Ups and downs
If you wait long enough, virtually every mutual fund will eventually have its time in the sun. Unfortunately, sometimes you need a lot of patience.
Consider the case of global bond funds. For the past few years, they have been non-performers – dead money in a portfolio. Yes, every asset allocation model says that investors should have some foreign bond holdings but when you look at a five-year average annual compound rate of return of 0.8 per cent for the category (to March 31), it’s hard to work up much enthusiasm for them. Even the best performer among the mainstream funds, RBC Global Bond Fund, only managed an average annual gain of 3.3 per cent over that period.
But suddenly, this bedraggled sector has done a U-turn. To the close of trading on April 18, most of the funds in the Global Fixed Income category were showing year-to-date profits for 2008 (take that, global stock funds!). In several cases, the gains exceeded 7 per cent and one was in double-digit territory. CIBC Global Bond Index Fund was ahead 9.1 per cent for the year to that point, according to Globefund. Altamira Global Bond Fund was up 8.4 per cent, and Scotia Global Bond Fund advanced 8.5 per cent. The lesser-known SEI Enhanced Global Bond Fund advanced an amazing 10.2 per cent (P units).
Why the sudden turnaround? Several factors have been at work, the most important of which was a steep decline in interest rates in response to the weak U.S. economy. The Canadian dollar also helped out by slipping a little against the U.S. greenback.
Most of the funds in this group are still in the red when you look at one-year returns, but that is likely to change soon. Anyone who believes the world economy will continue to weaken and that interest rates will keep on trending downwards should consider adding a foreign bond fund to their portfolio. The best choices are the bank no-load entries.
While global bond funds are on the rise, emerging markets funds are sliding after a terrific run. According to the Franklin Templeton organization, stocks from the BRIC countries (Brazil, Russia, India, China) were the best-performing investment category in 2007 with a gain of 32.4 per cent. Emerging markets equities (of which BRIC stocks are a part) came in second at 18.6 per cent.
Some mutual funds and ETFs that specialize in these areas did even better. The Claymore BRIC ETF (TSX: CBQ) gained an impressive 70.9 per cent in 2007. Among conventional mutual funds, the Templeton BRIC Corporate Class was ahead 35.7 per cent for the year. Only one emerging markets fund finished in the red in 2007: the Brandes Emerging Markets Fund was down just over 1 per cent for the period.
But that was then. This is now and things haven’t been going so well for emerging market entries so far in 2008. As of April 18, only two funds in this group were showing a year-to-date profits – the entries from Brandes and GGOF. Several were showing losses of more than 6 per cent while one was double-digit territory, the Mackenzie Cundill Emerging Markets Value Class (-10.9 per cent).
All this is a reminder that nothing stays the same in the investment world. Last year foreign bond funds were down and emerging markets funds were making big money. Now it’s the reverse. The moral of the story is not to try to outguess the markets. If you have a well-diversified portfolio, some of your assets will always be in the right place at the right time.
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, click here.