The canadian dollar stole centre stage in mid-March as it climbed to slightly more than US88¢, its highest level in more than 14 years. Still, it’s hard to see the loonie rising indefinitely. Commodity prices, for instance, are expected to retreat as the U.S. economy — in response to a weaker housing market — slows down, exerting a negative effect on the Canadian dollar.

All this should be music to the ears of investors in global equity funds, who have suffered greatly as a rising C$ evaporated virtually all of their gains in recent years. So far, however, sagging flows in this category suggest that many Canadians are still keeping their capital at home. When they wake up, who’s going to get that money?

One choice might be the long-suffering $2.5-billion Trimark Fund SC, an AIM Funds Management Inc. fund that still earns a four-star risk-adjusted ranking from Morningstar Canada despite three sub-par years. The fund rose 7.7% in calendar 2003, when the median fund in the category was up 12.4%. That trend continued; it delivered a modest gain of 4.8% in 2004, while the index saw an increase of 6.9%. In 2005, the fund was up 4.2%, again lagging the index return of 7.3%. For the two months ended Feb. 28, it has earned 1.8% — all of which translates into a five-year annual compound return of 3.8%.

Compare this with the equally large, four-star, $2.5-billion Ivy Foreign Equity Fund, offered under the sponsorship of Toronto-based Mackenzie Financial Corp. The fund lost 3.7% in 2003, eking out a 3.9% gain in 2004, before returning 3.2% last year. So far in 2006, it has been a break-even proposition. As a result, its five-year average annual compound return comes in at 1.9%.

These are not big numbers in either case, but are better than those for most overseas funds. In fact, despite suffering through a string of net redemptions over the past couple of years (Trimark Fund is down from a 2002 peak of $3.8 billion in assets), both these funds enjoy first-quartile status among their peers for the five-year period. Redemptions have been a terrible distraction because managers have had to worry not only about results but also about fund liquidity.

Tye Bousada, who began his investment career in 1994 with the Ontario Teachers’ Pension Plan Board and joined Trimark in 1999, has been in charge of this Trimark fund for the past two years, following the departure of long-time lead manager Bill Kanko. He became only the third lead manager in the history of the fund, which was launched 25 years ago.

Trimark’s established style has been to focus on a blended bottom-up stock-picking approach. Some of the factors Bousada and co-manager Dana Love examine include the ability of companies to respond to competitors, strong free cash-flow generation, solid returns on capital and, of course, management stability. Average portfolio turnover has been around 25%; several large-cap names have been in the fund for more than 10 years.

Mackenzie’s Jerry Javasky has more than 20 years of experience in the financial services industry, beginning his career with United Financial Management, and jumping to Mackenzie in 1992 to establish the Ivy family of funds.

Javasky takes a bottom-up view, looking for companies that can steadily expand their operations profitably yet with limited volatility. Discounted cash flow is a key indicator. The Ivy fund invests predominantly in large-cap companies, with no fixed sector allocations or cash weighting.

With different takes on country exposure and only a few common holdings, the level of position diversification between these two funds is significant. Both funds have suffered from sustained redemptions in recent years, greatly affecting how they handle cash. Typically, Javasky has been content to build up cash — sometimes as much as 25% — in volatile markets to protect assets in the Ivy fund. On the other hand, Bousada’s Trimark Fund seldom holds much on the sidelines, other than to backstop potential redemptions.

The Ivy fund holds an extremely concentrated portfolio, currently about 23 stocks. Javasky generally plants as much as half its assets in the fund’s top 10 holdings, with these presently accounting for roughly 54% of the fund. Bousada’s approach for the Trimark fund is much the same, with 40 holdings currently. Its top stocks account for about 37% of its assets, however.

@page_break@The Trimark fund is considerably underweighted in U.S. equities relative to the benchmark, at 37%, significantly less than its historical tilt toward cross-border stocks. British equities account for a further 27% of the fund, with Mexico taking up 11%; the rest of Europe, 12%; and Japan accounting for another 5%. There is no Canadian equity exposure; cash is less than 3%.

The Trimark fund has had no exposure to energy and utilities, the two hottest-performing sectors over the past two years. Despite recent strong performance, Bousada doesn’t expect oil and gas stocks to produce good returns on capital over the long term. Instead, he leans toward consumer stocks, in which he is heavily overweighted. Major holdings include Cemex, the third-largest cement producer in the world; WPP Group PLC, one of the world’s largest communications groups; and Reed Elsevier PLC, a major British publisher.

The Ivy fund also invests outside Canada exclusively, but its geographical diversification is quite different. Its 51% weighting in U.S.-based companies approximates the index. Twelve per cent of the fund is located in Britain with a further 20% in the more mature European countries. Japan has a 2% allocation. Cash is hovering around 15%.

Betting on health care

Steering clear of energy, Javasky has large bets on health care, consumer stocks and industrials. Major holdings include Reckitt & Colman, a British consumer health products provider; and environmental toolmaker Danaher Corp.

The difference in risk between the two vehicles is significant, with the Trimark fund registering a 12.3 standard deviation over the past five years — essentially matching the index and the median fund. The Ivy fund’s 9.7 rating over the same period means it has been a lower-risk option in recent years.

Nonetheless, the funds’ relative three-year Sharpe ratios of 0.13 (Trimark) and minus 0.05 (Ivy) indicate that the Trimark vehicle has been the better risk-adjusted performer, outperforming both the benchmark and the average fund. But it really hasn’t made a lot of money.

Underperformance in hot markets is not unusual for a fund managed with Trimark’s particular style, Morningstar reports. The fund sports an “up capture” of 109%, registering only 77% when it comes to downturns in the markets. (Generally speaking, the lower the “down capture” percentage, the better. Correspondingly, a higher up capture percentage indicates better returns when markets are rising.)

If you go back far enough, Trimark Fund has outperformed the index and its peers by a healthy margin. That record, along with its recognizable brand, suggests it is a sound choice for most investors.

By the same token, the Ivy fund’s consistent management style has produced top-quartile 10-year annualized returns with volatility that has been lower than 99% of its peers in its category, Morningstar reports.

Both are solid, out-of-favour funds. Pick one; not both. IE