Top U.S. funds for 2006

Recent years have been tough for many U.S. equity funds because of the rise in value of the Canadian dollar. Stock market gains, which were anaemic on Wall Street in 2005, were further eroded by currency losses, leaving the final numbers looking emaciated.

Only U.S. mutual funds that have benefited from exceptional stock picking by their managers and those that use currency hedges to minimize the impact of the loonie’s surge have fared well.

Looking ahead to 2006, it’s likely the currency factor will continue to be a concern for investors in U.S. funds. The Canadian dollar was very strong in the second half of 2005 and the huge U.S. trade and fiscal deficits are goingy to put continued pressure on the greenback. I don’t expect the loonie to gain at the same rate but a move to the US90c range by the end of 2006 is certainly possible. That would represent a gain of about 5 per cent from current levels, which would erode U.S. stock market gains in unhedged funds.

The inescapable conclusion is that investors must be highly selective if they are going to hold U.S. funds in their portfolios. There are only a handful that I feel are worth considering right now and somof them, such as the high-performance ABC American-Value Fund, require a big up-front dollar commitment.

Here are three U.S. funds that you can buy into for $1,000 or less that are worth considering. Talk to a financial advisor before acting.

Dynamic Power American Growth Fund. Manager Noah Blackstein is considered to be one of the rising stars at Dynamic and he shows why with this fund. Despite the handicap of the rising loonie, he recorded an average annual gain of 12.8 per cent in the three years to Nov. 30, thanks to some great stock-picking. His winners include Apple Computer, which has shot up from the US$10 range (split-adjusted) at the start of 2004 to about US$75, and Google, which rose from its August 2004 IPO price of US$100 to over US$400. Volatility is on the high side, however. The other negative is a very high MER (4.06 per cent), but that is due in part to a performance bonus clause which is described in the prospectus.

In July, Dynamic announced the launch of a companion fund to this one, called Dynamic Power American Currency Neutral Fund. It’s really the same fund but with a currency hedge built in to guarantee that U.S. stock market gains aren’t eroded by currency losses if the loonie rises. During the three months to Nov. 30 it outperformed the core fund by a small margin (9.63 per cent vs. 9.25 per cent) because the loonie rose during that time. If you think our currency is going to trend higher, as we do, it’s the fund to choose.

Mutual Beacon Fund. There is nothing exciting about this fund except that it offers slow, steady returns with minimal risk. Think of it as playing the role of the tortoise in the Great Mutual Funds Race. This is one of two funds in the “Mutual” series offered by the Franklin Templeton organization in Canada, although there are several in the U.S. The name Templeton says “value investing,” but this offering goes beyond that mandate. Manager Michael Embler, who took over in May, focuses on capital preservation. Long-term growth is the aim, with income a secondary goal. This fund is unlikely to soar to the heights of some of the go-go growth funds in hot markets, but it’s a good safe haven in troubled times.

RBC O’Shaughnessy U.S. Growth Fund. This specialty fund includes a lot of small-cap stocks. The manager uses his proprietary O’Shaughnessy U.S. Growth Strategy Index, which is a fundamental momentum-based filter model that identifies firms with low price-to-sales ratios, rising earnings, and a rising share price. Over five years, the performance is way ahead of the peer group. The one-year return to Nov. 30 was a sterling 19.5 per cent while the three-year average annual compound rate of return was 20.8 per cent, more than double the category average. You’ve probably never heard of most of the names in the portfolio but James O’Shaughnessy’s fine record suggests that you needn’t let that worry you. One caution: the fund, although less volatile than the U.S. equity fund average, nevertheless has a high standard deviation attesting to the volatility in this category.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder subscriber: