Investment strategy gets good reviews

Zoomer | January 1st, 2006

A year ago, I recommended a unique new fund called Spectrum Tactonics to readers of my Mutual Funds Update newsletter.

What sets it apart from its peers is the fact it invests only in exchange-traded funds (ETFs) that are traded in Toronto and New York. These have become very popular with some investors.

Liquidity, low MER
There is a wide range of these available, with more appearing all the time. In Canada, they’re known as iUnits, developed by Barclays Global Investors.

They trade on the TSX and offer such advantages as good liquidity (they trade like stocks) and a low MER.

You can buy iUnits that track broad indexes, such as the S&P/TSE 60 and the S&P 500, units that provide exposure to specific sectors, such as gold and energy, and fixed-income units that track benchmark bonds.

Aggressive buyer interests
The sector units are best suited for highly aggressive investors. For example, if you had been smart enough to buyhe Canadian Gold iUnits a year ago, you would have reaped a profit of 83 per cent (to May 31).

On the other hand, if you had picked the Canadian Information Technology Units (IT Fund), you’d be looking at a 51.5 per cent loss.

The key to the success of the Spectrum Tactonics Fund, therefore lies in choosing the right mix of ETFs.

Strategy considers risk
The fund uses a momentum strategy combined with a risk minimization approach, developed by Karen Bleasby, the company’s vice-president, investments.

When I first looked at the fund, I said I liked the concept, but wanted to see the theory tested in the marketplace.

Well, we now have had a little over a year to look at and so far, so good.

Since its inception in April 2001, the fund shows a gain of 2 per cent. That’s not a lot, but considering the rough stock market during that period, it’s pretty good.

For the 12 months to May 31, the fund was down 3.9 per cent, compared to an average loss of 12.1 per cent for the Global Equity category and 13.3 per cent for the benchmark MSCI World Index, as expressed in Canadian dollars (all figures as per Globefund).

Next page: Small, mid-cap stocks

Small, mid-cap stocks
Current top holdings focus on small and mid-cap stocks, with positions of almost 9 per cent each in iShares that specialize in the Russell 2000 Index (U.S. small caps) and the S&P 400 Midcap Index.

The fund also maintains a significant position in the gold sector, through a combination of Canadian Gold iUnits and a basket of gold stocks.

Gold outlook promising
Bleasby says that she continues to like the outlook for gold, for three reasons:

    1) Uncertainty, both political and economic, which is always a positive for bullion.

2) The suspension of gold sales by central banks.

3) The reduction of forward gold hedging by major companies such as Barrick.

Invest in underperformers
Right now, the portfolio is concentrated in sectors that underperformed in the latter part of the ‘90s, she explained. Everything that was out of favour then is back in favour now, and our models say that we should continue to invest in those sectors.

This fund deserves a look if you’re seeking to beef up your global holdings.

The pending acquisition of the Spectrum funds by CI could affect it down the road, but I’d be surprised if CI doesn’t retain it, given an impressive debut, uniqueness, and the fact it has pulled in more than $115 million in assets to date.

Adapted from an article that originally appeared in Mutual Funds Update