The best of TD

It’s a toss-up as to which of the big banks has the strongest mutual funds line-up: Royal or TD. The fact is that you can’t go far wrong with either as long as you choose carefully. There are some duds in both companies but the winners outnumber the losers by a wide margin.

I recently completed a detailed review of the TD funds and came away very impressed. After my initial review of all the funds offered, I had a total of 12 entries on my “worth buying” list. There were also several others that came close but did not make the final cut. On the other side of the page, there were only six funds I had labelled “avoid”.

The solid line-up helps explain why TD is the third-largest fund group in the country among members of the Investment Funds Institute of Canada with $55.7 billion in assets under management as of the end of May. That’s still well behind RBC’s $81.6 billion (not including Phillips, Hager & North) but TD has momentum working for it. Over the past 12 months, it has enjoyed a growth rate of 13.2 per cent. Over at RBC, assets under management slipped about 3 per cent in the same period.

What makes the TD funds so attractive? Good performance, of course. A well-diversified line-up certainly helps. But innovation is a major factor: the company’s low-cost, no-load e-series, which can only be purchased on-line, has attracted almost $2.4 billion worth of business. The MERs on these funds range from 0.31 per cent to 0.5 per cent, well below the price you’ll pay for almost all other index mutual funds. They’re also competitive with most ETFs, with no brokerage commissions. If any of the TD funds that interest you are available in the e-series, you’ll come out ahead by choosing that option. Details here.

Here are two TD funds that especially impressed me.

TD Canadian Bond Fund. Since 1994, this fund has beaten the average of its peer group most of the time (2008 was a rare exception) and it shows above-average performance numbers for all time periods from one month to 20 years. Over the 12 months to June 30, the fund outperformed the category average by more than two percentage points (8.9 per cent to 6.6 per cent) and longer term results are almost as good. The 10-year average annual compound rate of return to June 30 was 6.2 per cent compared to 4.9 per cent for the category. I expect this outperformance to continue although the returns may be softer in the second half of 2010 and into 2011 if interest rates rise, depressing bond prices in the process.

The fund is tilted towards corporate issues (58.8 per cent of the total), which have been strong recently. We can see evidence of this in the six-month results which show the fund with a 4.1 per cent gain, half a point better than the peer group average.

The fund is conservatively managed as far as interest rate risk goes with federal and provincial issues among the largest individual holdings (government bonds account for 30.4 per cent of the mix). Corporate names include bonds from highly-rated companies such as TD Bank and Manulife Financial. Distributions are paid quarterly and the fund has decent cash flow with a 12-month trailing yield of about 4 per cent. This is a solid performer and is a good candidate for an RRSP or RRIF. It’s a no-load entry and you can take a position for as little as $100.

The fund is also available in three segregated formats, which I absolutely do not recommend because of MERs that can run as high as 2.53 per cent, more than double that of the regular no-load entry. The code for the no-load units is TBD162. Rating: $$$$.

TD Canadian Equity Fund. This is a very impressive no-load equity fund. It has been a first-quartile performer every year from 2003 to now with the exception of 2008 and shows above-average returns over almost all time frames. The fund uses a combination of bottom-up growth and value techniques in the stock selection process. It invests across all capitalization classes, but the main emphasis is on larger company stocks like the banks, Suncor, CN Rail, and Rogers. The portfolio is well diversified with an emphasis on energy (25 per cent), materials (24 per cent), and financial services (23 per cent). Most of the assets are Canadian (89.6 per cent) but there are some foreign stocks, mainly from the U.S. with Apple the largest position.

Like all equity funds, this one was beaten up in the bear market of 2008-09 losing more than 46 per cent in the 12 months to Feb. 28/09. It has bounced back nicely, gaining over 47 per cent in 2009 but is still below its pre-crash peak. Taking the long view, however, this is a consistently strong performer. Over the 10 years to June 30 the fund gained 4.8 per cent per annum, well above the 3.2 per cent average for the peer group and the 3.3 per cent average for its benchmark, the S&P/TSX Total Return Index. On the negative side, volatility is higher than average for the Canadian Equity category, so watch this fund closely if markets go into a dive.

This is one of TD’s most popular funds (more than $3 billion in assets under management). I recommend it as a core Canadian equity fund for the growth portion of a portfolio. However, its history shows that it is more aggressive than the companion TD Canadian Blue Chip Equity Fund, with bigger gains in strong market years and bigger losses in bad ones. Cautious investors may prefer the Blue Chip Fund or the Dividend Growth Fund as a result. This fund also offers A units (commissionable) and a segregated GIF II version. The latter has a very high MER of just under 5 per cent and as a result we do not recommend it. The code for the no-load units is TBD161. Rating: $$$$.

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Adapted from an article that originally appeared in Mutual Funds/ETFs Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information, click here.