Although some ana-lysts see brighter days ahead for the U.S. market, the fear of recession in the world’s biggest economy lingers. The fallout from the subprime crisis continues, housing values remain underwater and corporate earnings are under pressure.

Nonetheless, on the theory that most Canadians keep too much of their money on this side of the border and that the Canadian dollar has to back off sometime, clients looking to get back into the U.S. market may want to review the following two mutual funds.

The $52-million Ethical American Multi-Strategy fund, sponsored by Vancouver-based Northwest & Ethical Investments L.P. , slid 2.7% in calendar 2005 but enjoyed a big rebound — 17.3% — the following year. Last year, it struggled again, delivering a 16.5% loss. So far this year to March 31, the fund is down almost 5%.

A somewhat-larger alternative is the $485-million BMO U.S. Equity Fund sponsored by Toronto-based BMO Investments Inc.A solid performer in 2005 and 2006, when it returned 7% and 11.8%, respectively, performance fell off in 2007 with the fund dropping 6.7%. Year-to-date, the fund is down an additional 8%.

The BMO fund’s average annual compound rate of return for the five years ended March 31 is a seemingly modest 4.6%, but this eclipses the 3.6% return of the median fund in the U.S. equity category and the S&P 500 benchmark, landing it in the first quartile.

By contrast, the Ethical fund has produced a fourth-quartile five-year return of just 0.5%. Toronto-based Morningstar Canadagives it a risk-adjusted two-star ranking while the BMO fund earns a four-star ranking, largely on the back of its steady performance.

Most of the Ethical fund’s dismal longer-term numbers are attributable to a previous manager, Morningstar notes, suggesting the fund may finally be poised for a rebound. Rochester, N.Y.-based Manning & Napier Advisors Inc. became the fund’s subadvisor in late 2005 and is the longest-tenured manager in this category south of the border, says Morningstar.

Manning & Napier, which uses a team approach to portfolio management, has been able to produce topnotch long-term results in its other funds. Its core U.S. equity fund, for instance, ranks in the top decile for U.S. separate accounts for the past 10 years.

The socially responsible investing screens Manning & Napier employs follow a best-in-class approach, seeking companies that boast strong environmental, social and governance practices. From there, the managers look at the entire spectrum, investing in growth and cyclical stocks, as well as those in depressed sectors that are strong enough to rebound over time.

Daniel Sido, manager of the BMO fund, is head of large-cap equities at Chicago-based Harris Investment Management Inc. He joined Harris in 1994 after working with a St. Louis investment management firm for the previous 11 years.

Sido employs a quantitative investment process to screen companies for consistent earnings and attractive valuations, and completes the stock selection process through fundamental analysis. This sees him looking for stocks that have low price/earnings multiples, strong free cash flows and established franchises in mature industries. Turnover in the fund is modest.

The rise of the C$ has been a drag on the performance of both funds, but many analysts think the worst is over in terms of currency risk. The C$ has stalled this year and has traded within about 5% of parity with the U.S. currency. Neither of these two funds hedges this risk.

Both funds have about 30% of assets in the top 10 holdings. The Ethical fund holds about 56 positions, while the BMO fund tracks about 68. All of their assets are U.S. stocks, with cash hovering around the 3% mark.

The Ethical fund favours mid- to large-cap stocks and has a significantly lower average market cap than most of its peers. But its P/E ratio is much higher. The BMO fund, on the other hand, is very much a large-cap play, and its multiples are largely in line with the median fund in the category.

Under its ethical screens, the Ethical fund steers clear of the energy, materials and telecom stocks that pepper most Canadians’ portfolios, preferring information technology instead.

Recently, the Ethical fund had a 23% exposure to tech names including Cisco Systems Inc., Google Inc. and Microsoft Corp. It has another 14.3% in health care and about 16.8% in consumer stocks. Beaten-up financials account for a further 12%.

@page_break@The BMO fund has a similar weighting in financials (12.8% of assets), much less than its benchmark. It has a significantly larger tilt toward energy (13.5%) and materials (19.8%), with an above-average weighting in telecom stocks (6.2%). Major holdings include ExxonMobil Corp., Hewlett Packard Co. and AT&T Inc.

You might think that the Ethical fund, largely because of its mixed portfolio and mandate, wouldn’t look much like its benchmark. However, its five-year R-squared measure is 79 (the closer to 100, the higher the correlation), vs 86 for the more mainstream BMO fund.

The two funds do, however, exhibit different risk profiles. The BMO fund posted a five-year standard deviation of 9.4, lower than the 10 posted by the benchmark, while the Ethical fund registered 11.6, placing it among the more volatile funds in the category in the past five years.

The BMO fund’s five-year Sharpe ratio of 0.2 pushes it ahead of the Ethical fund’s minus 0.3 by a significant margin. On balance then, the nod here has to go to the BMO fund. Although it is not likely to lead the pack anytime soon, clients looking for decreased risk and a reasonable MER should find the fund to be a good core foreign holding.

The prospects for the Ethical fund are less clear, notwithstanding Manning & Napier’s track record. Although the firm has shown itself to be a skilled manager in the past, the fund’s multi-style approach makes style drift a near certainty, says Morningstar.

Although the fund has maintained a growth tilt in recent years, it could easily take on a value bent if management begins to load up on distressed stocks. IE