Cool funds for rising temperatures
It was a cool summer in most of Canada, except in B.C. But the temperature is rising on several other fronts and if you’re not careful your portfolio may risk overheating. Consider the following:
Soaring oil prices. How high is up? At this point, no one knows. First US$40 was seen as a barrier. Then US$45. In late August, crude closed in on US$50 before retreating. No one knows whether the pull-back marks a change in the long-term direction or a blip. But unless there is prolonged relief soon, the world economic recovery will be compromised.
The continued issue of Iraq. The U.S. opened a Pandora’s Box with its invasion and at this point it’s difficult to see how anything good can come out of it. The step-up in Iraqi oil exports, which had been expected to take some of the pressure off world crude prices, has been sabotaged at every turn, making the U.S. and Europe ever more dependant on the tottering regime in Saudi Arabia.
A dog-fight for the U.S. presidency. The election is still two months away but the mud-slinging has already begun in earnest. A victory for the Kerry-Edwards ticket might evoke a gh of relief from many people but it will likely spell bad news for stock markets. Whenever an incumbent president has been defeated, the S&P 500 has fallen an average of 4.7 per cent in the following year.
Rising interest rates. The U.S. Federal Reserve Board has twice nudged rates higher with increases of 25 basis points in June and again in August. Statements by Chairman Alan Greenspan suggest that he thinks the U.S. economic slowdown is only temporary and that we could see more quarter-point hikes in the next few months. Bank of Canada governor David Dodge has also weighed in with comments that economists interpret as a signal that our rates will start to trend up before long. According to Sam Stovall, chief investment analyst at Standard and Poor’s in New York, the S&P 500 fell by an average of 5.8 per cent in the 12 months following the first of a series of Fed rate hikes during the period from 1970 to 2000.
Slowing corporate profit gains. Corporate profit increases have been strong, but they are coming off a weak base. Going forward, the pace is likely to slow considerably, which will remove some momentum from stock markets. Stovall predicts the S&P earnings per share will increase at a 19 per cent rate this year but that will fall to 11 per cent in 2005.
All of this suggests that you need to exercise caution in your investment portfolio going forward. The big gains of 2003 and early 2004 are not likely to be repeated any time soon. With that thought in mind, here are a few equity mutual funds you might consider adding to your portfolio over the next few months.
Next page: Our picks!
Templeton Global Smaller Companies Fund. You’d normally expect a small-cap fund to be fairly risky. Not this baby! During the bear market, its worst one-year decline was 0.7 per cent in 2002. Prior to that, you have to go all the way back to the fund’s first full year of operation, 1990, to find red numbers. When you consider that this fund may hold stocks from such tiny markets as Peru, Indonesia, and Hungary and invests relatively little in the U.S., that’s quite an achievement. And you don’t have to sacrifice returns for this high level of safety.
The fund gained 22.5 per cent over the year to July 31 and has a five-year average annual compound rate of return of 10.1 per cent since being taken over by Bradley Radin in May, 1999. He is based in Toronto. I suggest purchasing the front-end load “A” units on a zero commission basis. The code for these units is 707.
CI Canadian Investment Fund. If you don’t already have a position in this fund, all I can say is: Why not? Manager Kim Shannon has proven her skill at generating above-average returns while keeping investors’ risk to a minimum ever since she took over this portfolio in 1996. Since that time, the fund has never had a losing year. That’s right – never! Not even during the depths of the bear market. Her worst performance was a break-even in 2002 at a time when most equity funds were being clobbered.
Equally impressive is the fact that, unlike many value managers, Shannon has been able to outperform in rising markets as well. Over the year to July 31, the fund gained 19.2 per cent, compared to an average return of 16.1 per cent for the category. Over five years, the fund shows an average annual return of 10.9 per cent versus 5.5 per cent for the Canadian Equity group as a whole. Whether markets are weak or strong, Shannon has demonstrated the ability to produce. This should be a core fund in every portfolio.
Beutel Goodman Canadian Equity Fund. Like Shannon, the Beutel Goodman organization employs a value style for stock selection and they are doing it very well. But unlike the CI fund, this one did not get through the bear market unscathed, losing 7 per cent in 2002. However, that was the worst calendar-year loss since the fund was launched back in December 1990, so if that’s as bad as it gets you won’t lose much sleep.
This is a steady performer that occasionally cracks through the 20 per cent barrier as it did in 2003 with an advance of almost 27 per cent. The management team is very keen on the financial services sector right now, with six of the top 10 positions from that group. The fund currently has a 10 per cent+ cash reserve.
Saxon Balanced Fund. It’s hard to find a balanced fund that did not lose money during the bear market and this is one of the few that qualify. It actually managed to post a gain of 3 per cent in 2002, while most balanced funds were in the red. Since 1994, the only calendar-year loss it incurred was 1998 when it declined 1.3 per cent. As with all the funds I review in this article, it outperforms in both strong and weak markets.
The one-year gain to July 31 was 13.8 per cent, about one-third above the category average. Over three years, the fund has produced almost triple the return of the average Canadian balanced entry. The fund is currently weighted 68 per cent to equities and 29 per cent to bonds, with a small cash position.
As always, consult a financial advisor before making a final decision.