The s&p/tsx composite index soared more than 24% in 2005, and the average Canadian equity mutual fund performed solidly as well, posting a return of about 17% after fees. Not that anyone was buying, however.

Despite overall net fund sales of more than $23.4 billion, the latest data from the Investment Funds Institute of Canada show almost $2.5 billion was redeemed from Canadian equity funds last year.

A big chunk of investors’ money has undoubtedly been devoted to the red-hot income trust sector. But investors are eventually going to remember that there are other options, including reliable Canadian equity funds.

One strong Canadian equity fund with a proclivity for blending Canadian and foreign companies is CI Investments Inc. ’s $3.6-billion CI Signature Select Canadian Fund. It rose 20.2% in 2003, matching the average fund in the category, and delivered a solid gain of 12.9% in 2004, compared with 14.5% for the S&P/TSX index. Last year, the fund was up almost 23%, sharply higher than the average fund’s 16.6% return; its performance has continued in 2006, with a 5% jump year-to-date.

A much smaller stay-at-home alternative is BMO Investments Inc. ’s $1.9-billion BMO Equity Fund, which is on an equally steady run. The fund produced a 19.3% return in 2003, then jumped a strong 14% in 2004, before rising an additional 20.6% last year. It’s up roughly 4% so far this year.

The two funds earn five- and four-star rankings, respectively, from Morningstar Canada, suggesting the CI fund has been the stronger performer.

In fact, the CI fund has been doing better than most funds in the category. Long-time fund manager Eric Bushell in Toronto has produced top-quartile annual returns 74% of the time since he started the fund in 1998.

Michael Stanley, a veteran BMO fund manager who began his career at Royal Trust and later moved to MT Associates Investment Counsel, is chief investment officer at BMO’s subsidiary, Toronto-based Jones Heward Investment Counsel Ltd. He was recently named Fund Manager of the Year for his work on another high-profile offering, BMO Dividend Fund.

CI’s Bushell spent the early part of his career working for the former BPI Financial Corp., signing on with CI when it acquired the young BPI. A “growth at a reasonable price” manager, he uses a combination of top-down, big-picture factors and bottom-up stock-picking to construct his portfolio.

Looking first at credit markets for key signals of corporate health, Bushell is primarily interested in firms with high barriers to entry, strong brands and continued growth potential. He is looking for mergers and acquisitions to pick up, continuing to reduce the number of large liquid stocks in the Canadian marketplace, and so he has been spreading his portfolio accordingly, including non-Canadian stocks such as AP Moeller Maersk, one of the world’s largest shipping companies.

As a result, the CI fund’s foreign component hovers around 27% of assets invested in, split primarily between the U.S. and Europe. Now that the foreign-content limit has been removed from RRSPs, the percentage will probably edge up further as Bushell becomes more concerned with the narrowing he sees in the Canadian market.

BMO’s Stanley describes his investment style as “old-fashioned value,” focusing on individual stocks. He looks for financially sound companies with strong management, high-quality earnings and steady growth potential.

In contrast to CI, the BMO fund keeps all its money close to home, creating quite a different geographical mix. Both funds have modest cash holdings and marginal exposure to income trusts. Of the two, Bushell is more inclined to use cash as a buffer against market swings and to manage currency exposure. Throughout most of last year, more than 85% of the fund’s U.S.-dollar exposure was hedged back into Canadian funds.

Although geographically different, the two portfolios have some similarities. Bushell has 40% of the CI fund’s assets in his top 10 holdings, while Stanley holds about 44% in the BMO fund. The latter fund generally holds about 80 positions, whereas CI tracks slightly more than 100. Of the two, BMO has a modestly higher turnover.

Both funds concentrate on large-cap stocks, although the CI fund has a slightly lower average market cap. Both sets of portfolio measures are largely in line with the index. Within the Canadian portion of the portfolios, the two funds also have many large holdings in common.

@page_break@The CI fund is currently underweighted in information technology and financial services. Within the energy sector, its holdings are skewed toward oil and gas services companies. Fund themes include wireless communications, railways and transportation logistics. The large holdings include EnCana Corp., Canadian Pacific Ltd. and Barrick Gold Corp.

The BMO offering is much heavier in financial services stocks, with a smaller tilt toward communications stocks and a below-market weighting in utilities. A bit more similar to the index, the BMO fund’s major holdings here include most of the major banks, as well as Suncor Energy Inc., Canadian National Railway Co. and Rogers Communications Inc.

The two funds exhibit similar risk profiles. CI Signature Select Canadian posted a five-year standard deviation of 10.9, lower than the 14 posted by the index, while BMO Equity registered 11.2.

Risk-adjusted, the CI fund’s five-year Sharpe ratio of 0.79 helps push it further ahead of the BMO fund’s 0.42. On a three-year basis, however, the two funds are running neck and neck.

The BMO offering has proven to be a solid fund that exhibits a fairly high correlation to the index, but CI Signature Select Canadian, with increased exposure to offshore markets and a similarly steady hand at the tiller, may offer more promise down the road. IE