Searching for purity

The past two years have been good for those who stuck with their Canadian equity funds through the bear market or who took new positions early in 2003. Scanning down Globefund’s “pure” Canadian equity funds (those with little or no foreign content) we see that every single one of the 105 listings recorded a double-digit gain in 2003, with the great majority topping 20 per cent.

The results aren’t quite as good for 2004, but they are pretty impressive nonetheless. No fewer than 90 of the funds in this group showed double-digit gains for the year. Another 14 had single-digit profits and there was one solitary loser. However, I note that in every case but one, the gains in 2004 were less than those in the prior year. In many cases, the difference was more than 10 percentage points.

Pay attention to the message
There’s a message in those numbers that fund investors should heed. Historically, the first year of a bull market (in this case 2003) is the strongest. After that, the gains are more modest until we reach the end of the cycle and a new bear begins. That could happen sometime in 2005, or it may be delayed until 2006.

Whatever the timing, it seems likely that Canadian equity funds will generate lower returns in 2005 than they did last year. Single-digit gains are likely to be the norm, and we will see more funds in the red by year-end than at any time since 2002. There are several reasons for this, including a slowing economy, the high Canadian dollar, and a pull-back in oil and gas prices.

Taking this into account, I suggest that if you are overweighted in Canadian stock funds you may wish to reduce your holdings to some extent. High-performance growth funds are the first place to look to take some profits. Emphasize low-volatility, value-oriented funds in the coming year. One that fits the bill nicely is the Mawer Canadian Equity Fund, from Calgary-based Mawer Investment Management.

This is what is known in the industry as a “pure” Canadian equity fund, in that it holds little or no foreign content. Technically, the mandate of this fund allows it to hold up to 30 per cent foreign content, but it currently has only Canadian stocks, so it qualifies as “pure” from an investment perspective.

The Mawer organization is unfamiliar to most people, but it is one of the best boutique houses in Canada, with a number of top-quality funds. The Canadian Equity Fund, managed by Jim Hall, has an above-average performance record over all time frames, with a better-than-average risk rating.

Over the year to Nov. 30, the fund gained 17.3 per cent, about a point more than the category average. The five-year average annual compound rate of return, which roughly coincides with Hall’s tenure, is 11.6 per cent, compared to a 6.9 per cent category average.

I especially like Hall’s ability to hold his ground during difficult years. For example, in 2001 and 2002 when many equity funds were being battered, this one managed to lose less than 1 per cent. 

The fund focuses on large-cap stocks, with names such as Petro-Canada, CN Rail, Scotiabank, and Power Corporation among the top five holdings. The MER (management expense ratio) is a very low 1.35 per cent.

The minimum initial investment is $5,000 when you buy through a financial advisor. Although the fund is ostensibly no-load, you will probably have pay a fee or commission to acquire it.

Talk to your financial advisor to see if this fund is suitable for your needs.