Some investors have given up altogether and switched over to exchange-traded funds, but most equity fund investors are still seeking the cream of the actively managed crop: funds with experienced management, research depth, low expense ratio and a time-tested investment strategy. Do the two established bank-sponsored offerings profiled here fit the bill?

The largest bank-sponsored fund in the “Canadian equity” category is Toronto-based RBC Asset Management Inc.’ s $5.1-billion RBC Canadian Equity Fund. Its return rose by 23% in 2005, besting the average fund in the category, and delivered an equally solid gain of 17.5% in 2006, compared with 17.3% for the S&P/TSX composite index. The fund was up by 9.4% for calendar 2007, higher than the average fund’s 7.3% return; its performance has slowed in 2008, with a 1.6% jump year-to-date.

A smaller alternative is Toronto-based BMO Investments Inc. ’s $2.1-billion BMO Equity Fund, which is on an equally steady run. The BMO fund produced a 20.6% return in 2005, and then rose by 13.9% in 2006, before climbing by an additional 8.5% last year. It’s up roughly by 2% so far this year.

The two funds both earn four-star rankings from Morningstar Canada, although the RBC fund’s average annual compound rate of return for the five years ended April 30 of 17.6% is considerably better than the BMO fund’s 16%.

The Canadian equity team attached to the RBC fund has seen its fair share of manager turnover. John Varao, who replaced John Embry and John Kellett three years ago, departed in 2007. Only a couple of months ago, Warner Sulz, the fund’s most recent lead manager, also left. The portfolio is now with Doug Raymond and Stuart Kedwell, both of whom have been managing equities within RBC’s framework for the past five years.

RBC management employ a proprietary tool that incorporates quantitative, fundamental and technical indicators to define the areas of interest, selecting the top-ranking ideas for further analysis and execution by various sector specialists. Thanks largely to this team approach, the RBC fund does not seem to have been adversely affected by recent staff turnover.

Michael Stanley, a veteran BMO fund manager who began his career at Royal Trust and spent some time at MT Associates Investment Counsel, is chairman of the investment strategy group at BMO’s subsidiary, Toronto-based Jones Heward Investment Counsel Inc. He has been in charge of the BMO fund since its inception in 1993.

BMO’s Stanley describes his investment style as a mixture of value and growth at a reasonable price, with the emphasis on the latter. He looks for financially sound companies with strong management, high-quality earnings and steady growth potential. Stanley has not typically made big bets on sectors over the years, and the BMO fund tends to share many top holdings with the benchmark index.

Both funds keep virtually all their money in Canada, have modest cash holdings and have only marginal exposure to income trusts. The RBC fund’s allocation to U.S. equities has averaged 5% over the past couple of years, and management tactically hedges the fund’s currency exposure.

Stanley is even more of a purist and keeps foreign content in the BMO fund to a bare minimum. As a result, the fund currently holds less than 1% in U.S. stocks and employs no hedging strategy.

With no significant geographical differences, the two portfolios have several similarities: 37% of the RBC fund’s assets are in its top 10 holdings; for the BMO fund, this figure is about 42%. The latter fund generally holds about 50 positions, whereas the RBC fund tracks roughly 125. Of the two, the BMO fund has a modestly higher turnover, resulting in increased trading costs and more taxable distributions.

Both funds concentrate on large-cap stocks, although the RBC fund has a slightly lower average market cap. Its other portfolio measures are largely in line with the index. The BMO fund, however, has slightly elevated P/E and P/B measures when compared with the index and its peer group.

In fact, for the most part, the two funds are very similar to their benchmark. RBC’s five-year R-squared measure is 97 (the closer to 100, the higher the correlation) vs 96 for the BMO fund. Only a couple of other funds in the category exhibit higher degrees of correlation.

@page_break@In keeping with this degree of correlation, the RBC fund is essentially sector-neutral. Large holdings include Royal Bank of Canada, EnCana Corp. and Manulife Finan-cial Corp.

The BMO offering is lighter in financial services stocks, with a larger tilt toward industrial stocks and no health-care or utility stocks. The BMO fund’s portfolio has been slightly underweighted in resources in recent years as Stanley had underestimated the strength and duration of the recent commodities boom. Major holdings include most major banks, Suncor Energy Inc., Potash Corp. and Agrium Inc.

The two funds exhibit very similar risk profiles. The RBC fund posted a five-year standard deviation of 9.9, while the BMO fund registered 10, modestly lower than the 10.2 posted by the index. Risk-adjusted, the RBC fund’s five-year Sharpe ratio of 1.35 helps push it slightly ahead of the BMO fund’s 1.21. On a three-year basis, the two funds have also been moving in tandem.

Being so similar to the index certainly helps performance during the good times. And clearly the intention for both these funds is to offer a TSX-like fund that adds value over time through stock selection rather than sector calls. But an approach like this really requires a low MER to remain competitive with index funds. And, at 2.3%, the BMO fund’s MER is hardly low — although it is in line with the average fund.

Over 10 years, thanks largely to being underweighted in the technology sector during its collapse, the RBC fund’s annualized return outpaces the index by 0.5% — with less volatility, Morningstar notes.

While the RBC fund has certainly been a decent option over the past several years, there is little evidence to suggest that it will significantly outperform the benchmark in a downturn. However, the fund’s 1.99% MER does make it cheaper than about three-quarters of its peers. IE