Two funds for 2012
About the only thing I can predict with confidence for 2012 is unpredictability. There are so many uncertainties playing out on the world stage that it is impossible to know how the year will unfold.
In these circumstances, the best advice I can give is to be cautious. Prudence should trump greed, at least until such time as we have a clearer idea of how the European debt crisis will play out, how the U.S. economy is faring, and whether we are headed into another recession. However, that doesn’t mean we have to sacrifice all profit potential. The goal is to identify funds with a strong history and an acceptable risk/return profile. With that in mind, here are two fund selections for 2012.
RBC Canadian Equity Income Fund. This fund has done amazingly well in very tough market conditions. Manager Jennifer McClelland has skillfully transformed a former income trust fund into a high-yield equity fund that has outperformed just about everyone else in the Canadian Dividend and Income Equity category. Her focus is on mid-cap stocks, with a value bias in her selection process. Ms. McClelland is an active trader; the portfolio has a turnover rate of 141 per cent which means it is completely overhauled more than once a year on average.
According to Morningstar.ca, the fund was showing a one year gain of 12.7 per cent as of the close of trading on Jan. 20 (A units). That was more than 11 points above the category average, ranking it number two in its peer group for the period. Over the past three years, the fund has generated an average annual compound rate of return of 31.2 per cent, which should be good enough to please even the most demanding investor.
The portfolio, which has just over 100 positions, is a mix of blue-chip stocks such as Brookfield Asset Management and CIBC, REITs, former income trusts, and various resource companies. About one-third of the assets are in the financial sector with 23.3 per cent in energy, 14.6 per cent in industrials, and 10.4 per cent in materials. The investments are heavily concentrated in Canada with only a smattering of foreign securities.
The fund offers good cash flow (hence the inclusion of the word “income” in the name) with current distributions running at $0.09 a unit per month ($1.08 per year). Based on a recent NAV of $23.69, that projects to a yield of 4.6 per cent over the next 12 months.
Volatility is slightly above average for a fund of this type so there’s more risk involved here as compared to a traditional dividend fund. However, the strong returns more than compensate for that.
Buy this one for good cash flow and capital gains potential. The code for the Series A no-load is RBC591.
Fidelity Monthly Income Fund. This fund offers a well-balanced portfolio, which is just the sort of thing we need in turbulent times. It is a consistently strong performer, beating its peers over all time periods by a substantial margin and earning a five star rating from Morningstar.
During a year when many funds lost money, this one posted a gain of 6.4 per cent over the 12 months to Jan. 20, the fourth-best in its category. For the three years to that date, the fund showed an average annual compound rate of return of 16.4 per cent, a very fine result for a conservative portfolio such as this. That was good enough for second place in its group.
However, this does not mean the fund is immune from market downturns: it dropped 21.5 per cent in the year ending Feb. 28, 2009. But most equity and balanced funds did worse during that period. Fidelity rates the risk as below average on its volatility meter.
This is a huge fund, in all ways. It has accumulated over $4 billion in assets since it was launched in November 2003 (all series). The portfolio holds a breathtaking 1,659 positions, 272 of which are equities and the rest bonds. Stocks make up about 43 per cent of the fund with about the same weighting in bonds, and 11.4 per cent in cash, so the portfolio is quite defensive in nature. Foreign content is about 30 per cent.
The main negative is that cash flow is thin if you need regular income. Monthly payments vary but were less than $0.02 a unit for most of 2011.
The managers use a value approach to stock selection and the MER for the B units is a reasonable 2.09 per cent. There are 44 different types of units for this fund so check out the Fidelity website for the appropriate code.
Be sure to ask a financial advisor about the suitability of these funds for your portfolio before making a decision.
Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies.
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