Low-risk foreign funds
In a recent column I wrote about some Canadian equity and balanced funds with a good record of protecting capital in down markets. Now let’s turn our attention to U.S. and international funds, where finding safe havens is more of a challenge, due in part to currency risk.
In fact, according to Globefund the average U.S. equity fund lost about four per cent in the year ending Nov. 30 and showed a three-year average annual compound rate of return of only 3.1 per cent to that point. The average international stock fund did better, gaining 2.4 per cent in the latest 12-month period and averaging 10.9 per cent over the last three years. However, that was well below the numbers posted by Canadian equity funds.
However, our main concern at the moment is not high performance but capital preservation. Who will do the best job for you if global markets hit the skids? Here are two funds to consider. Ask a financial advisor if either is appropriate for your needs.
RBC O’Shaughnessy U.S. Value Fund. This fund fits comfortably into a conservative portfolio despite the fact that manager James O’Shaughnessy is always fully invested and does not build large cash reserves. As a bonus, you also get excellent returns. Over the years, this fund has far outperformed the peer group although all the credit doesn’t go to the manager’s stock-picking skills. The fact the fund hedged its currency risk back into Canadian dollars gave it a huge boost as the loonie soared. The five-year average annual compound rate of return to Nov. 30 was 10.1 per cent compared to 2.5 per cent for the competition. That ranked it number seven of 244 in its category, according to The Fund Library. The portfolio emphasis is on blue-chip value stocks (ExxonMobil and Microsoft make the Top 10 list). However, there are some smaller, lesser-known companies as well. The fund held up well in the 2000-2002 bear market, with a loss of 5.9 per cent in 2002 as the only black mark on its record. The fact it is no-load adds to its appeal. The MER is a low 1.57 per cent. Rating: $$$$.
Mawer Canadian Diversified Investment Fund. The name of this fund is somewhat misleading. It is not a Canadian balanced fund, as the title might suggest, but a global balanced entry with strong Canadian content. Manager Craig Senyk can choose securities from around the globe and takes full advantage of this flexibility. Currently, international and U.S. stocks make up 35 per cent of the total portfolio, with 28 per cent in Canadian equities. The balance is in bonds and cash. Returns are comfortably above average, with a one-year gain to Nov. 30 of 4.3 per cent compared to 0.6 per cent for the peer group. Longer-term results are also above average, with a five-year average annual compound rate of return of over 9 per cent. The safety record is good with the worst loss during a 12-month period being a 9.3 per cent decline for the year ending March 31/03. Over a calendar year, the fund’s worst performance during the 2000-2002 bear market was a small 1.2 per cent drop in ’02. That makes this a fine choice if capital preservation is a major priority for you. Distributions are paid monthly. I like the fund’s combination of consistently good results with below average risk. Rating: $$$$.
The bottom line: No fund that holds stocks in its portfolio is absolutely risk-free, but these funds will minimize the damage if markets fall.
Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: http://www.buildingwealth.ca/promotion/50plusproducts.htm