Break away from the pack - put your money in the stock markets this RRSP season.
Mutual fund sales figures show that investors are doing what they always do when the stock markets get twitchy, which is to say they're big into money market funds right now. A year ago, with the markets coming off a strong four-year winning streak, investors were pouring money into equity funds. Now, with some bargains finally emerging, they're withdrawing.
The hardest move in investing is to buy when the markets are down. Still, it's the right approach for the sort of long-term investing done in registered retirement savings plans. To help reluctant investors take the plunge, the Portfolio Strategy column presents a group of mutual funds that address their trepidations while offering good potential for the future.
Let's call them the Silver Seven - seven Canadian equity funds that lost only token amounts at worst in the 2001-02 bear market, offer lower volatility than their peers and have performed well in the past five years. Safety and performance are a rare combination, which is why these were the only funds to emerge from a screening process that began with more than a thousand mainstream equity funds of various types.
Just to be clear, not a single U.S., global or international equity fund made it through the screening process. Globefund.com analyst Tilly Cheung and I played repeatedly with the screening criteria and found that too many allowances had to be made to get any non-Canadian funds into the mix. We'll keep trying to build a list of safe, good-performing U.S. and global funds. For now, though, the Silver Seven rule.
Here's how we selected the funds for this exclusive group.
Bear market history: Only funds that lost 2 per cent annually or less in 2001 and 2002 were included.
Volatility: Funds were only included if their three-year beta was 0.85 or less, meaning they were no more than 85 per cent as volatile as the S&P/TSX composite, which has a beta of 1.
Performance: Funds on the list have five-year average annual returns that are within the first and second quartiles for their respective categories, which in simple terms means they were better than average.
What a diverse group the Silver Seven is. There are a couple of widely available bank dividend funds, some big and small offerings from brand-name fund companies and a fund from a small but respected West Coast money management firm.
The prevalence of dividend funds here is no surprise because blue-chip stocks that pay a quarterly dividend are always a good bet for long-term investing. Lately, though, dividend funds have shown that they are not invulnerable to market turbulence.
Bank stocks are the issue. They're fixtures in dividend funds and, lately, they've been hammered. Net result: Dividend funds were weak performers last year, delivering returns that were commonly well below that of the S&P/TSX composite index. Bank stocks could easily go down some more, but it's a cinch that they'll be worth lots more than they are now a decade or two from now. A dividend fund is a way to exploit this buy-low opportunity.
Note that there are some differences between the dividend fund members of the Silver Seven. BMO Dividend and RBC Canadian Dividend have close to 45 per cent of their assets in financial stocks, while Dynamic Canadian Dividend is around 33 per cent and Dynamic Dividend is around 20 per cent. The two Dynamic funds also hold more U.S. and global dividend stocks, and they were also holding more cash than the two bank funds as of the third quarter of last year. Cash is a drag on returns in rising markets, but it cushions market declines and puts a manager in a position to hunt for bargains.
It's not unusual for funds that play well in a bear market to lag behind when stocks are on the boil. But CI Harbour came out of the last downturn in fine shape and then accelerated along with the broader market. Last year, its 6.2-per-cent return compared with 1.2 per cent on average for its peers.
CI Harbour's loss of 0.9 per cent in 2002 is inconsequential in comparison to the 14-per-cent decline by the S&P/TSX composite, and its gain of 7.3 per cent in 2001 ranked it among the leaders in its category. The shelter-from-the-storm theme remains intact thus far in 2008 - CI Harbour was down 4.4 per cent as of Feb. 7, which is among the best performances in the Canadian focused equity category. It's also the best year-to-date performance by any of the Silver Seven.
Mackenzie Growth looks like a doubtful choice for a market downturn if you judge by its year-to-date loss of 10.9 per cent, which is by far the worst among the Silver Seven. But its history since the last bear market deserves notice.
The Mackenzie Financial fund lineup has many better known names than Mackenzie Growth, and some of them are the sort of funds that you'd expect to do well in down markets. Mackenzie Ivy Canadian and Mackenzie Cundill Canadian Security are examples.
Yet it's Mackenzie Growth that delivered the best mix of great results in the last bear market with good recent returns. The fund is run by Fred Sturm, who is Mackenzie's chief investment strategist and the manager of the very successful Universal Canadian Resource Fund. Note that Mackenzie Growth has much less exposure to energy and mining stocks than the S&P/TSX composite index, and it has less than market weight in financials as well. This should, in theory, help cut risk in today's markets.
The final member of the Silver Seven is Leith Wheeler Canadian Equity, which is run by Vancouver-based Leith Wheeler Investment Council. Consider this fund a standard bearer for all the low-profile firms out there that offer mutual funds as a sideline to their main business of running money for pension funds, endowments, foundations and high-net-worth individuals.
There are some common traits to these companies and their funds. One, the minimum upfront investment is usually high. In Leith Wheeler's case, the minimum is $25,000. Two, ownership fees are extremely low. The management expense ratio for Leith Wheeler Canadian Equity is 1.5 per cent, which is the lowest among the Silver Seven. Three, returns are often strong on a consistent basis, if not spectacular.
Leith Wheeler Canadian Equity has delivered above-average returns that beat not only the average peer fund over the past 10 years, but also the S&P/TSX composite index. This is exactly the kind of fund you should be looking at if you want to put money into the stock market this RRSP season but are having trouble pulling the trigger.
The Silver Seven
It's RRSP season and the stock markets are wobbling. In other words, it's a good time to invest for the long term. Problem is, many people find it hard to invest in the markets at times like this. To help these nervous investors, we went looking for conservative funds that stood up well to the last bear market and have done well lately. We ended up with seven funds - our so-called Silver Seven.
|BMO Dividend||- 1.80%||+2.76%||- 7.03%||0.70||2|
|CI Harbour||- 0.91%||+7.27%||- 4.36%||0.85||2|
|Dynamic Canadian Dividend Fund||- 0.46%||+6.30%||- 5.79%||0.85||1|
|Dynamic Dividend||+0.74%||+9.14%||- 4.70%||0.62||2|
|Leith Wheeler Canadian Equity B||- 1.22%||+4.24%||- 6.13%||0.72||1|
|Mackenzie Growth||+14.23%||+26.10%||- 10.86%||0.82||2|
|RBC Canadian Dividend||- 0.48%||+4.44%||- 5.05%||0.73||1|
|S&P/TSX Composite index||- 14.00%||- 13.90%||- 6.60%||1.00|
|*to Feb. 7|
© 2007 The Globe and Mail. All rights reserved.
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