Find­ing a fund that works for you

Mu­tual funds may not be fash­ion­able, but there are still plenty of great op­tions

Winnipeg Free Press - - MONEY MATTERS - JOEL SCHLESINGER

UTUAL funds of­ten get dumped on by the ex­perts, in­clud­ing per­sonal fi­nance writ­ers. And of­ten for good rea­son: they can be costly to own and many don’t beat their bench­mark.

So, the the­ory for more than a decade has been in­vestors are bet­ter off own­ing a fund — likely an ex­change­traded fund (ETF) — mir­ror­ing per­for­mance of a broad in­dex like the TSX Com­pos­ite rather than buy­ing a mu­tual fund that aims to beat it, but likely won’t over the long term.

The prob­lem with this idea is it gives peo­ple the im­pres­sion that ev­ery sin­gle mu­tual fund isn’t worth the trou­ble. And that’s not true.

Plenty of great funds ex­ist. You just need to find them.

Mu­tual funds of­ten ex­cel when they fo­cus on spe­cific sec­tors, themes or ideas where the ex­per­tise of the man­agers is worth the ad­di­tional fee.

Yet there are hun­dreds of funds to sift through, which makes find­ing those worth con­sid­er­ing chal­leng­ing. A lit­tle help can’t hurt. So, with that in mind, here are four mu­tual funds with ei­ther long track records of per­for­mance, or that pro­vide ex­po­sure to themes that may be of in­ter­est to av­er­age Joes and Janes, who don’t have the time, skill or in­cli­na­tion to in­vest in on their own.

(Oh, and one more thing: just be­cause these funds are dis­cussed in pos­i­tive light, doesn’t mean in­vest­ing in them will turn out well. Ev­ery in­vest­ment, no mat­ter its track record, in­volves risk. And so, you’ve been warned.)

MTD En­ter­tain­ment and Com­mu­ni­ca­tions Fund

Rated five stars by Morn­ingstar — its high­est — the TD En­ter­tain­ment and Com­mu­ni­ca­tions Fund started out in the heady days of the tech craze in 1997. But it’s by no means just a tech fund. As the name states, it fo­cuses on com­pa­nies in­volved in me­dia, tele­com and a bit of tech­nol­ogy, too. “There are a lot of trends go­ing on in this space that are very durable and pow­er­ful, and that cre­ates a lot of win­ners and losers,” says fund man­ager Paul Greene, who runs Bal­ti­more-based T Rowe Price’s Com­mu­ni­ca­tions & Tech­nol­ogy Fund, from which the TD fund is cloned. T Rowe Price’s man­age­ment has been very good at pick­ing win­ners, in­clud­ing Alibaba, Ama­zon and Net­flix, while avoid­ing the losers. Since its in­cep­tion, re­turns have been about 12 per cent per year af­ter fees. Put into mon­e­tary terms: $10,000 in­vested in 1997 would be worth about $110,000 to­day. The man­age­ment ex­pense ra­tio (MER) is fairly high — 2.82 per cent — but a 300-plus per cent to­tal re­turn over the last decade has pro­vided in­vestors value for fee cost. While it holds the big names of tech (Al­pha­bet and Mi­crosoft) and of con­sumer dis­cre­tionary groups such as Ama­zon and Net­flix, it also owns com­pa­nies that sup­port these sec­tors — such as real es­tate in­vest­ment trusts (REITs) own­ing wire­less tow­ers, which of­ten pro­vide sta­ble, low-dou­ble-digit per­cent­age re­turns an­nu­ally. An­other plus: “It has had very good up­side/ down­side cap­ture, mean­ing the fund goes up more than the bench­mark in good mar­kets and down less in down mar­kets,” Greene says.

StoneCas­tle Cannabis Growth Fund

From some­thing old to a fund that is very new: StoneCas­tle’s Cannabis Growth Fund launched just last month, so very lit­tle per­for­mance data ex­ists at this junc­ture. But, for in­di­vid­u­als who want to in­vest in cannabis stocks but don’t know what to buy, this is a good op­tion. Fund man­ager Bruce Camp­bell is one of the first an­a­lysts to fol­low this bur­geon­ing in­dus­try, which has cap­tured the at­ten­tion of in­vestors around the globe. Cannabis stocks have pro­vided in­sanely high re­turns for some in­vestors. Mil­lion­aires have been made in the span of a few months. That said, the seg­ment has also crushed the cap­i­tal of in­vestors who have en­tered the space at the wrong time. Look­ing for­ward, Camp­bell be­lieves the cannabis in­dus­try will “be one of the fastest-grow­ing sec­tors in the next decade.” Yet, it will re­main volatile, cre­at­ing both op­por­tu­nity and stomach-churn­ing drops in value. That’s where this fund aims to help. “We think it’s im­por­tant that you man­age around it (volatil­ity),” he says. “When the sec­tor is in its up­trend, you want to be fully in­vested, and when the sec­tor is in its down­trend, you want to be less in­vested so you have cash when the tide turns to buy at lower prices and cap­ture the up­side.” The fee is about one per cent for do-it-your­self in­vestors buy­ing from a dis­count bro­ker­age, and two per cent through an ad­vi­sor. (No MER ex­ists be­cause the fund is less than a year old.) Ad­di­tion­ally, StoneCas­tle charges an ex­tra, hedge­fund-like per­for­mance fee that is

20 per cent of the fund’s re­turn that ex­ceeds the re­turn of its bench­mark, the North Amer­i­can Mar­i­juana In­dex.

BMO Fos­sil Fuel Free Fund

An­other new fund — though this one was launched in 2016 — the Fos­sil Fuel Free Fund is for in­vestors seek­ing to own com­pa­nies that are part of the cli­mate-change so­lu­tion rather than part of the prob­lem. “The main dif­fer­ence com­pared with other re­spon­si­ble funds is that we re­ally do want to look at the pos­i­tives of com­pa­nies — though we do have one neg­a­tive screen and that is fos­sil fu­els,” Serge Pepin with BMO Global As­set Man­age­ment says. Cen­tral to its premise is buy­ing firms that ad­dress one of the United Na­tions’ 17 sus­tain­able de­vel­op­ment goals. But the Fos­sil Fuel Free Fund shouldn’t be con­sid­ered a niche prod­uct. “It’s a global equity fund that can com­pete in that cat­e­gory against any other global equity mu­tual funds.” Year-to-date, the fund has re­turned 20 per cent and 15 per cent since its launch, putting it among the first quar­tile of global equity funds. Still, given that it launched dur­ing the down­turn in en­ergy prices one might ask whether it will out­per­form when oil prices are on the up­swing. Pepin ar­gues it will, be­cause it in­vests in com­pa­nies pro­mot­ing en­ergy ef­fi­ciency or pro­vid­ing al­ter­na­tive en­ergy. Both seg­ments tend to do well when oil prices rise, and con­sumers and busi­nesses start look­ing for ways to re­duce con­sump­tion. Ad­di­tion­ally, given most Cana­dian in­vestors have a home bias — mean­ing they own a lot of Cana­dian firms di­rectly or in­di­rectly in­volved oil and gas — the Fos­sil Fuel Free Fund is a good ad­di­tion to di­ver­sify their port­fo­lio. (Of note, RBC also has a fos­sil-fuel-free of­fer­ing, and you can ex­pect more to choose from as de­mand grows.)

Mawer Global Small Cap Fund

This mu­tual fund also is a good com­ple­men­tary in­vest­ment for in­di­vid­u­als seek­ing to di­ver­sify be­yond Canada, only with a twist. As its name sug­gests, the Mawer Global Small Cap Fund owns com­pa­nies around the world with mar­ket cap­i­tal­iza­tion sizes of US$3 bil­lion or less. But the strat­egy be­hind it is more like that of a large­cap div­i­dend fund. “We want to own blue chip, small-cap com­pa­nies that are among the best in the world at what they do, but they also must of­fer good value,” Mawer money man­ager Karan Phadke says. “An­other way to put it is we want to buy Fer­raris at the cost of a Toy­ota.” It’s a proven for­mula, gen­er­at­ing good re­turns for more than a decade. Since its launch in 2007, Mawer Global Small Cap has re­turned about 13 per cent per year com­pared with its bench­mark, about eight per cent an­nu­ally. Key to its suc­cess is find­ing firms with “sticky, re­cur­ring rev­enues,” he says. These are busi­nesses which — sim­i­lar to the large, blue chip com­pa­nies in North Amer­ica — have reg­u­lar in­come streams that are dif­fi­cult to dis­rupt. Their cus­tomers need what they make and would have trou­ble switch­ing to a com­peti­tor with­out up­set­ting their busi­ness model in the process. Ad­di­tion­ally, Phadke notes that un­like most small-cap-fo­cused funds, which are gen­er­ally prone to big swings in price, the Mawer fund is de­signed to help in­vestors “sleep at night and have a rea­son­able rate of re­turn.” In other words, you get blue-chip per­for­mance sim­i­lar to large com­pa­nies — like Canada’s big banks — only in a space that is less cov­ered by an­a­lysts. “So there is the po­ten­tial for out­per­for­mance,” he says.

TRI­BUNE ME­DIA

Many in­vestors are seek­ing own­er­ship in com­pa­nies that are part of the cli­mate-change so­lu­tion.

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