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Volume 21, Number 4
WHAT’S NEW
♦ ETFs Celebrate a Quarter Century – It was March 9, 1990 when the Toronto 35 Index Participation Fund began trading on the exchange. Who knew that 25 years later, this ETF would still be going strong? Now known as the iShares S&P/TSX 60 Index ETF, it is the largest and most heavily traded ETF in the country, with AUM of nearly $12 billion and an average daily trading volume of 3.5 million shares. That ETF paved the way for the global ETF industry that continues to show solid growth month after month and is fast becoming the preferred investment for do it yourself investors and a growing number of advisors. And why not? ETFs provide cheap access to a wide range of investment products, covering nearly all the investment universe. At the end of February, it was estimated that there were more than 5,600 ETFs available worldwide, from nearly 250 providers in 52 countries. Global assets under management stood at $2.9 trillion. Happy belated birthday ETFs!! ETFs see strong inflows in February – According to data reported by the Canadian ETF Association, February saw net creations of more than $1.6 billion, up more than 250% from a year ago and four times January’s level. BlackRock’s iShares and BMO were in a very tight race for the lead, followed by Vanguard. Total assets in the 353 Canadian traded ETFs sat at $81 billion, up more than 4% from January. 1
April, 2015
Single Issue: $15
OIL HITS CANADIAN
ECONOMY
By Dave Paterson, CFA
GDP growth turns nega0ve in January. Believed to be a precursor to dismal Q1 numbers. With the price of oil continuing to struggle, the impact is starting to be felt across the
entire Canadian economy. Last Tuesday, Statistics Canada reported that GDP shrank
by 0.1% in January, a stunning reversal of December’s impressive 0.3% rise. If there
is a bright spot in all of this, it is that it could have been worse. Many economists had
been predicting a drop in GDP of 0.2%.
Digging deeper, it was wholesale trade and retail sales that were the biggest drags on
growth. While some of this is no doubt attributed to the lower oil price, a large
component can arguably be blamed on the weather. January saw massive snow
storms across many parts of the country and the Northeastern United States.
A bright spot in the report was the goods sector, which saw a modest 0.3% gain.
Given the harsh weather and frigid temperatures, utilities were strong, gaining 1.4%
in January. Perhaps the biggest surprise was that oil production rose by more than
2.6%, despite the depressed oil prices. Unfortunately this was a one-time event
resulting from many oil sands plants coming back on stream after being closed for
maintenance in the fourth quarter. While positive for January, it doesn’t paint a
particularly rosy picture for February as neither event was repeated in February.
These numbers certainly support the comments made by Bank of Canada Governor
Stephen Poloz, who expects the growth numbers for the first quarter of the year to be
“atrocious”. Atrocious may be a bit harsh, but there is little doubt they will be
disappointing, as many oil companies have shuttered production, cutting spending
and jobs. Some analysts fear that this trend will spill over into other parts of the
economy, including construction, real estate, and the banks.
I’m not quite so negative. I certainly don’t expect we’ll escape this unscathed, but the
Continued on page 2...
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April 2015
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Oil - continued from page 1...
lower dollar, combined with an increase in economic
growth south of the border will help to shore up other
areas of our economy including the industrial and retail
focused sectors. Unfortunately, with the oil shock
happening as quickly as it did, we may see a few months
or even a quarter or two that look to be quite dismal before
things start to turn around.
Looking at the investment implications, the biggest is that
interest rates in Canada are likely to remain lower for
longer than many had originally anticipated. Whether Mr.
Poloz steps in and makes another rate cut will be largely
dependent on how the economy responds. If he sees any
signs of further weakness, I expect him to make another
cut. However, should we see a rebound, he will maintain
the current rate levels until a meaningful recovery takes
place.
While I am not expecting any major downward pressure on
bond yields, I certainly would not taking an overweight
position in bonds. Sure, we may see a rally if the numbers
point to a further rate cut, but I still see more risks to the
downside. In this environment, I am a little more
comfortable taking on more duration risk in the fixed
income portion of a portfolio, however, I would still keep
it in line with the FTSE / TMX Universe Bond Index or
preferably shorter. At the end of February, the benchmark
duration was listed at 7.6 years.
I continue to prefer high quality corporate and provincial
bonds over Government of Canada bonds. They allow for a
slight yield pickup without taking on substantial default
risk. For those investors comfortable taking on a higher
level of overall risk, high yield can be a nice addition to
your portfolio. It can provide higher returns than
traditional bonds, but you accept more default risk and you
also have the added worry of a liquidity crisis should we
see a rush to the exits. Considering the total risk profile of
high yield, I would suggest they make up only a portion of
your bond allocation.
On the equity side, I remain concerned with Canada. Even
with the recent selloff, energy makes up more than 20% of
the S&P/TSX Composite Index. There is no doubt that
2
energy will rebound, but the question is when. Until then, I
expect to see higher than normal levels of volatility in the
Canadian market. For those investors looking for Canadian
equity exposure, I suggest you look for a fund that is much
different from the index.
U.S. equities have been my top pick for a while now, and
remain so, but just barely. Valuation levels are high when
compared to Canadian or EAFE stocks. Yet, given the
potential growth picture in the U.S. compared to other
regions around the world, these valuations may be
somewhat warranted. According to estimates on
Morningstar, the forward one year earnings growth of the
S&P 500 is more than double the S&P/TSX Composite and
significantly higher than the MSCI EAFE Index.
European equities appear to be in the midst of a rally
thanks to a stabilizing economy and the liquidity provided
by the European Central Bank’s (ECB) latest bond buying
program. With the ECB buying more 60 billion euros a
month of bonds, yields on the region’s bonds continue to
fall, and in some cases are negative, while equity markets
have moved largely higher. I still think there is some
upside potential, but until I see further signs that the
moribund economies in the region turn around, I will view
Europe as a shorter term opportunistic trade, rather than a
longer term investment.
My current investment outlook is:
Under-­‐
weight
Cash
Bonds
Government
Corporate
High Yield
Global Bonds
Real Return Bonds
EquiIes
Canada
U.S.
Interna_onal
Emerging Markets
Mutual Funds / ETFs Update is published monthly by BuildingWealth.ca. All Rights Reserved
Neutral
X
X
X
X
X
X
Over-­‐
weight
X
X
X
X
X
X
April 2015
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3
TOP FUND PICKS FOR THE CURRENT
ENVIRONMENT
By Dave Paterson, CFA
Highligh0ng some of my favourites for right now…
With the continued uncertainty surrounding the investing
environment, I thought it might be a good time to provide a
quick update of some of my top picks for the near term.
deep value process, and has done an excellent job protecting
capital in down markets. This is a great core equity funds for
most investors.
Fixed Income
U.S. Equity
PH&N Short Term Bond & Mortgage Fund (RBF 1250) –
This has been my go-to fund in the short-term space for a
while. It invests in a well-diversified portfolio of short term
bonds and mortgages. The quality of the underlying portfolio is
top shelf and the management team is excellent. If you can buy
the Series D units, you can get them for a very reasonable
0.60%. This remains the best short term pick around.
iShares Core S&P 500 (CAD Hedged) (TSX: XSP) – With
the S&P 500 being such a tough index to beat, you might as
well not even try. With a management fee of 0.10%, this is one
of the cheapest ways to access U.S. equities. The currency
exposure is fully hedged, which should help if we see the
Canadian dollar gain any ground on the greenback. If you think
the Canadian dollar has further to fall, check out XUS which is
the same investment exposure without the hedged currency.
PH&N Total Return Bond Fund (RBF 1340) – When I thought
higher rates were on the horizon, I favoured the conservatively
positioned Dynamic Advantage Bond Fund over this fund.
However, with rates likely on hold for the next few quarters, this
high quality bond fund is now my top pick thanks to its top shelf
management team and more index like duration. It invests in a
mix of government and corporate bonds, and allows the managers
the flexibility to invest in high yield and some other nontraditional strategies. In a flat or falling rate environment, this is a
great pick that should do well relative to its competition.
Manulife Strategic Income (MMF 559) – This tactically
managed global bond fund makes a great compliment to the
PH&N offering. It invests in a mix of government, corporate
and high yield bonds from issuers located around the world.
The management team will also dynamically manage currency
in an effort to manage risk and boost return. Not a core holding,
but definitely a nice piece of the fixed income portion of your
portfolio.
Canadian Equity
Fidelity Canadian Large Cap Fund (FID 231) – This fund is
a bit of a rarity for a Canadian focused equity fund in that it has
a significantly underweight position in energy, no golds, and no
exposure to Canadian banks. It is managed using a bottom up,
Global Equity
Mackenzie Ivy Foreign Equity Fund (MFC 081) – If you are
looking for a global equity fund to hold in volatile markets, this
fund belongs on your short list. It is a concentrated portfolio of
high quality companies that is an excellent core offering for
most investors.
Mawer Global Equity Fund (MAW 120) – While the
Mackenzie offering above is a great pick in volatile markets, this
fund is a great pick in all markets. It doesn’t offer the same
downside protection, but this portfolio of attractively valued,
wealth creating companies offers much better upside
participation. Factor in a low cost and a rock solid investment
process and you get a rock solid core holding for most investors.
Specialty / Sector
Manulife Global Infrastructure Fund (MMF 8584) –
Infrastructure investments generally offer long term stable cash
flows that are often adjusted to inflation, low risk of loss of
capital, and potentially attractive risk adjusted returns. This
makes them excellent diversifiers when included as a part of a
well-diversified portfolio. This Brookfield managed offering is,
in my opinion, the best of the category, and a great way to
access infrastructure investments.
Mutual Funds / ETFs Update is published monthly by BuildingWealth.ca. All Rights Reserved
April 2015
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4
UNDERSTANDING RBC’S
GLOBAL BOND OFFERINGS
By Dave Paterson, CFA
Which of these RBC offerings will make a great addi0on to a tradi0onal bond porGolio?
Recently, a reader emailed asking my opinion on the relative
merits of four RBC Global Bond Funds; RBC High Yield
Bond (RBF 496), RBC Global High Yield Bond (RBF 579),
RBC Emerging Markets Bond (RBF 497), and BlueBay
Global Convertible Bond (RBF 490).
RBC High Yield Bond Fund – This fund invests in a
diversified portfolio of U.S. and Canadian based high yield
bonds. At the end of the year, it was heavily weighted towards
the U.S., with just a modest 10% weighting in Canada. Nearly
all the holdings carry a credit rating lower than investment
grade. The yield is significantly higher than the broader
Canadian bond market, and it carries a duration of 5.0,
significantly lower than the 7.6 years of the FTSE/TMX
Universe Bond Index. The managers use a value focused
approach and look to find what they believe are high quality
companies with stable or improving credit profiles.
RBC Global High Yield Bond Fund – This fund has a much
broader mandate than the RBC High Yield Bond Fund, and
looks for opportunities around the world. It will invest in a mix
of high yielding corporate and government bonds. It has a
neutral asset mix of 50% U.S. high yield and 50% in emerging
market bonds. As a result, it carries a higher level of risk than
the other high yield offering. Volatility has been significantly
higher over the most recent three year period, and I would
expect it to remain higher.
RBC Emerging Markets Bond Fund – This invests in a mix
of government and corporate bonds of issues located in
emerging market countries. Unlike the other two funds
discussed, the credit quality of this offering will be more
diversified, ranging from investment grade to high yield. This
has been a very volatile bond fund, with a level of volatility that
is more than double the broad Canadian bond market.
BlueBay Global Convertible Bond Fund – This is a rather
interesting offering that invests in convertible bonds from
issuers around the world. A convertible bond is a bond that can
be converted into a specified number of equities at a set price.
Like a traditional bond, it pays a coupon rate of interest. When
the company’s stock is trading below the conversion price, the
convertible tends to trade more like a bond. However, when the
stock is above the conversion price, it tends to trade more like
equities. It is usually companies with poor credit ratings, but
high growth potential who are most likely to issue convertible
bonds. The fund itself has done okay, gaining 5.8% in the past
year. Unfortunately, the fund was only launched in late 2012, so
there isn’t a lot of track record on which to do a full analysis.
Because the issuers are generally unrated, you are taking on a
higher level of risk of default than with more traditional bonds,
but you do have the growth potential of equities.
So which of these is best? None. These are not core bond funds,
and should not be used to make up your bond allocation.
Instead, you’ll likely want to use the PH&N Total Return
Bond Fund as your core, combined with a mix of the RBC
High Yield Bond, RBC Emerging Markets Bond and the
BlueBay Global Convertible Bond. This will be a nice, welldiversified portfolio. Alternatively you could just use the Global
High Yield Bond instead of the High Yield and EM Bond funds
to get a similar allocation.
If you are willing to look outside of the RBC family, I would
strongly suggest you consider the Manulife Strategic Income
Fund. It is a tactically managed global bond fund that provides
exposure to a mix of government, corporate, and high yield
bonds from around the world. It invests in both developed and
emerging markets. Another interesting feature is the managers
actively manage currency as a way to not only lower risk, but
also increase return. Yes, it is more expensive, but in my opinion,
it is worth the extra cost for the high quality management and
process used. This, combined with the PH&N Total Return Bond
would be my pick for a fixed income sleeve of a portfolio.
Mutual Funds / ETFs Update is published monthly by BuildingWealth.ca. All Rights Reserved
April 2015
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5
USING T-SERIES FUNDS TO
REDUCE OAS CLAWBACK
By Dave Paterson, CFA
Return of capital distribu0ons reduce likelihood of triggering OAS clawback
With the baby boom generation fast approaching retirement
age, many Canadians will begin drawing from the Canada
Pension Plan (CPP) and the Old Age Security Program (OAS).
Everyone who is 65 or older, and has contributed to the plan is
eligible for the CPP. OAS is a supplement to this plan that pays
those eligible an income of up to $563.74 per month in 2015.
Unlike the CPP, the OAS has an income means test, where
those with incomes over $72,809 will see their benefits reduced
based on what they earn. Currently, for every dollar of income
above this limit, your OAS will be reduced by $0.15. This
means that once you have an income in retirement of more than
$76,567, you will receive no OAS, and will only receive CPP
payments.
For those who need to generate cash flow from their
investments, but are very close to the income threshold, you
may want to take a look at T-Series mutual funds. As a
refresher, a T-Series Fund will pay out a monthly distribution
that is largely treated as return of capital for tax purposes. Any
return of capital is not included as “income” for tax purposes.
Instead, they reduce the adjusted cost base (ACB) of your
investment. This effectively delays your tax liability until you
sell your units, at which point you will have a higher capital
gain than you would have had otherwise.
Whether this strategy is right for you depends on your
particular situation, and I would strongly encourage you to
speak with a financial advisor or a tax professional to make
sure it is suitable for you.
Another thing to note is that once you have reduced your ACB
to $0, all future distributions are treated as capital gains for tax
purposes. These capital gains distributions will be considered
income, and can potentially result in a clawback of the OAS. I
should also point out that in a T-Series fund, it is possible that
you may still receive a capital gain, dividend or regular income
distribution, however most of the fund companies work to try to
reduce this likelihood. But you should be aware that it is
possible.
They are generally available in a few different payout options,
with an annualized 5% and 8% being the most prevalent. If you
want to generate your own return amount, you can invest in a
mix of T5 and T8 units to create your custom payout depending
on your needs. For example, 50% T5 and 50% T8 would create
an annualized payout of 6.5%. Changing the mix can result in
any amount between 5% and 8% per year.
These types of funds are readily available, and are offered by
most of the bigger fund companies and some of the banks.
Many of the smaller companies do NOT offer these types of
funds. For example, Mawer, Beutel Goodman, Leith Wheeler
or Steadyhand do not have these types of funds.
Continued on page 6...
B U I L D I N G W E A L T H
M u t u a l F u n d s / E T F s U p d a t e
Editor and Publisher: David Paterson
Circulation Director: Kim Pape-Green
Customer Service: Katya Schmied, Terri Hooper
© 2015 by Gordon Pape Enterprises Ltd. and D.A. Paterson &
Associates Inc. All rights reserved. Reproduction in whole or in part
without written permission is prohibited. All recommendations are
based on information that is believed to be reliable. However,
results are not guaranteed and the publishers and distributors of
Mutual Funds / ETFs Update assume no liability whatsoever for any
material losses that may occur. Readers are advised to consult a
professional financial advisor before making any investment
decisions. Contributors to the MFU and/or their companies or
members of their families may hold and trade positions in securities
mentioned in this newsletter. No compensation for recommending
particular securities or financial advisors is solicited or accepted.
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April 2015
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T-Series Funds - continued from page 5...
While the tax deferred cash flow is an interesting feature, you
still need to evaluate these funds the same way you would
invest any investment product. You need to insure that you are
investing in a high quality fund that is suitable for your specific
needs and risk tolerance.
I always want to make sure I understand who the manager is,
their investment process, buy and sell criteria, risk management,
costs, and of course risk adjusted performance. Once you find the
fund or funds that meet your needs, you can combine them to
build the most appropriate portfolio for your needs.
Another thing you’ll want to look at is how effective the fund
has been at reducing taxable distributions. To do this, I would
look at how much of previous years distributions contained
other types of income. Obviously this is only an indication as
we have no way of knowing what may happen in the future, but
generally, if there are consistently many different income types
in the T-Series distribution breakdown, then there may be
problems with the structure. If not, you’re likely okay.
Fortunately, many of the funds on my Recommended List are
available in one or more T-Series options. The funds on the list
that are offered in a T-Series are:
6
RECOMMENDED FUNDS WITH T-­‐SERIES OPTIONS
Bond Funds
None
Balanced Funds
Manulife Monthly High Income
Mac Cundill Cdn Balanced
AGF Monthly High Income
Fidelity Canadian Balanced
Income Funds
PH&N Monthly Income
CI Signature High Income
RBC Canadian Equity Income
Canadian Equity Funds
CI Cambridge Canadian Equity Class
Fidelity Canadian Large Cap
IA Clarington Cdn Conserva_ve Equity
RBC North American Value
Fidelity Dividend
Canadian Small Cap Funds
None
U.S. Equity Funds
Fidelity Small Cap America
Mackenzie U.S. Large Cap Class
Franklin U.S. Rising Dividends
InternaDonal/Global/North American Funds
IA Clarington Global Equity Fund
Mackenzie Ivy Foreign Equity
Trimark Global Endeavour Dynamic Power Global Growth
Sector Funds
None
PORTFOLIO STRATEGY - UNDERSTANDING
ACTIVE SHARE
By Dave Paterson, CFA
Understanding how this measure can help build be5er por6olios
For years, study after study has concluded that most mutual
fund managers cannot outperform their benchmarks with any
degree of consistency. When looking into the reasons, there are
a couple that standout.
The first, obviously is cost. According to Morningstar, the
average Canadian focused equity mutual fund carries a
management expense ratio (MER) of 2.0%. It is a similar story
for U.S. and foreign equity funds, which also carry MERs north
of 2%. Sector and specialty funds are even higher.
This dovetails nicely into the second reason that most managers
underperform, which is many of their portfolios tend to look a lot
like the index they are trying to beat. The more a portfolio
resembles its benchmark, the tougher it will be for the manager to
outperform, particularly when you are already facing a fee hurdle
of 2% or more. To put it simply, if you want to outperform a
benchmark, you can’t build a portfolio that looks like the index.
One of the latest buzzwords in the industry is “Active Share”. It
seems every time I’m talking to an advisor, they want funds
Continued on page 7...
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April 2015
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Portfolio strategy - continued from page 6...
with a high Active Share. It doesn’t really matter what the fund
is or does, but it needs to have active share and a lot of it.
Active Share is a measure that was devised by Martijn Cremars
and Antti Petajisto, a couple of professors at the Yale School of
Management, way back in 2006. In very simple terms, it
measures the percentage of a fund’s holdings that differ from its
benchmark. The higher the active share, the less it looks like its
benchmark. In their research, they noted that funds with higher
scores, generally 80% or more, on average outperformed their
benchmark by between 2% and 2.7%.
Except it’s not quite that simple. Don’t get me wrong, I firmly
believe in the concept of active share. There is little doubt in
my mind that if you want to outperform your benchmark, you
need to have a portfolio that is different from your benchmark.
But there is more to it. There is not one single factor that can be
used to consistently pick outperformance in funds. For
example, there are dozens of studies that show cost is the
biggest single predictor of outperformance, but I wouldn’t pick
a fund based solely on cost either.
7
does a lot of trading in their funds. Further, this is not a measure
that is widely available. To my knowledge, the only place it is
published is on Morningstar Direct, which is prohibitively
expensive, costing thousands of dollars per month.
Bottom Line
The more I research this concept, the more it is starting to look
like a high active share is not so much a predictor of
outperformance, but more a byproduct of a manager who is
following a process that can lead to outperformance. In general,
good managers tend to follow a disciplined stock selection
process that results in a portfolio that is much different than the
index. These portfolios often times tend to be fairly
concentrated, holding a handful of names.
Managers who are truly active have the potential to outperform
more than those who are following a “closet index” approach.
But that is the key - having a good manager following a
disciplined, repeatable process. Managers must place an
emphasis not only on generating return, but also on managing
risk. And finally, costs must be reasonable.
It should also be pointed out that while a fund that has a high
active share has the potential to outperform its benchmark, it is
also likely that it could dramatically underperform its index.
For example, take a Canadian equity fund that is underweight
in energy and financials. It will outperforming while those two
sectors are hurting, but will likely lag when they are rallying.
This is not uncommon with high active share funds.
When I screen a fund, I am looking for managers that have a
demonstrated history of delivering a strong level of risk adjusted
performance, and doing so with a return stream that is different
from its index. Once I have identified these funds, the next step
is to understand how the manager builds and maintains the
portfolio. Only once these factors are understood and put into
context can we make a real judgement on likelihood of a
manager’s ability to outperform on a consistent basis.
Another issue I have with active share is that while it is easy to
calculate, it is difficult to track in practice. We do not have
current portfolio holdings of all the mutual funds in Canada, so
often times, the data on which the calculation is based can be
out of date. This is especially true in cases where a manager
There is not one factor, be it active share, cost, factor tilt or
what have you that can unequivocally predict outperformance.
Instead, it is a mix of quantitative and qualitative factors that
help paint that picture.
HIGH ACTIVE SHARE FUNDS
By Dave Paterson, CFA
Highligh0ng a few quality funds that have high ac0ve share numbers…
While active share can be a great measure in helping to identify
funds that are much different than their benchmark, it does very
little to highlight quality. There are still many factors that need
to be evaluated before making an investment.
To help you narrow this process down, I thought it might be
interesting to highlight some high quality funds that offer a very
high level of active share.
Continued on page 8...
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April 2015
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8
Active Share Funds - continued from page 7...
Name
RaDng
Brandes Canadian Equity
A
NaAonal Bank US Equity F
Mackenzie Ivy Foreign Equity B
AcDve Share
Category
91.20 Cdn Focused Equity
90.03
US Equity
94.39
Global Equity
3 Mth 1 Yr 3 Yr 5 Yr 9.4%
19.2% 26.2% 18.6%
12.1% 30.2% 26.5% 17.2%
10.5% 17.9% 17.9% 12.5%
10 Yr MER
4.5% 2.72%
2.49%
7.0% 2.56%
Total Assets ($Mil)
$46.2 $98.7 $4,133.8 Returns at February 28, 2015. Return data provided by Morningstar. Active Share data courtesy of National Bank Financial.
Brandes Canadian Equity (BIP 121) - Managed by a team at
Brandes using a bottom up, deep value approach, this portfolio
looks nothing like its benchmark. It is very concentrated,
holding 22 names, with the top ten equity holdings making up
around 38% of the fund. It also has a very healthy exposure to
global stocks through it’s nearly 40%% holding of the Brandes
Global Equity Fund. It has an all cap mandate and can invest
in companies of any size. At the end of February, it was
significantly underweight in materials, energy, and financials,
which helps explain a lot of its recent outperformance. It is
overweight consumer names and cyclicals. The managers are
very disciplined and do not stray from their process. That style
conviction, combined with the all cap mandate and
concentrated portfolio has resulted in volatility levels that are
significantly higher than the index and peer group. It has
however, done very well in down markets. For the most recent
five year period, it has experienced more than 120% of the
market’s upside, yet realized less than half of the downside.
Despite this, I would be reluctant to use it as a core holding. I
believe it is just too volatile for most investors. Instead, I would go
with a fund that is more large cap focused as a core holding. Also,
while recent performance has been excellent, as with any fund
where the managers are disciplined and remain true to their style,
the fund may experience periods of significant underperformance.
While I wouldn’t recommend it as a core holding, I do think it can
be a nice compliment in a portfolio, bringing some all cap equity
exposure into the mix. There are a lot of things to like about it,
including the strong management team, disciplined, repeatable
process, and a portfolio that looks nothing like its index.
National Bank U.S. Equity Fund (NBC 443) – When Nadim
Rizk and his team took over the management duties of this fund
back in 2012, performance improved dramatically. For the three
years ending February 28, it has posted an average annualized
gain of 26.5%, slightly lagging the S&P 500, but handily
outpacing much of its competition. Using a fundamentally
driven, bottom up investment process, they look to find best of
breed companies that offer excellent growth potential, yet are
trading at reasonable valuations. Portfolio turnover is relatively
modest, and significantly lower than with the previous
management team. For 2013, turnover was just under 20% and
was on pace for that level after the first half of the year.
Using this bottom up approach, the portfolio is very different than
the index. It is a concentrated portfolio, holding just over 30
names. The sector mix is the byproduct of the stock selection
process and at the end of February, it had no exposure to energy,
communications or utilities, was significantly underweight
technology, and was overweight industrials, consumer, and
healthcare names. For those looking for pure U.S. equity exposure,
this is definitely a fund you should take a look at. I expect it to
provide index like return, with comparable levels of volatility. It
could be a great core equity holding in most portfolios.
Mackenzie Ivy Foreign Equity Fund (MFC 081) - I have long
said that this is the global equity fund you want to own when
markets get volatile, and that point was driven home by recent
market activity. Between September 1 and October 16, the MSCI
World Index dropped by nearly 6% in Canadian dollar terms.
During the same period, the Ivy Foreign Equity Fund dropped a
little more than 3%, or roughly 56% of the downside movement
of the market. This is in line with its historic average. The
managers run a concentrated portfolio of high quality companies
from around the world with strong balance sheets and excellent
management teams that are trading at a reasonable valuation.
They pay no attention to benchmark weightings and build the
portfolio on a stock by stock basis. As a result, it is much
different than the index, with no exposure to energy,
communications, and a significant underweight in financials. It is
heavily weighted to consumer and industrial names.
They are very patient in their approach as evidenced by their low
levels of portfolio turnover. For the most recent five year period, it
has averaged less than 20% per year. With more volatility likely in
the next few quarters, those investors looking for a way to gain
global equity exposure with lower volatility will want to consider
this offering. One warning, given the conservative nature, it is
likely to lag in rising markets. For those comfortable making that
tradeoff, this is one of the best all-around global equity funds to
own. I expect it will continue to offer excellent risk adjusted
returns and continue to protect capital in volatile markets.
Mutual Funds / ETFs Update is published monthly by BuildingWealth.ca. All Rights Reserved
April 2015