Hidden Gems 2007
There are a lot of mutual funds out there – so many, in fact, that no one can seem to agree on the precise number. My Online Buyer’s Guide to Mutual Funds contains reviews and rating for more than 1,200 funds and that’s just the beginning because I don’t include funds of funds, third-party repackaged funds, and funds with a track record of less than three years. Nor do I have separate entries for all the different units of a core fund, which can sometimes exceed 25.
So it’s little wonder that most investors and advisors focus their attention on just a few companies. I have had some advisors tell me in confidence that they don’t even look at the funds of more than five to seven companies when making recommendations to a client. Trying to sort through the whole universe of choices would simply be too time-consuming.
There’s no doubt that narrowing the focus helps to improve efficiency, both in selecting funds for a portfolio and monitoring their performance. But it also means that some high-performance funds get overlooked because they are too small or too obscure to attract attention. Sometimes these funds are offered by major companies but have been buried beneath the pile of more popular entries. Sometimes they are sponsored by firms that few people have heard of. And sometimes they have not been around long enough to establish a presence.
Here are three of the best of these Hidden Gems for 2007. Only funds with total assets under management of less than $200 million qualify for consideration.
AGF US Value Class. This overlooked fund (only $48.7 million in assets) is run out of Dublin, Ireland by AGF International Advisors. They’re the same group that has done such a great job with AGF European Equity Fund and AGF International Stock Fund. Recently the strong performance of those entries was rewarded when the group was given control of the AGF International Value Fund, a move which in retrospect the company should have made five years ago. This little value fund is overseen by Rory Flynn, who was recently joined by Yvonne Brett at the helm. The mandate is to use the group’s bottom-up approach to stock selection to find undervalued mid- and large-cap stocks in the US market. After a weak start in 2002 (-14.5 per cent) and relatively unimpressive returns from 2003 to 2005, in large part due to the rise of the loonie, this fund is finally hitting its stride. It gained 12.2 per cent in the year to March 31, more than double the category average, and its average annual returns over three and five years are well above the US equity fund norm. Almost half the fund was committed to the financial sector in early 2007, with the top 10 holdings including companies such as Bank of America, US Bancorp, Fannie Mae, and Wachovia. The value approach of the management team should keep risk within reasonable bounds. Rating: $$$ (out of four).
BMO North American Dividend Fund. This used to be called the NAFTA Advantage Fund. In May 2006, unitholders approved a mandate change and the focus is now on dividend-paying common and preferred shares, mainly from the US and Canada. However, there was no change in the management team of Michael Stanley and Andrew Janes so it’s pretty well been business as usual. As of the end of March, US blue-chip stocks dominated the portfolio with American stocks accounting for 68 per cent of the assets compared to 30 per cent for Canada and 2 per cent for Mexico. Both before and since the change-over, this fund has been an above-average performer. The one-year gain to March 31 was 17.8 per cent, more than double the category average. Longer-term results have also been very good. Despite the word “dividend” in the name, don’t look for cash flow from this fund; distributions are paid only once a year, in December. The fund, which has slightly more than $100 million in assets, is best suited for investors looking for long-term growth and a relatively conservative management style. Rating: $$$.
Capital Global Small Companies Fund. This is my top pick from Scotiabank’s Capital funds line-up. It invests in Class I units of Capital International – Global Small Cap Fund which focuses on companies with a market cap of between $75 million and $2.25 billion – a very large range for a fund of this type. The fund got off to a terrible start with losses of 17.7 per cent in 2001 and 14.5 per cent in 2002. But the end of the bear market brought about a turn in fortunes and over the past three years (to March 31) it gained an average of 10.2 per cent annually, more than a full percentage point above the category average. As you might infer from those first two bad years, volatility is on the high side so this is not a good fund for an RRSP. But it’s appropriate if you want to add some high risk/high return global exposure to your non-registered portfolio. This is a tiny fund with assets of less than $9 million – it deserves a better fate. Rating: $$$.
Check with your financial advisor to see if any of these are right for your needs.