Mutual fund line looks strong

When the U.S. giant Merrill Lynch took over Midland Walwyn brokerage firm, it was the start of some big changes. One was the demise last fall of the Atlas fund group, Midland Walwyn’s in-house brand.

Merrill Lynch wanted a new fund line-up cast in their own image.

It was a smart move because most of the Atlas funds were indifferent performers. A few of the previous managers were kept on, but essentially Merrill Lynch decided to rebuild the house.

Top managers
Fortunately, the company hired two top managers who are handling the all-important core Canadian funds: Kim Shannon, who holds the title of Chief Investment Officer, and her long-time associate, Gaelen Morphet.  They are responsible for four of Merrill Lynch’s top offerings.

Last November, I could only find three funds I liked. Things look much better now. Here are the current picks, a “six-pack” of recommended funds:

Merrill Lynch Core Canadian Value Fund
This is the Merrill Lynch equivalent of the Spectrum Canadian Investment Fund. The management team is the same and the style is similar, although this fund includes mid-cap stocks in the portfio while the Spectrum fund is mainly large cap.

The Spectrum entry has produced better results recently, but this one has performed respectably and showed a year-to-date gain of 5.8 per cent to mid-August, much better than the performance of the TSE.  A good choice for conservative investors.

Merrill Lynch Canadian Small Cap Fund
This fund grew out of an amalgamation of three former Atlas funds. The team of Shannon and Morphet are also in charge here and they have been doing good things. The fund gained 11.1 per cent in the year to July 31, a very fine performance. This team is known for their value approach to investing, so we expect the risk level here to be somewhat lower than you might expect in a small cap fund.

Merrill Lynch U.S. Basic Value Fund
As the name suggests, this fund searches out undervalued stocks with low price/earnings and price/book ratios. That keeps the risk level relatively low, which has worked well for investors recently.

While many equity funds suffered, this one returned a handsome 12.2 per cent over the year to July 31. The portfolio tends to favour large-cap stocks.

Merrill Lynch Select Canadian Balanced Fund 
This is one of the few cases in which Merrill Lynch kept one previous Atlas manager: Len Racioppo, president of the Montreal-based investment firm of Jarislowsky Fraser. It was a good decision. 

This fund has easily outperformed the average of the Canadian Balanced category over the last several years by investing in a relatively conservative and diversified portfolio of blue-chip stocks along with a blend of government and high-quality corporate bonds.

With a 20 per cent position in foreign stocks, this fund also offers good geographic diversification. The fund has been an above-average performer in its class over almost all time frames. Its one-year gain was 7.9 per cent in the year to July 31. The three-year average annual gain was 6.6 per cent. Overall, a good low-risk choice and well suited for a registered plan.

Merrill Lynch Canadian Balanced Value Fund
There are actually two fine balanced entries in this group. This one is run by the Shannon/Morphet team. It’s a conservative fund with a value style that is just the ticket if you’re looking for a core holding for a registered plan.

Stocks are of the blue chip, low risk variety while the fixed-income side contains of mix of government bonds and high-quality corporate issues. Performance has been very good so far with a gain of 10.7 per cent in the year to July 31.

Merrill Lynch Canadian Income Trust Fund
This fund is designed for investors seeking above-average, tax-advantaged income who are prepared to accept a higher degree of risk.

The portfolio is made up primarily of real estate investment trusts (REITs) and royalty income trusts. These securities can generate very attractive cash flows, but their market prices have proved to be volatile, especially in the case of energy trusts.

The fund has been very good at fulfilling its mandate. In calendar 2000, it paid out $0.75 per unit, which amounted to a yield of 11.6 per cent based on the unit price at the start of the year. More than half of that income was received on a tax-deferred basis if units were held outside a registered plan.

Total return for the year to July 31 was 27.7 per cent. This is a good choice if you’re looking for strong cash flow – but don’t lose sight of the market risk.

From the September 2001 issue of Mutual Funds Update.