused" equity by the end of the summer, he said.

Unlike his peers who have opted to boost foreign holdings, Fred Pynn, who co-manages the $3.7-billion Bissett Canadian Equity Fund, is going in the opposite direction.

The manager with Calgary-based Bissett Investment Management sold off his foreign stocks last year to be totally invested in Canada. It will take another couple of years before the fund moves to the "pure" Canadian equity category.

He is leaving the global turf to Bissett's parent, Franklin Templeton Investments Corp. "Our expertise has always been the domestic equity market," Mr. Pynn said.

"If you buy our fund, you are getting purely Canadian," he said. "It's just easier to keep track of your asset mix."

Adrian Mastracci, a fee-only financial planner who heads KCM Wealth Management Inc. in Vancouver, seeks pure Canadian stock funds for the Canadian portion of his clients' asset allocation mix.

But he prefers Canadian index or exchanged-traded funds instead of actively managed equity funds that could have some foreign stocks.

"It's much easier and cheaper to buy, and more tax-efficient," said Mr. Mastracci, who does not rely on trailer fees from fund sales. "But it's not everyone's cup of tea.

New categories

The days of the plain vanilla Canadian large-cap stock fund is gone. Here are the new industry categories that can be found at http://www.globefund.com

Canadian Equity (Pure): Must have a minimum of 95 per cent in Canadian stocks.

Canadian Equity: Must have at least 70 per cent and less than 95 per cent in Canadian stocks.

Canadian Focus Equity: Must have at least 50 per cent and less than 70 per cent in Canadian stocks.

Pure Canadian stock funds

Some funds just concentrate on Canada or have dumped foreign holdings to embrace Canadian stocks.

Net assets1-year 3-year 5-year% of Canadian
Fund Name$millionreturnreturnreturncontent in equity*MER
Fidelity True North-A1,469.0026.80%21.00%13.60%86.62.45%
PH&N Canadian
Equity-A1,366.9026.70%19.80%15.10%87.461.13%
TD Canadian Value955.922.20%18.90%12.90%97.172.20%
Elliott & Page
Growth Opportunities861.410.80%17.50%15.70%89.622.70%
CIBC Canadian Equity662.822.70%16.60%10.60%99.032.30%
RBC Canadian Index496.622.10%20.40%14.40%99.770.70%
iShares CDN
MidCap Index255.725.20%20.90%16.10%1000.60%
Desjardins Canadian
Equity204.824.80%20.10%12.70%100.052.20%
GGOF Canadian Lrg
Cap Equ Mutual164.625.70%21.10%14.20%98.82.40%
Mawer Canadian Equity108.824.90%20.70%14.50%96.741.20%
*Last portfolio reported anytime from December 29 to May 31. (Foreign content can fluctuate on a daily or monthly basis.)

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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