Bench the underperformers
The fund universe has become so vast that investors simply can’t keep up with what’s going on. Mutual funds, segregated funds, closed-end funds, exchange-traded funds (ETFS): the variety of choice is bewildering. The result is often a state of semi-paralysis; people don’t know what to do with their portfolios so they end up doing nothing.
Sometimes that can work out all right but more often it’s a good idea to make occasional changes to ensure you are maximizing your returns. I recommend taking the time to study your investment line-up at least twice a year and apply the same tough standards that a sports coach does: players that are not performing at peak capacity get benched.
For example, I recently reviewed the ETF Recommended List in my Mutual Funds Update newsletter and was distinctly unimpressed by the performance of the iShares CDN MSCI EAFE Index Fund (TSX: XIN). As the name suggests, this ETF is supposed to track the performance of the Morgan Stanley Capital EAFE Index in Canadian dollar terms but it has fallen well short of that benchmark. Over the five years to Nov. 30, it lost an average of 1.17 per cent annually while the MSCI Index gained an average of 2.17 per cent. Over the latest 12-month period, the iShares ETF did post a gain of 17.64 per cent but that again fell short of the benchmark (+18.31 per cent) and was well below average for the international equity category (+20.72 per cent).
That simply wasn’t good enough so I began to search for an alternative. I found one that satisfied me in the Claymore International Fundamental Index ETF (TSX: CIE).
This fund is designed to replicate the performance of the FTSE RAFI Developed ex US 1000 Index, which comprises the top 1,000 non U.S.-listed companies with the largest fundamental value. The index uses four factors in making its selections and weightings. They are: total cash dividends (five-year average of all regular and special distributions), free cash flow (five-year average), total sales (five-year average), and current book equity value .
Claymore says that this approach has the effect of reducing holdings in stocks whose prices have risen disproportionately while increasing holdings in companies whose prices have fallen behind. “In addition, Fundamental Indexation decreases exposure to high P/E stocks during episodes of unsustainable P/E expansion. Therefore, this approach seeks to avoid over-exposure to the more overvalued stocks,” Claymore says on its website.
The net result is a portfolio which includes stocks from 25 countries in Europe, Asia and Australasia.
The fund was launched in February 2007. Over the 12 months to Nov. 30, it gained 19.42 per cent on a net asset value basis, almost two percentage points better than the iShares ETF and more than a full point ahead of the same benchmark index despite an MER of 0.65 per cent. Granted, it does not have as long a history as the iShares fund but considering that the latter has underperformed its benchmark over five years, I felt a switch was in order and would result in an improved return for our readers.
If you have an international index fund in your portfolio, take a close look to see if the Claymore entry might be a better fit and discuss it with your financial advisor. The shares closed on the TSX on Dec. 18 at $14.15.
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