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Ways to avoid that bunker mentality

There's no need to dive for cover in hostile markets. Now is a good time to pick up funds that have weathered previous downturns, though not all of them have what it takes this time around

rcarrick@globeandmail.com

Welcome to the worst RRSP investing season in quite some time.

Stock markets have fallen hard early in 2008, which means conditions are hostile at a time when many people are making their key investing decisions of the year. Are you tempted to get conservative and keep contributions to your registered retirement savings plan away from the stock market?

Don't be a bunker investor. Sure, you can safely stash your RRSP contribution in money market funds to wait out the deluge on the markets. But your returns will be meagre and you'll probably miss the ideal time to go back into stocks.

Truth is, falling stock markets offer a good opportunity to buy into the kind of mutual funds that stand up well in down markets.

One possibility is conservative Canadian equity funds. We're talking here about funds that survived the last bear market in good shape and have shown a degree of resilience in the market mayhem this year.

One example would be Mackenzie Cundill Canadian Security, which focuses on undervalued stocks and has avoided most of the high-flying names of the past few years.

This fund fell 3.6 per cent on Jan. 21, the day the S&P/TSX composite index fell 4.75 per cent.

For the year to that date, the fund's decline of 8.9 per cent compared to 12.3 per cent for the composite index.

No, you're not entirely insulated from market declines with a fund like Mackenzie Cundill Canadian Security. But if you look back at how it fared in the last bear market, you'll see it protected its unitholders quite well.

Remember 2002 on the stock markets?

Now, that was a nasty year. The S&P/TSX composite index fell about 14 per cent and the average Canadian equity fund lost 7.9 per cent. But Mackenzie Cundill Canadian Security made 4.1 per cent that year, putting it ahead of almost all of its peers.

Other funds that held up well the last time the markets tanked include CI Harbour, CI Canadian Investment, Mawer Canadian Equity, Saxon Stock, IA Clarington Canadian Conservative Equity and Mackenzie Growth.

Mackenzie Ivy Canadian held up well, too, but its returns sagged in the ensuing bull market. With a concentrated portfolio of quality blue chips, this fund should look better.

In the global and U.S. equity fund categories, a few stalwarts from the last bear market include RBC O'Shaughnessy U.S. Value, Mackenzie Ivy Foreign Equity and the Trimark Fund. U.S. and global funds were savaged in the last bear market and it's difficult to find names that did notably well.

Balanced funds are ever-popular with investors (despite their high fees), and it's likely that many people will find comfort this RRSP season in their conservative mix of stocks and bonds.

A standout name in this sector is Mawer Canadian Balanced RSP, which despite its name is classified today as a global balanced fund.

The management expense ratio for this fund is low at 1.05 per cent - the category average is 2.71 per cent - and the returns have been consistently strong, even through the last bear market.

Other balanced funds with good bear-market credentials include Harbour Growth & Income, Mackenzie Cundill Canadian Balanced, Saxon Balanced and Trimark Income Growth.

Dividend funds were an excellent refuge during the last bear market, but caution is warranted this time around. The reason is that bank stocks, a staple in most dividend funds, have been hammered lately because of concerns flowing out of the U.S. subprime mortgage crisis.

The big Canadian banks have varying levels of exposure to the subprime market, but none of them are in the trouble of big U.S. players such as Citigroup.

Two dividend funds that have held up well so far this year are CI Signature Dividend and Dynamic Dividend, both of which mix global dividend stocks with their Canadian blue chips. Both funds were strong in the last bear market as well.

Bond funds were another safe harbour back in the last bear market, but don't expect much from them this time around.

With 10-year Government of Canada bonds yielding about 3.75 per cent, returns are likely to be in the mid-single-digit range at best.

If you want a bond fund, TD Canadian Bond is one of the best widely available funds in the category.

Beutel Goodman Income and Phillips, Hager & North Bond are great choices, but they have minimum upfront investments of $10,000 and $25,000, respectively.

In the last bear market, probably the best place to be was in funds that invested heavily or exclusively in income trusts. There are still many good trusts out there, but the sector simply isn't the bear-market panacea it once was.

© 2007 The Globe and Mail. All rights reserved.

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