Investors switch, mix assets
Finding the right mutual fund strategy is a key to successful investing. In the past, I’ve discussed basic strategies such as buy and hold and dollar-cost averaging. Now, for more advanced investors, I’d like to look at two other key strategies:
For some investors, buy and hold and dollar-cost averaging strategies are too tame. They want more action and faster growth, and they’re willing to take the risks associated with that. They also believe they can time market movements, at least to some extent.
So they use a switching strategy, moving their money among different types of mutual funds depending on conditions.
This approach to fund investing first became popular in the United States, where there are many large mutual fund companies that offer a wide variety of funds and charge very low fees (or no fees at all) to switch your money among them. Switching became so widespread south of the border that many investment newsletters are devoted entirely to the subject.
In Canada, more fund companies are recognizing the growing importance of switching for many investors. They’ve aggressively added to the number of funds ey offer and are removing some of the impediments to easy switching. This gives investors more options.
Walls come down
- For a time in the ’90s, Mackenzie Financial Corporation operated three distinct groups of mutual funds: the Industrial Group, the Ivy Group, and the Universal Group.
However, there was a Chinese wall between them. If you held units in one group you could not switch to another. You had to sell your holdings, perhaps paying a stiff back-end load in the process, and then make a new purchase in the group you wanted to get into – paying a new commission, of course. This clearly discouraged switching, and probably cost Mackenzie business as a result.
But now the walls are down, and Mackenzie has become a switcher’s paradise with over 30 funds. And with the addition of the Cundill funds to the group, investors can now choose from four distinct managerial styles. You can move among all four Mackenzie families without restriction other than the nominal two per cent switching fee your sales rep is allowed to charge. (You may be able to negotiate this down to zero).
More inter-fund switching
Several other companies have also moved multi-family approach, including C.I., Templeton, Guardian, and AIM (with the addition of the Trimark line).
Of course, the no-load funds, such as those offered by financial institutions and fund companies like Altamira, Phillips, Hager & North and Scudder, allow free switching among all their funds.
The dedicated switcher will search out companies that combine an attractive switching policy with high-performance funds. That’s why it’s especially important for switchers to carefully review the entire family and not base their investment decision on the performance of a single fund.
A basic switching strategy involves being heavily invested in equity funds at times when the stock market is strong and switching into money market and/or fixed income funds at other times.
The trick, obviously, is to get out of the equity funds before the stock market tumbles. If you’re not confident in your ability to do that, a switching strategy probably isn’t right for you.
More sophisticated switching strategies involve moving money around in different international funds, increasing holdings in countries that look like their markets are in a bull phase and moving out of high risk areas.
Another approach is to switch on the basis of management style: weigh your portfolio towards value funds when they are doing well and switch to growth and momentum funds when they are strong. This is very tough to do on a consistent basis, however – in fact, if you develop a knack for it you should probably apply for a job as a fund manager yourself.
2. Asset mix:
An alternative to switching for those who want to increase the growth potential of their funds is an asset mix approach. This involves structuring your fund portfolio in such a way as to give certain types of investments greater weight than others, in line with current economic conditions.
The true asset mix investor will always hold some funds from each of the three key asset groups in his or her portfolio:
- Fixed income
The percentage of each will be shifted periodically, depending on a number of factors including:
- Risk tolerance
- General economic conditions
For example, a younger person who wishes to emphasize growth might use the following asset mix during good economic times:
- Cash-type funds: 5% – 15%
- Fixed-income funds: 15% – 25%
- Growth funds: 60% – 80%
When the economy is heading for rougher times and the stock market looks vulnerable, this investor might vary the asset mix as follows:
- Cash-type funds: 25% – 40%
- Fixed-income funds: 25% – 50%
- Growth funds: 30% – 50%
This produces a more balanced mix and reduces the fund’s exposure to the stock market. At the same time, it allows cash reserves to build to take advantage of future buying opportunities. The fixed-income section is also strengthened because deteriorating economic times frequently signal a drop in interest rates. This will have a positive effect on the unit values of bond funds and, to a lesser extent, mortgage funds.
Varying your asset mix can be achieved by using switching techniques, as long as this can be done at minimal cost. It can also be done by directing new investment money to the asset categories you wish to strengthen.
Adapted from Making Money in Mutual Funds by Gordon Pape, published by Prentice Hall Canada.