Energy stocks are driving Canada’s stock market and investors are anxious to have some exposure to the sector. However, if there is a fall-off in the price of oil this year because of global economic weakness, resources stocks will suffer. As well, Canada’s close commercial ties with the U.S. make us vulnerable to any slowdown there. Here, then, are two funds with different takes on these issues.

Toronto-based CI Investment Inc. ’s $59-million Synergy Focus Canadian Equity Fund had a rough time a few years ago. More recently, however, it has bounded ahead of its peer group. It jumped 29.1% in calendar 2004, rising a further 15.1% in 2005 and an additional 23.3% in 2006 — eclipsing both the average fund and the benchmark S&P/TSX composite index — delivering a first-quartile average annual compound return of 21.6% for the five years ended Nov. 30, 2007.

A far different alternative is the $923-million Trimark Canadian Fund, sponsored by AIM Funds Management Inc. of Toronto. Once a household name, this offering has lagged in recent years. It rose 9.4% in 2004 and gained 8.5% in 2005, followed by a 17.4% jump in 2006. Over the five-year period, the fund is up a modest 8.9%, trailing both the index and the average fund.

The Trimark fund earns only a two-star ranking from Morningstar Canada; the Synergy fund rates five stars, confirming that the latter has been by far the stronger risk-adjusted performer in recent years.

David Picton has been lead manager of the Synergy fund since inception. A momentum investor, he surfs fast-changing market trends, trading stocks quickly. After seven years as a quantitative analyst at RBC Dominion Securities Inc., Picton joined Synergy Asset Management Inc. when it was founded in late 1997. The firm was acquired by CI in 2003.

For Picton, investing is a process that starts with quantitative analysis using a computer program that ranks the relative attractiveness of stocks. He looks for companies experiencing upward earnings forecasts, revenue acceleration and relative share price strength.

The Trimark fund’s lead manager, Ian Hardacre, worked for Bank of Nova Scotia prior to joining the Ontario Teachers’ Pension Plan Board. He joined AIM in 1997, first as an analyst and, more recently, as manager of this Trimark and other AIM funds.

Using a bottom-up strategy, Hardacre tends to invest in sectors and growth companies that are temporarily out of favour. Discounted cash flow is a key measure, with only companies that exhibit high levels of free cash flow, healthy balance sheets and ethical management teams making the list.

Several fund companies have recently changed their guidelines to allow Canadian equity managers to boost their foreign content considerably. AIM, for instance, now allows the Trimark fund to have slightly less than half its portfolio outside Canada; 29% of assets are now in the U.S., and 6% in Europe.

The Synergy fund, in comparison, has 28% of its assets invested outside Canada, virtually all of it across the border.

The Trimark fund does not hedge currency, whereas the Synergy fund has benefited from a U.S.-dollar hedge as the Canadian dollar strengthened against the US$.

Both managers have almost 40% of their funds’ assets in their top 10 holdings. The Trimark fund seldom holds more than 50 positions, whereas the Synergy fund tracks almost twice that. The Trimark fund can be described as a low-turnover option; the Synergy fund’s momentum strategy tends to involve more active trading, with a turnover rate of roughly 200% a year.

Both funds favour mid- to large-cap stocks, although the Trimark fund has a slightly lower average market cap. Its price/earnings and price/book multiples are also lower than the index and the average fund in its category.

The two funds do have several large holdings in common, but their mix is quite different. Recently, the Trimark fund was sharply underweighted in energy stocks, which account for a scant 4% of the portfolio vs 27% for the benchmark. Materials are also underweighted. The Trimark fund is, however, considerably overweighted in consumer stocks, technology and health care, with a market weighting in financials.

Recent additions include Covidien Ltd., a global leader in health-care equipment products. As well, Hardacre added to the Trimark fund’s position in Time Warner Corp., as he believes the conglomerate is trading at a significant discount to the sum of its parts.

@page_break@The Synergy offering is slightly lighter in financials, with a significant tilt toward energy, industrial products and information technology. Notwithstanding recent record gold prices, Picton has been reducing the Synergy fund’s holdings in materials on decelerating earnings growth and concerns about generally poor operating results in certain companies.

The Trimark fund is the least index-like of the pair, with a five-year R-squared measure of 54 (the closer to 100, the higher the correlation with the index), vs 73 for the Synergy fund. Trimark’s Hardacre has been more willing to deviate from the benchmark than many of his peers, as indicated by his costly aversion to energy stocks in recent years.

These two funds exhibit sharply different risk profiles, however. The Trimark fund posted a five-year standard deviation of 8.4, lower than the 9.9 posted by the index, while the Synergy fund registered a much higher 12.7.

Although returns have suffered recently, the Trimark fund has never experienced a negative return over any three-year period, whereas the benchmark has had 19 such losing streaks. But the Synergy fund’s five-year Sharpe ratio of 1.4, which is better than 85% of its peers, trumps the Trimark fund’s 0.7 by a significant margin.

Although there’s no denying the Synergy fund’s recent success, it could stumble if the cyclical growth stocks it favours should falter. It faced a similar situation back in 2001 and 2002, when technology imploded, Morningstar cautions. In 2001 and 2002, the fund’s returns dropped 17.6% and 25.2%, respectively, following the collapse of the technology sector. Over the same period, the average fund lost 0.6% and 12.4%, respectively.

Nonetheless, the Synergy fund has delivered excellent results for several years now, whereas the Trimark fund has not. However, the Trimark fund’s longer-term record cannot be ignored, particularly as this version comes equipped with a remarkably low management expense ratio of 1.64. IE