Wants a RRIF fund

Question: We have just opened a RRIF and are looking for a good Type B dividend fund to complement the investment mix. We have been very impressed with the performance of boutique Mavrix Dividend & Income Fund. Globefund rates it as five stars with a first quartile performance over a number of years. Its portfolio composition is mainly financial and telecom with a small amount of income trusts. The MER is on the high side at 2.45 per cent and the three-year risk and beta is average for the Canadian Dividend category. I would appreciate your overall impression of the fund. — B.M.

Gordon’s answer: To clarify for those who may not be familiar with my approach, I divide dividend funds into two types. Type A is the most common. These are basically blue-chip stock funds that focus on dividend-paying securities. Type B funds have a substantial percentage of preferred shares in their mix. This allows for better cash flow and reduces overall risk. There are very few of these left that are open to new investors.

The Mavrix fund to which you refer certainly does not fall into the Type B category. In fact, I question whether it should be called a “dividend” fu at all. As of December 31, about half the portfolio was in Canadian stocks, just over 38 per cent in income trusts, including REITS, and the rest in a smattering of short-term notes, corporate bonds, global equities, and cash. Moreover, some of the largest holdings don’t pay any distributions at all. Kingsway Financial, which comprises 7.7 per cent of the fund’s assets and is the third-largest position, is an example.

Yes, the returns have been great thanks mainly to the large income trust holdings and the sterling performance of stocks like Kingsway and Shoppers Drug Mart (another non-dividend payer). But make no mistake about it. Despite the relatively low volatility rating, this is an aggressively-managed fund, as are most of the Mavrix entries. It would be far more vulnerable in a market downturn than, say, the Signature Dividend Fund which has about half its portfolio in preferred shares.

All that said, the Marvrix fund offers good cash flow with monthly payments of 6.5c a unit, most of which was received in the form of capital gains in 2003. But I really cannot recommend this fund for a RRIF. It is too aggressive and holding it in a registered plan means that the capital gains tax break is lost.

If you do decide to buy, be aware that the company has announced that the fund will close to new investors on March 1.

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