The new range of fund options (2)

The mutual fund world has changed dramatically in recent years, with whole new categories of funds appearing. In this second of a series, we look at the New World of Mutual Funds, focusing on U.S. and international offerings.

U.S. equity funds
Whereas Canadian equity funds may hold a fairly high percentage of foreign content, most U.S. equity funds are pure. In a few cases, you may find a couple of Latin American or Canadian stocks in the mix (it would not be unusual for a U.S. equity fund to own shares in Nortel, which is listed on the New York Stock Exchange as well as in Canada). But if the percentage of non-U.S. stocks is at all significant, the fund gets pushed into a different category, known as North American equity.

Our official categorization system recognizes two types of U.S. stock funds. They are:

Broadly-based funds. As with broadly-based Canadian funds, these invest across all capitalization classes.

Small-to-mid-cap funds. In the case of U.S. funds of this type, the companies held will usually be much larger than you’d find in a comparable Canadian stock fund. Another significant difference is th in this case, the greater profit potential of the small cap stocks really has paid off. The average fund in this category had an annual return that was more than four percentage points higher than the average U.S. broadly-based fund over the decade to Oct. 31, 2000.

International/global equity fundsThis is where things can really start to get confusing. For starters, there are technically two main types of funds in this broad classification:

Global equity funds. These can invest anywhere in the world, without exception. The confusion arises from the fact that some of these funds include the word “international” in their name – which actually means something else in the arcane language of the fund business.

International mutual funds. These are funds that can invest anywhere except in their home country. In Canada, we have extended that definition to include the U.S., so a true international fund will not hold any shares in companies resident in the U.S. or Canada. The fund may hold Mexican shares, however.

Moving beyond these two general classifications, we find more focused categories. These include:

Regional funds. In this case, the fund manager concentrates on a specific area of the world. Typical examples are European funds, Pacific Rim funds and Latin American funds.

Country-specific funds. The focus sharpens to one country – at least in theory. After the U.S., Japanese equity funds are the most common. You will also find funds that focus on India, Germany and China, although some of the China funds cheat by broadening their definition to include companies that have strong economic connections to that country but are not indigenous Chinese.

Emerging markets funds. Here the main criterion is the state of development of a nation’s economy. Whether a particular country qualifies for inclusion is very much at the discretion of each fund manager. As a result, you may find that a fund will hold stocks from countries that clearly fall into the “emerging” ranks, such as Indonesia, as well as nations that we would normally think of as being relatively advanced, like Singapore, Israel, and South Korea.

Adapted from the forthcoming book Six Steps to $1 Million, by Gordon Pape, to be published by Prentice Hall Canada in spring 2001.