Three of
the most overlooked Canadian funds
If you look
through the pages of Canada’s largest business newspapers and magazines, you’re
likely to come across an abundance of ads boasting the merits and performance
of the same mutual funds we all keep hearing about. However, there are many
high quality funds that just get shunned by both individual investors and the
investment media. Why? My guess is that they’re not backed by a big marketing
budget and strong distribution network. While marketing shouldn’t matter in
your investment decisions, mutual fund companies can bombard investors with ads
to the point of ignorance when it comes to the industry’s lesser-known stars.
As some of
you will have already guessed, the funds featured as “hidden gems” are all
no-load funds, none of which are real popular with financial advisors, though
they should be. Another important common denominator is that each fund is run
by a firm that is best known in the institutional world of investing. That
means their focus has been on managing pension money for various companies and
the fortunes of some of Canada’s wealthiest families. With that “institutional”
focus, most of these firms will be unknown to many investors and advisors
alike.
The
Calgary-based trio of Martin Ferguson, Jim Hall, and Bill MacLachlan runs this
small cap Canadian stock fund using a disciplined, value-conscious growth
style. Despite a more than twelve-year record of solid performance, this fund
has only attracted about $39 million from Canadian fund investors. This fund
has outperformed most of its peers in seven of the last ten calendar years, and
has beaten the BMO Nesbitt-Burns Small Cap Index in six of the last ten years.
That adds up to outperformance of the category average and the benchmark of 3
and 2 percentage points per year, respectively, over the last ten years. Annual
fees (MER – management expense ratio) of 1.59 per cent per year gives this fund
a full percentage point head start over its competition, which has an average
MER of nearly 2.60 per cent per year. How does this team do it?
At the
heart of this disciplined process is intensive fundamental research. For Mawer,
that means scrutinizing a company’s management, business model, and ability to
carry current growth trends in cash flow into the future. In the end, their
goal is to find a well-diversified group of about fifty companies that are adding
true economic value to shareholders and trading at reasonable prices, in
relative and absolute terms. While this is a great fund, bear in mind that it
does hold smaller companies and, as such, has an above average level of risk.
The average investor probably shouldn’t hold any more than ten to twelve per
cent of their total portfolios in a fund like this one. If going direct to
Mawer, the minimum investment is $100,000 but that drops to $5,000 when bought
through a broker, fund dealer, or financial advisor.
Like the
Mawer fund above, this is another stellar small cap offering from a
well-established money management firm. A younger fund, this gem has been
around for five full calendar years so far, and has outperformed most of its
peers in four out of five years, and beaten the benchmark small cap index in
all of those years. A benefit with firms that are big in the institutional
world is that they have a true team-based approach, and Beutel Goodman is no
exception. All of the research used in the investment decision-making process
is internally generated. While they also practice a blended approach of value
and growth, this fund is more growth oriented and a bit more concentrated
(fewer stocks and sectors) than the Mawer offering. Low fees (MER of 1.55 per
cent), a disciplined team-based approach, and historical performance record
make for a compelling argument for including this fund for a portion of a
balanced portfolio (up to ten or twelve per cent of the total). The minimum
investment is $10,000.
When it
comes to choosing a quality Canadian bond fund, there are two key ingredients
for which to look – low fees and great management. While fees on a
growth-oriented equity fund shouldn’t be your most important criteria, they
should be near the top when choosing more conservative investments like
income-oriented funds. As for great management, that’s been discussed in detail
many times in this space – a true team based approach that is consistent among
all individual team members. Going by these two key factors, this fund earns
high marks for its low MER of 0.70 per cent and its large and highly skilled
investment team. Investors should not forget to include bonds for a portion of
their portfolios and this fund is one of the best in its category. McLean
Budden’s approach has been proven in its ability to beat most of its
competition in eight of the last ten calendar years. Also, it trails the Scotia
McLoed Universe Bond Index by just a half of one percent per year over the last
ten years. The minimum investment is $10,000.
Don’t let
advertising drive your investment decisions. Rather, develop your strategy
based on your needs and expectations. Then implement that strategy prudently
using quality investments, such as the ones featured above. If you invest
through a discount broker or fund dealer, you should have access to these fine
funds. If you rely on the advice of a financial advisor, don’t be afraid to ask
about these funds just because they are technically classified as “no load”.
Your advisor may not know about them but you can ask. Besides, each pays a
trailer fee to advisors who recommend them to their clients.
Dan Hallett, B.Comm.,
CFP is Senior Investment Analyst with Sterling Mutuals Inc. He can be reached
at dhallett@sterlingmutuals.com. Sterling Mutuals is registered as a mutual
fund dealer in Ontario, British Columbia, and Manitoba.