Good things in small packages

Good things come in little packages, they say. Indeed they do. In fact, the smaller fund companies in Canada have a disproportionate share of top-level performers. As a bonus, these funds are often among the cheapest to buy and own.

I recently completed a detailed analysis of the country’s boutique fund companies and published the results in a report titled Hidden Gems 2005. In it, I identified 11 companies that I felt were worthy of inclusion of which only one, Phillips, Hager & North, ranks among the top 25 in terms of assets under management. Hidden Gems rates a total of 69 funds, of which 34 received my top $$$$ ranking. That’s an impressive result.

Here is a selection of my top choices. All results are to Aug. 31.

Canadian Equity Funds
Leith Wheeler Canadian Equity Fund (B units). Like most value funds, this buy-and-hold entry experienced hard times in the late 1990s, when the high-tech bubble was driving markets ever higher. But the fund showed the value of its low-risk approach in the bear market, fulfilling one of Vancouver-based Leith Wheeler’s primary goals, which is preservation of capitalWhile the markets were tumbling in 2000-2002, this fund performed strongly, with only a small loss of 1.2 per cent in ’02 marring its record. Value funds tend to lag in strong markets but this one has done well recently. For the year to Aug. 31, the fund gained 23.5 per cent, a little below the average Canadian stock fund. The three-year average annual compound rate of return was 19 per cent, compared to an average of 16.5 per cent for the peer group. If you are looking for a fund for a non-registered portfolio, this one may be of special interest. All securities are purchased with the intention of retaining them for two to four years, so there isn’t a lot of active trading going on. This makes for a tax-efficient portfolio with relatively small distributions to attract the attention of the Canada Revenue Agency. The portfolio mainly consists of large-cap stocks, but a few small- and mid-cap companies are mixed in. Historically, this fund has always been defensive by nature, which is why the risk profile is better than average for the Canadian Equity fund category and the S&P/TSX Total Return Index. Minimum investment: $25,000. Rating: $$$$.

Sceptre Equity Growth Fund. Manager Allan Jacobs went through a rough time from 1998 to 2000 but he has come back with a vengeance. This fund gained an eye-popping 66.7 per cent in 2003 and added another 25.6 per cent in 2004. Currently, the three-year average annual compound rate of return is 31.4 per cent, way above average for the Canadian Equity category. Jacobs looks for companies with strong earnings growth and momentum, superior management, good profit margins, and strong balance sheets. The portfolio is heavily weighted to materials, consumer staples, financial services, and energy, with large positions in companies such as Reitmans, Peyto Energy Trust, and RONA. Volatility is a on the high side but this fund has once again become a good choice for investors. Minimum investment: $5,000. Rating: $$$$.

Canadian Small-Cap Funds
Front Street Small Cap Canadian Fund. This was known for years as the Multiple Opportunities Fund, when it was run out of Vancouver and specialized in junior mining companies traded on the old Vancouver Stock Exchange. However, things changed in 1999 when Norm Lamarche, formerly a top manager with Altamira, assumed responsibility for the portfolio. This is now a more conventional small-cap fund. Performance has been very good under Lamarche’s direction. The fund scored a handsome gain of 58.4 per cent in the year to Aug. 31 and was showing a three-year average annual compound rate of return of 44.8 per cent to that point. Both figures were well above average for the Canadian Small Capitalization category. Risk is on the high side, although the fund is nowhere near as volatile as it was when it was invested almost exclusively in junior mining issues. Lamarche is a proven manager and the future of this small fund looks good. Minimum investment: $500. Rating: $$$$.

Canadian Bond Funds
McLean Budden Fixed Income Fund. This fund specializes in high-quality government and corporate bonds. It generally produces very good results and has not been below second quartile since 1999. Returns over all time periods are well above average for the Canadian Bond category. The fund gained 9.7 per cent in the year to Aug. 31, an excellent return, and results out to 15 years are all above average. That makes it a very good choice for an RRSP or a RRIF. The low management expense ratio of 0.65 per cent is a big help here. Distributions are paid quarterly, so cash flow is good. Minimum investment: $10,000. Rating: $$$$.

Be sure to consult a financial advisor to see if any of these funds meet your personal needs before making an investment decision.

You can order the complete Hidden Gems 2005 report at www.buildingwealth.ca/partner.cfm?partner=50Plus