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Currency-neutral funds best bet to beat index

WHAT ARE WE LOOKING FOR?

Index-beating U.S. equity funds, which are said to be a rare breed.

TODAY'S SEARCH

Simple - we just screened all funds in the U.S. equity category to see which beat the 3.6-per-cent annual return of the S&P 500 in Canadian-dollar terms for the five years to Aug. 31 (that's a total return, including dividends). The funds are presented in order of their five-year compound average annual returns, and just for fun we've noted their beta. That's a risk measure comparing volatility to the appropriate benchmark stock index, in this case the S&P 500. The index has a beta of one and funds on either side of that threshold are said to have either lower or greater volatility.

SO WHAT DID WE TURN UP?

Globefund.com lists 123 U.S. equity funds with a five-year history - of those, 39 were index beaters over that period, or just under one-third. Several index funds made the list, but not just any index funds.

With the soaring Canadian dollar reducing the value of assets denominated in U.S. dollars in recent years, currency-neutral index funds have fared the best. By protecting against currency fluctuations through the use of hedging, these funds ideally deliver what the underlying index makes, minus fees. Note that the S&P 500 in U.S.-dollar terms has made about 12 per cent annually over the past five years with dividends reinvested.

Currency-neutral funds seem to have an additional advantage over unhedged funds - a lower beta. It looks as if converting S&P 500 returns into Canadian-dollar terms adds an extra level of volatility that currency-neutral funds remove. RBC O'Shaughnessy U.S. Value, a reliable long-term performer with a comparatively low beta, is a user of currency hedging.

Dynamic Power American Growth does not use hedging, so its index-beating numbers are all the more impressive. Note: This fund has been available in a currency-neutral version for the past two years, and it has outperformed.

(As of Aug. 2007)

Net AssetsLast MER5 year5 year
Name($-millions) reported dateMERreturn (%)BETA
Dynamic Power American Growth201.012/29/20064.3412.38%0.96465
SEI U.S. Large Cap Synthetic-O112.88/31/20070.1411.42%0.76366
TD U.S. Index Currency Neutral-I133.38/31/20070.8510.82%0.76649
Altamira Precision US Curr Neutral117.68/31/20070.5310.81%0.76211
RBC U.S. Index Currency Neutral368.38/31/20070.710.74%0.75145
RBC O'Shaughnessy U.S. Value1,432.38/31/20071.5710.25%0.69532
NWQ U.S. Large Cap Value99.912/31/20022.218.11%1.0063
Dynamic American Value157.412/29/20062.698.02%0.91367
BMO U.S. Equity Index153.78/31/20071.227.64%0.81685
CI American Managers Corp Class336.68/31/20072.346.74%0.69241
IA Clarington Navellier US All Cap48.08/31/20072.876.54%0.62627
CI American Value Corporate Class349.18/31/20072.346.28%0.66696
United-US Equity Diversif Pool Cl W37.18/31/20070.216.23%0.95403
CI Synergy American315.68/31/20072.345.41%0.49762
iShares CDN S&P 500 Index571.38/31/20070.155.35%0.92928
Integra U.S. Value Growth68.812/31/20022.495.29%0.86024
CI American Small Companies452.48/31/20072.345.21%0.67492
imaxx US Equity Growth3.78/31/20072.855.03%0.94606
McLean Budden American Equity754.53/31/20041.254.79%1.07691
PH&N U.S. Growth-A577.78/31/20071.254.74%1.07478
CI American Equity386.08/31/20072.344.70%0.98083

FUND PROFILES

Check out Globefund.com's fund profiles. They compare a mutual fund's returns against both the appropriate stock or bond benchmark and the average return for funds in the same category.

rcarrick@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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