Funds that beat the bear

The long bear market began just about three years ago, during Easter Week 2000. Until then, stock markets had been riding high, with technology issues at the forefront. So widespread was the enthusiasm that some market-watchers predicted that we were into a 10-year bull that would see the Dow soar to 30,000 and beyond.
There were doubters, of course, among them U.S. Federal Reserve Board chairman Alan Greenspan who warned repeatedly of the “irrational exuberance” in the markets. But few investors paid attention.

Not many people saw the Easter slide of 2000 as much more than a blip, and the summer rally that followed gave credence to that view. As things turned out, however, it was just the first of many bear market rallies that were to bring false hope to investors.

Among those who took a more pessimistic view, virtually no one predicted a slide as deep and as long as we’ve experienced. And there is no guarantee that it’s over.

As the bear deepened and the realization of how serious it actually was began to sink in, more investors began retreating from equity funds. In most cases, their instincts were right. The majority of stock fundsave suffered serious losses.

Some funds have defied the markets
But not all of them. A few bear-beaters managed to defy the markets, and the odds, to post gains for their unitholders. Given that we have not seen a bear market this severe since the Great Depression, that is a remarkable achievement and the managers that accomplished it deserve recognition.

Here’s my list of the most outstanding bear-beating Canadian equity funds. Some of them may surprise you, others won’t.

Next page: The winners

ABC Fundamental-Value Fund. Manager Irwin Michael has guided this fund to a three-year average annual compound rate of return of just over 14 per cent (to Feb. 28) by sticking with his basic principles of value investing. The fund focuses on mid-cap and small-cap stocks. Current major holdings include Masonite International, National Bank, Canada Bread, and Canadian Natural Resources. Unfortunately, you need $150,000 to take a position.
Chou RRSP Fund. It may be hard to believe, but this one has an even better record than ABC Fundamental-Value. Over the past three years, investors have enjoyed an average annual gain of 24.6 per cent. Manager Francis Chou also uses a value approach to stock selection and stood well clear of the high-tech bubble. Minimum investment is $10,000.
Co-operators Canadian Conservative Focused Equity Fund. If the folks at Co-operators who are charged with marketing this little-known fund were smart, they would change that tongue-twister name pronto. Here’s a fund with a great bear market story to tell, but no one can remember its name. This was previously called the Associate Investors Fund and it flourished under that title for more than half a century before being taken over by Co-operators a couple of years ago and slapped with the new moniker. The management team is still the same, however, and they have guided the fund to an average annual return of 10.2 per cent over the past three years, with a safety rating that is much better than average. Unlike many of the top bear beaters, which require a large initial investment, you can take a position in this fund for as little as $500.

Mackenzie Cundill Security Fund. Peter Cundill’s deep-value approach has served investors well here. The fund is down slightly year-over-year, but in the three years since the onset of the bear market investors have gained an average of 9.4 per cent annually. The portfolio is a very strange mix of Canadian and foreign securities (mainly Japanese), with a very large cash position of more than 30 per cent. It seems to work, though. Co-manager Alan Pasnik gets a lot of the credit for the success of this one. You can buy in for as little as $500.
McElvaine Investment Trust. Tim McElvaine was chosen as fund manager of the year in Gordon Pape’s 2003 Buyer’s Guide to Mutual Funds. This small fund, which he runs himself, was part of the reason (the other is that he is chief investment officer of the successful Cundill funds) . Investors have enjoyed an average annual gain of 18.8 per cent over the past three years and the fund even managed to stay in the black during the past three months when the markets were being clobbered. Unfortunately, it costs $150,000 to get in. That said, this is an excellent choice if you have the money.
Optima Strategy Canadian Equity Value Pool. Unless you are a client of Assante Asset Management, you probably don’t know about this one. If you are with Assante and your rep hasn’t recommended it, you two should have a talk. This fund managed an average annual gain of almost 20 per cent over the past three years. It finished just under break-even in the latest 12-month period, while the average Canadian equity fund was losing more than 14 per cent. The money genius here is Daniel Bubis, a low-profile manager who is also chief investment officer at Assante. Minimum investment is $25,000.
Saxon Stock Fund. It hasn’t had a particularly good year, dropping 8.7 per cent, but we’d be remiss not to mention this fund run by Richard Howson as one of our top bear beaters. The three-year average annual compound rate of return is a healthy 12.2 per cent, despite the recent mini-slump. You need $5,000 to invest here.

Sprott Canadian Equity Fund. This fund has the top three-year record in the Canadian Equity category, with an average annual gain of just under 30 per cent. Gold, oil, bonds, and cash have been the keys to success for manager Eric Sprott. His unconventional approach continues to pay off, with a 7.1 per cent gain in the latest three months. Minimum investment is $25,000.