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Fund-picking with an eye to a nascent recovery

As the global economy seems poised to grow ever so slightly this year, look for plays that stand to benefit from a market rebound


A global economic recovery appears to be inevitable given the government stimulus being pumped into the system, but the timing and breadth of a rebound is still subject to some debate.

The International Monetary Fund earlier this month forecast that the world economy will expand 2.5 per cent next year, but expects differing stages of recovery across the globe.

The World Bank last month said the global recession this year will be deeper than predicted in March, suggesting growth will be 2 per cent next year instead of 2.3 per cent in an earlier forecast.

Because stock markets tend to be forward-looking and typically rally before an economic recovery, we asked analysts to suggest funds that are poised to benefit from an economic turnaround.

Mackenzie Universal World Resource Class

Funds focused on commodity stocks should benefit from an economic recovery, says Morningstar Canada analyst Phillip Lee.

"Economic activity will drive the demand for energy consumption, and the building out of infrastructure will increase the demand for hard commodities."

Mackenzie Universal World Resource has a "strong long-term track record," and manager Fred Sturm's interests are aligned with unitholders by having a meaningful stake in the fund, Mr. Lee said.

The resource fund is diversified globally, and "this helps because he [Mr. Sturm] invests in non-traditional energy plays like solar power - areas that are thin in Canada," Mr. Lee added.

But the analyst also cautioned that resource funds can be highly volatile and suffer losses at any point in time. Commodity stocks have also "staged a huge rally off their lows from earlier this year, and the bounce may be getting ahead of the economic recovery," he suggested.

Brandes Global

Small Cap Equity

Smaller companies tend to benefit early in a recovery as their less liquid stocks compared with larger companies tend to snap back quicker after being "pounded harder" in the decline, said independent fund analyst Dan Hallett.

With confidence returning and markets becoming more bullish, investors are also more interested in buying smaller-capitalization firms because "they have more growth potential," Mr. Hallett said.

While the fund run by a team at San Diego-based Brandes Investment Partners has been beaten up in recent years partly due to their out-of-favour value style, "the long-term performance is pretty solid," he said.

"Unlike 2005, everyone seemed to love them. All of a sudden in the last three or four years, some people were convinced they never had it, or lost it. I am not one of them."

AGF Global Value

Core funds suffering the most during a market downturn historically have experienced the most rapid recovery, and global value funds certainly have been hit hard, said independent analyst Peter Loach.

The "proven management team" of John Arnold and Rory Flynn use a 30-30-30 rule, whereby they look for stocks trading 30 per cent below all-time highs, stocks whose price-to-earnings ratio is 30 per cent below the market P/E and stocks whose dividend is 30 per cent above the market yield, Mr. Loach said.

The fund is underweight U.S. stocks relative to its peer group, and instead provides more potential returns from Europe, the Far East and emerging markets, he added.

Unlike many of his peers, Mr. Arnold, who took over as lead manager of the fund in 2006, is a seasoned pro who ran money through a similar environment in the early 1980s, Mr. Loach said.

CI Signature

Canadian Resource

"The resource sector should do reasonably well as the economy starts to turn," and as demand for energy and metals rises from China and other parts of Asia, said independent analyst Dave Paterson.

CI Signature Canadian Resource, run by manager Scott Vali, uses a more value-oriented approach to picking stocks and is less volatile relative to its peer group, Mr. Paterson said.

"The fund had about 10 per cent in cash at the end of June," he noted. "It provides a little bit of buffer for volatility, and will give a bit more downside protection."

But if markets rebound sharply, "you will have 10 per cent of the portfolio essentially doing nothing so you will have a cash drag," he said.

iShares CDN MSCI

World Index Fund

The exchange-traded fund launched by iShares Canada last month tracks the performance of the MSCI World Index with more than 1,500 stocks from 23 developed markets around the globe.

"This ETF is the simplest way to play a global recovery - one-stop shopping, if you will" for do-it-yourself investors, says Larry Berman, chief investment officer with ETF Capital Management, which manages client portfolios using ETFs.

"You are going to track the global equity markets at they recover," he said. "Those looking to add emerging markets can buy the iShares MSCI Emerging Markets ETF."


Fund picks to play a global economic recovery

(As of June 30)LatestJuly 29June 30Calendar Year % Returns
NameCategory Assets ($-mil)MERYTD % rtnYTD % rtn200820072006200520042003200220012000
AGF Global ValueGlobal Equity1,342.32.781.90.0-36.9-10.920.0-1.34.411.3-23.70.827.8
Brandes Global Small Cap EquityGlobl Sml/Md Cp Equity123.72.5720.615.2-37.6-
CI Signature Canadian ResourceNatural Resources Equity532.02.3118.119.1-29.618.928.149.819.334.811.012.532.4
iShares CDN MSCI World Index*Global Equity4.10.45* 2.4* 3.0
Mackenzie Univ Wld Resource ClassNatural Resources Equity113.22.5036.534.5-62.132.323.627.322.830.36.422.0
MSCI World ($ Cdn)1.4-26.1-
S&P 500 Composite ($ Cdn)-3.4-23.8-12.213.6-
S&P/TSX Total Return18.817.6-33.09.817.324.114.526.7-12.4-12.67.4
* Calculated Since Inception 6/24/2009
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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