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Mutual Fund News

A walk on the mild side

These substitutes for mutual funds and ETFs will spare you the market roller-coaster ride and help protect your capital

Special to The Globe and Mail

Feeling the squeeze from low interest rates on your fixed-income portfolio? The good news is that you have alternatives.

Alternative investing is a large, deep pool with something for everyone, from the most conservative to those who want a little spice. These investments can take the form of limited partnerships, mutual funds, closed-end funds or even mortgage pools.

The single biggest advantage of alternative investing is that it reduces the risk in your portfolio by providing an asset class that does not move up and down with the stock market.

For more conservative investors, Marret Asset Management Inc. offers three closed-end bond funds - two of them long-short strategies - managed by its founder, Barry Allan. He buys securities he thinks will go up and sells short those he thinks will fall. The Marret High Yield Strategies Fund yields 7.5 per cent, while the Marret Multi-Strategy Income Fund yields 5.9 per cent. The third and most conservative, the Marret Investment Grade Bond Fund, is a long-only fund yielding 5 per cent. The funds trade like stocks on the Toronto Stock Exchange and are eligible for registered savings plans.

The two long-short funds are "equity substitutes," offering stock-type gains but without the volatility, Mr. Allan said.

He sees trouble ahead for the U.S. Treasury market if and when the European debt crisis spreads to its shores. To position the funds, he has bought long-duration bonds of triple-A rated U.S. multinationals such as Procter & Gamble Co., McDonald's Corp. and Google Inc. In Canada, he likes high-yield bonds such as those issued by Baytex Energy Corp. and Vidéotron Ltée with yields in the 5- to 7-per-cent range.

"It's also prudent to have some exposure to precious metals."

Against the corporate bonds, he has sold short U.S. Treasuries, whose prices have been pushed up by the Federal Reserve's low-interest-rate policy. Worries about the U.S. debt load could eventually put upward pressure on long-term interest rates, knocking bond prices down.

High-net-worth investors have even more options, among them private mortgage pools such as Toronto-based Romspen Mortgage Investment Fund. The fund, founded in 1966, manages a $600-million portfolio of commercial and industrial first mortgages. Mortgage pools are generally limited to people with a salary of $200,000 or more ($300,000 for a couple) or an investment portfolio of $1-million, although the rules vary from province to province. Investors of lesser means have to invest a minimum $150,000.

Like Marret, Romspen's goal is to deliver high returns with low volatility. In 2008, when the Toronto stock market plunged 34 per cent, Romspen returned 10 per cent to investors - as it had for the previous decade. It has never had a negative year, said Mark Hilson, Romspen's managing general partner. It, too, is eligible for registered savings plans.

Falling interest rates since 2008 have depressed the Romspen fund's returns slightly, but it still managed 8.7 per cent in both 2009 and 2010 and 8.4 per cent in 2011. Investors are noticing.

"Because rates are so low across the yield curve, we sometimes have more money pouring in than we can accept," Mr. Hilson says. When that happens, the managers have to close the fund for a few months "until we can conjure up more business." It is open at the moment.

If you want spice, consider the Friedberg Asset Allocation Fund, a mutual fund in which investors stand to benefit from the strategies of hedge fund manager Al Friedberg. Despite the fund's constraints - the managers can neither sell short nor borrow - it was up more than 21 per cent for the 12 months ended Jan. 31.

Among the multi-strategy fund's holdings are its positions in gold and U.S. Treasury inflation-protected securities, or TIPS. The managers are free to invest in commodities, currencies, bonds and stocks anywhere in the world using derivatives such as futures and options. The fund, which can be considered an alternative to a bond fund, is eligible for registered savings plans.

© 2007 The Globe and Mail. All rights reserved.

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