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Mutual Fund News

Top funds rode out the global meltdown

Lipper cites Canadian mutual funds that outperformed their peers, and the managers who run them

INVESTMENT FUNDS REPORTER

Rising stock markets helped lift many equity funds out of the red in 2010, but international stock funds remained in a funk amid Europe's debt woes.

On Thursday, against this backdrop, U.S.-based global fund data and analysis provider Lipper Inc. handed out awards to fund managers for the best three-year annualized returns with lower risk levels than their peers.

With the retirement savings plan season in full swing, "we want to make sure that we are presenting awards at a useful time," said Jeff Tjornejoj, head of Lipper Americas research at Thomson Reuters, though he cautioned that Lipper winners are not suitable for all investors.

Among the funds that won top honours over three years, there were areas that "definitely" did better than others, and some that disappointed, Mr. Tjornejoj said.

"Small-caps did well over the last three years. They outperformed their large-cap counterparts. Over three years, fixed-income was a better performer than equity, while precious metals had a fantastic one year and three years. If we look at one year, it is definitely a story about equities."

Last year was "a consolidation year" following a big market rebound in 2009 and the stock market meltdown in 2008, he said. "We started to understand some of the stresses still reverberating in the global economy. Housing in the United States still seems unsettled. The debt concerns of Europe are now front and centre."

Emerging markets were continuing to draw in a lot of capital globally, but are now creating some new concerns, he said. "With all that flow of capital into emerging markets, it is very easy to overvalue securities there."

These are among the many challenges managers have faced over the past year when picking securities to outperform their benchmarks and peers. While Lipper highlights the three-year returns, it also gave awards for the one-, five- and 10-year periods to the end of Oct. 31, 2010. "Three years is a compromise," said Mr. Tjornejoj. "We usually see at least one market cycle within that period."

The awards are given in all categories defined by the Canadian Investment Funds Standards Committee, whose members come from domestic mutual fund database and research firms. There must be 10 funds available in a category before they are considered for a Lipper Award.

Lipper measures volatility, an indicator of risk, through a proprietary methodology it calls "effective return." It was a measure first developed for foreign exchange traders to understand the volatility in their markets, Mr. Tjornejoj said. "We developed it into a model that works very well for mutual funds."

Lipper hands out numerous awards over many time periods because "not all investors are the same" - but even the one-year winner must have at least a three-year track record, he said. "We want to enable investors to choose the time horizons and categories that are most significant for them."

Among fixed-income funds over three years, Beutel Goodman Income was the winner in the Canadian fixed-income category with its annualized 8.2 per cent return. It also took the honour for five and 10 years. Manulife Strategic Income won in the global fixed-income group for three years with an annualized 14.1 per cent gain. It also won for the award for one year.

Mawer World Investment, which lost 3.8 per cent annually over three years, won the Lipper award for that period. It also took the honour for five and 10 years when it posted annualized returns of 4.1 and 2.4 per cent, respectively. David Ragan of Calgary-based Mawer Investment Management Ltd. took over as lead manager last year from Gerald Cooper-Key, who had been at the helm since inception.

Sentry Precious Metals Growth, which posted an average annual return of 21.6 per cent over three years, earned the award in the precious metals category, and has the best return of all categories for that period. It also won for one and five years.

Manager Kevin MacLean of Toronto-based Sentry Investments said he has been able to reduce risk or volatility in his fund because it is focused on smaller companies, which can add to existing reserves and resources, as opposed to large gold producers, whose stock returns depend on a rising gold price that can often fluctuate.

"When the gold price goes down, the senior shares go down and stay down until the gold price goes up again," Mr. MacLean said. "The shares of smaller companies can go down initially, but they will come back fast because they are creating wealth by finding it in the ground."

While the price of gold has been falling this year after last year's strong surge, he suggested the tumbling commodity price amid improving U.S. economic data is only temporary. "The U.S. recovery is almost driven by printing money," he said. "The United States has decided to devalue their currency rather than tighten their belts, so that is bullish for gold."

Most Lipper Awards are given to actively managed funds, but some index funds can also be winners. For instance, the CIBC Nasdaq Index, which posted an annualized return of 0.2 per cent over three years, took the top honour in the U.S. equity category.

This index fund was helped by the fact that the technology-heavy Nasdaq 100 avoids financial companies, which had a "very volatile ride" during the last three years, Mr. Tjornejoj said. "So that group of stocks that it represents managed to put together good performance with some mitigation of risk, however unintended it was. It still had good numbers to back up its story."

It's worth recognizing that index funds can be solid performers, he said. "By excluding them, it in some ways gives a signal that active managers are not capable of competing with them."

The TD Japanese Index Investor series, which tracks the MSCI Japan Index, won a Lipper Award in the Japanese equity category for three years, even with an annualized 8.1 per cent loss. It also won for one and five years.

Even though the Japanese equity market has lost money for many years, a contrarian investor could believe that Japan is poised for a turnaround and might want to consider a Lipper winner for that category, Mr. Tjornejoj said.

Lipper also gives out awards to fund companies or fund families for three-year performance. Phillips Hager & North, which is part of RBC Global Asset Management Inc., won awards in the bond, equity and also "overall" category for bond, equity and balanced funds. The fund arm of National Bank of Canada won a Lipper award in the "mixed assets" or balanced fund category.

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LIPPER AWARD WINNERS, THREE-YEAR RETURNS

Fund NameClass 1-yr % rtn to Oct. 313-yr % rtn to Oct. 315-yr % rtn to Oct. 3110-yr % rtn to Oct. 31
Sentry Precious Metals GrowthPrecious Metals Equity93.9021.6236.0927.08
Front Street Special Opportunities Canadian Ser BNatural Resources Equity34.7715.0118.3125.42
RBC Canadian Equity IncomeCanadian Small/Mid Cap Equity28.3514.65
Manulife Strategic Income AGlobal Fixed Income10.3714.11
RBC Global High Yield Advisor SeriesHigh Yield Fixed Income14.259.497.56
Beutel Goodman IncomeCanadian Fixed Income6.768.206.296.77
Lakeview Disciplined Leadership High Income Srs ACanadian Equity Balanced24.897.878.26
Crystal Enhanced MortgageCanadian ShTrm Fixed Income5.507.00
Fidelity Special Situations Series ACanadian Focused Sm/Mid Cap Eq19.216.98
Trimark North American Endeavour Class Series ANorth American Equity17.586.553.63-4.85
Brandes Emerging Markets Equity Class AEmerging Markets Equity18.356.5311.62
NexGen Canadian Balanced Growth RegisteredCanadian Neutral Balanced12.326.39
AGF Elements Yield PortfolioGlobal Fixed Income Balanced7.675.75
CI Global Science & Technology Corporate Class AScience & Technology Equity21.225.564.02-9.86
Compass Conservative Portfolio Series ACanadian Fixed Income Balanced9.655.314.54
Sentry Diversified Total Return Series ACanadian Focused Equity19.794.888.47
CI Signature High Income Corporate Class AGlobal Neutral Balanced19.484.576.07
Hartford Global Balanced Series AGlobal Equity Balanced8.324.08
Investors Global Health Care Class AHealth Care Equity4.143.710.33
BMO Guardian Asian Growth & IncomeAsia Pacific Equity15.463.577.81
Hartford Global Leaders Series BGlobal Equity12.742.532.24-2.39
Mackenzie Ivy European Class Series AEuropean Equity4.752.195.32
Mackenzie Universal US Emerging Growth Class AUS Small/Mid Cap Equity24.652.101.52-6.78
Bissett Canadian Dividend Series ACanadian Dividend & Equity Inc22.191.996.31
CIBC Nasdaq IndexUS Equity19.930.162.52-8.59
Renaissance China Plus Class AGreater China Equity11.18-0.3418.608.36
Quadrus US & International Specialty Corp ClassGlobal Small/Mid Cap Equity17.40-1.233.43
DFA Canadian Core Equity Class ACanadian Equity21.03-1.266.49
Mawer World Investment Class AInternational Equity7.97-3.774.092.40
TD Japanese Index Investor SeriesJapanese Equity-0.16-8.09-5.63-5.88
Source: Thomson Reuters

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DECIPHERING LIPPERS

Expect to see mutual fund companies brag about their Lipper awards in coming days, either through press releases or on their websites.

This doesn't mean investors should run out and blindly buy these funds. "The Lipper fund award should be just one consideration" when choosing a investment, said Jeff Tjornehoj, head of research for the Americas at the Lipper unit of Thomson Reuters.

Here are some questions to ask when looking at a Lipper award winner.

1. How long has a manager been running the fund?

There are Lipper awards for one-, three-, five-and 10-years in many categories, but the same manager may not have run the fund for the whole time. Strong numbers by a manager in early years can help longer-term returns, but that person may no longer be around. Some firms, however, can pass on a certain investing culture to newer managers.

2. How much does the fund charge?

If you are a fee conscious investor, check out the management expense ratio of the winning fund and whether you can live with it. High fees can eat away at returns over time.

3. Is the fund appropriate for my portfolio?

A Lipper award winner may have caught your eye, but if you already have several investments in the category or sector, it may throw your asset allocation out of whack.

4. Is the winner in a region or sector likely to outperform?

A fund can be a winner, even if it is losing money. TD Japanese Index Investor Series was the winner over one, three and five years, but it has also been in the red during those times. It's not a surprise, given that the Japanese market has gone nowhere in two decades, but you might want to think twice before jumping into this one.

5. How many times has a fund been a winner?

Some funds are one-year award wonders, while others are repeat winners year after year. There are never guarantees, but repeat winners can provide more peace of mind.

Shirley Won

© 2007 The Globe and Mail. All rights reserved.

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