Uneven commodity prices could translate into an up-and-down year for Canada’s stock markets, suggesting to some that global markets may have more to offer. Nonetheless, Canadian investors are always overweighted in Canada, and anyone looking to stay put will be even more interested in funds that offer decent downside protection and low costs.
Here are two small funds for advisors to consider.
Leith Wheeler Investment Counsel Ltd. ’s $96-million Leith Wheeler Canadian Equity Series B Fund has repeatedly eclipsed both the benchmark S&P/TSX composite and the median fund in its category when the overall market has stumbled, then nicely held its own when the good times roll. The fund climbed 19.5% in 2004, then rose 19.3% in 2005 and a further 17.5% last year. This year, as of Feb. 28, it is up a further 3.6%.
A similar-sized alternative is the $156-million Mawer Canadian Equity Fund, sponsored by Mawer Investment Management Ltd. A top-quartile performer in 2004, its progress has since slowed a bit. The fund rose 15.7% in 2004, 20.6% in 2005 and 13.9% in 2006. Year-to-date, the fund is up around 2%.
The Leith Wheeler fund’s five-year average annual compound rate of return is a solid 15.8%, while Mawer comes in at 13.4%. Both numbers place them well above the median fund’s 12.2% and the market as a whole, landing them in the first quartile.
Furthermore, the Leith Wheeler fund has not yielded a loss over any three-year span, whereas the benchmark has produced 19 losing periods, with the worst being 11%, reports Morningstar Canada, which gives it a five-star ranking. The Mawer fund earns a solid four-star ranking.
Leith Wheeler is a small Vancouver-based, employee-owned company, founded in 1982 by Murray Leith and Bill Wheeler. Using a value approach that’s a bit contrarian, the firm currently manages some $7 billion of assets.
In choosing stocks, the five-person management team estimates the earning power of a company over a one- and three-year period, producing its own price/earnings multiple. It then discounts the potential returns and compares that with the returns on stocks it already holds, looking for targeted names that have hit a speed bump and offer a good entry price. Holding periods generally run three years or more.
At Mawer, director of research Jim Hall has served as a portfolio manager since 1997. Previously, he spent three years at Wood Gundy as an analyst.
Hall selects stocks using a growth-at-a-reasonable-price style with a value bias. He and his colleagues often refer to the acronym as “growth at the right price.” The focus here is on selecting money-making companies that are undervalued, have a competitive advantage and are in the right part of their business cycle. Stocks are generally held for three to five years.
Both funds run fairly concentrated portfolios. The Leith Wheeler fund has about 58% of its assets in its top 10 holdings; Mawer’s share is closer to 43%. Each holds roughly 35 positions, all in Canada, and both would be described as low-turnover options compared with many of their peers.
Both funds also favour mid- to large-cap stocks with an index-like average market cap. Other portfolio measures are largely in line with the median fund in their category, other than Leith Wheeler’s significantly lower price/book ratio.
Although the two funds have several large holdings in common, their mix is quite different. Recently, the Leith Wheeler fund was sharply underweighted in energy stocks, which account for a scant 11.9% of the portfolio, less than half that of the benchmark. The same ratio applies when looking at its holdings in materials. Financial stocks represent the largest bet, coming in at 42%, followed by industrials at 18.8%. The fund also has roughly 4% of its money in income trusts.
The Mawer offering has a similar weighting in financials. At 20%, it too has a smaller tilt toward energy than many funds, and a below-market weighting in materials. Consumer and industrial stocks are popular, with no exposure to utilities or technology.
Despite the similar number of holdings and financial tilt, the Leith Wheeler fund’s five-year R-squared measure is 75 (the closer to 100, the higher the correlation with the benchmark), vs 86 for the Mawer fund. The two funds also exhibit similar risk profiles. The Leith Wheeler fund posted a five-year standard deviation of 9.8, lower than the 11.2 posted by the benchmark, while the Mawer fund registered 9.5, ranking both among the least volatile funds in their category in the past five years. The two funds’ Sharpe calculations are quite close, reflecting the rewards of the slightly more successful Leith Wheeler portfolio.
@page_break@For many advisors and their clients, however, either fund’s emphasis on downside protection will probably prove to be its major attraction.
Over any one-year period since its inception, the Leith Wheeler fund’s worst performance was a loss of 17%, while the index’s worst outing was nearly twice as bad. The index had nearly twice as many losing periods, Morningstar reports.
The Mawer fund experienced negative one-year returns only 13% of the time, comparing favourably against the benchmark’s 29%. During the losing periods, the average loss was 4.3% for the fund vs 9.4% for the benchmark.
Both funds are inexpensive. The 1.25% MER at Mawer and 1.5% at Leith Wheeler make them cheaper than 90% of their actively managed peers, largely because the firms don’t offer much in the way of dealer compensation. Although it may be a setback for some, the funds both remain sound choices, particularly for advisors working on a fee-only basis.
On balance, however, the nod will have to go to the Leith Wheeler fund, despite the imminent retirement of Bill Wheeler, the firm’s founder.
Leith Wheeler is not currently accepting any new Canadian equity institutional mandates. Therefore, the small retail fund, with its minimum investment of $25,000, is the only way in. IE
Two funds offer downside protection at low cost
Leith Wheeler Canadian Equity Series B Fund and Mawer Canadian Equity Fund both outperform their benchmarks
- By: Gordon Powers
- April 3, 2007 October 30, 2019
- 11:28