If you believe the pundits, it’s time for investors to start thinking seriously about reducing their exposure to Canada.
Almost half the S&P/TSX composite index is composed of resources companies or the service businesses that support them, which makes the Canadian market simply too vulnerable to an economic slowdown, they argue.
Perhaps. But the truth is that most Canadians keep most of their money in this country, no matter what happens. Investors who prefer to hunker down in Canada until the potential storm blows over may want to consider the following pair of mutual funds.
TD Mutual Fund Inc. ’s $1.42-billion TD Canadian Blue Chip Equity Fund has often eclipsed both the benchmark S&P/TSX composite and the median fund in its category when the overall market has stumbled, but it’s been a laggard in the most recent boom.
The TD fund climbed 17.2% in 2003, before rising 13.6% in 2004 and a further 19.5% last year. The numbers, however, still lag both the median fund and the benchmark for the periods. So far this year, as of Sept. 30, the fund is up only 2.6%.
A similar-sized alternative is the $1.34-billion Synergy Canadian Corporate Class Fund, sponsored by CI Investments Inc. A top-quartile performer in 2003 and 2004, its progress slowed a bit in 2005. The fund rose 32.1% in 2003, 17.9% in 2004 and 19.2% in 2005. Year-to-date, the fund is up 6.6%.
The Synergy fund’s average annual compound rate of return for the five years ended Sept. 30 is a shining 15%, well above the median fund’s 8.9% and the market as a whole, landing it in the first quartile.
The TD fund, by contrast, has produced a five-year average annual compound return of 10.2%, placing it in the second quartile. However, the fund’s number of negative 12-month periods has been half that of the benchmark; when losses have occurred, they have on average been half as painful, reports Morningstar Canada, which gives the TD fund a four-star ranking. The Synergy fund earns a stellar five-star ranking.
At the TD fund, lead manager Margot Ritchie has spent more than 25 years in the money-management business (initially at Royal Bank of Canada and then RBC Dominion Securities Inc., for which she worked as an M&A analyst). Ritchie joined subadvisor Jarislowsky Fraser Ltd. in 1992, at which she has been lead manager of this TD fund since 1999.
With co-manager James Morton, Ritchie employs a conservative, risk-averse style that focuses on blue-chip stocks. Using a cautious “growth at a reasonable price” approach, they look for companies that have stable, visible earnings growth and minimal debt, and that are leaders in their industries. Forecasting cash flows and discounting them to present values is a key analytical tool.
At the Synergy fund, CI manager David Picton previously served as a portfolio manager with Synergy Asset Management Inc., which was acquired by CI in 2003. He is now a partner at Picton Mahoney Asset Management. Previously, he was head of quantitative research at RBC DS.
Picton employs a momentum-based strategy, concentrating on companies that are changing for the better and whose underlying fundamentals are improving more rapidly than the overall stock market. Key events are earnings surprises, revenue acceleration and improved competitive advantages. Buys and sells within the fund can be fairly frequent.
Foreign exposure in the Synergy fund has climbed to 24% from 11% two years ago, with roughly 10% across the border and the balance in Europe and Asia. The rise of the Canadian dollar has been a drag on performance, but Picton feels the worst is over, in terms of currency risk.
By comparison, the TD fund has a similar 9.7% of its assets in the U.S., with a further 7% in Europe and 3% in Asia. Neither fund holds much in cash or income trusts.
The TD fund has about 39% of its assets in its top 10 holdings, whereas Synergy’s share is closer to 32%. The TD fund holds roughly 150 positions, while the Synergy fund tracks about twice as many, largely as a result of the foreign equities component, which replicates Synergy’s global fund. Synergy’s Picton targets 70 to 90 Canadian equity holdings, depending on the liquidity of the higher-ranked stocks. The greater the liquidity, the fewer the positions.
@page_break@While the TD fund can be described as having low turnover — 17.4% in the past five years — the Synergy fund’s portfolio turnover has exceeded 100% in each of the past three years and was even higher in previous periods.
Both funds favour mid- to large-cap stocks, although the TD fund has a significantly higher average market cap. Other portfolio measures are largely in line with the benchmark and the median fund in their category.
While the two funds do have several large holdings in common, their mix is quite different. Recently, the Synergy fund was sharply underweighted in energy stocks, which account for a scant 16.1% of the portfolio, vs 27.8% for the benchmark. The fund has less energy exposure than more than two-thirds of its peers. The Synergy fund is also slightly underweighted in financials, preferring consumer and industrial stocks instead.
The TD offering is slightly heavier in financials. It has a significantly larger tilt toward energy, but only to a market weighting, and a below-market weighting in materials. Consumer and industrial stocks are popular as well.
Interestingly, despite the TD fund’s broad diversification, it is less like the benchmark than is the Synergy fund. The TD fund’s five-year R-squared measure is 79 (the closer to 100, the higher the correlation with the benchmark), vs 91 for the Synergy fund.
The two funds also exhibit significantly different risk profiles.
The Synergy fund posted a five-year standard deviation of 12.5, higher than the 11.5 posted by the benchmark, while the TD fund registered a scant 8.5, making it one of the least volatile funds in its category in the past five years.
Still, the Synergy fund clearly makes money. While more volatile than 82% of its peers on a five-year basis, its risk-adjusted return over the period beats 97% of the group, Morningstar data show. The fund’s five-year Sharpe ratio of 0.97 pushes it ahead of the TD fund’s 0.87.
On balance, the nod here has to go to the Synergy fund, an above-average fund since its inception. However, for many investors, the TD fund’s emphasis on downside protection will be more welcome. IE
Two Canadian funds offer safe harbour from possible storms
Clients who are averse to foreign stocks should consider TD Blue-Chip Equity Fund or Synergy Canadian Corporate Class
- By: Gordon Powers
- November 13, 2006 October 30, 2019
- 15:05