Canadian investors have become so enamoured of income trusts that many seem oblivious to the fact that global markets even exist. And while the S&P/
TSX composite index continues to best most of the world’s major indices, it does so by relying on the heavily cyclical natural resources sector.

On the theory that diversification is even more important these days, two smaller foreign funds to consider are Howson Tattersall Investment Counsel Ltd.’s $310-million Saxon World Growth Fund and the $723-million TD Global Select Fund from TD Asset Management Inc.

Like many of its global peers, the TD fund has provided negligible results in the past five years, in part because of a steadily appreciating Canadian dollar but largely because of some poor investment choices.
Fourth-quartile returns in 2000 and 2001 prompted a management change in 2002, however. Since then, results have improved significantly, generating a first-quartile return of 16.6% for the two-year period ended May 31, 2005. As a result of those earlier numbers, the fund garners a three-star risk-adjusted rating from Morningstar Canada.

Saxon World Growth has been a much more consistent performer, producing first-quartile returns in each of the past four calendar years — placing it among the top performers in the global equity category. For the past five years, its average annual compound return was 7.4%, vs the median fund’s average annual loss of 4.63%. This translates into a five-star rating from Morningstar Canada.

TD Global Select’s fund manager, William Wilby, is director of international equities at New York-based Oppenheimer Funds Inc., which he joined in 1991.

The Saxon fund’s manager, Robert Tattersall, is president and partner at Howson Tattersall. He spent 10 years with now defunct Confederation Life Insurance Co. in Toronto and another six with Bolton Tremblay Inc., for which he managed international funds. After joining Horgan Investment Counsel in 1985, he helped launch the Saxon funds, taking over and renaming the company soon afterward.

In the U.S.-sold Oppenheimer Global, after which TD Global Select is modelled, Wilby employs a growth strategy focusing on companies likely to benefit from mass affluence, new technology, restructuring and an aging population. He invests in companies with fast-growing sales and earnings but whose shares are under pressure. Wilby looks for growth and is willing to pay a premium for it. Historically, the fund’s portfolio has often traded at a higher price/earnings ratio than its market benchmark, and this continues to be the case.

When Wilby took over the TD fund late in 2002, he slashed the list of names to less than half the 320 held under his predecessor. Portfolio turnover has been reduced to less than half the previous rate of roughly 120%, making the fund considerably more tax-efficient. The portfolio comprises primarily large-cap stocks, with some mid-cap names. Prominent among them are Vodafone and Ericsson. In terms of major country exposure, the fund has about 36% of its money in the U.S., 23% in Europe, 14% in Britain and 12% in Japan and the Pacific Rim. Less than 3% is in cash.

For the Saxon fund, Tattersall knows that his deep-value discipline with a mid-cap tilt leads him far away from the market benchmark, the MSCI world index. Although the country allocation is somewhat similar to that of the index, this is really a byproduct of Tattersall’s bottom-up focus on company fundamentals. Because the big picture is not his major focus, he does not hedge the fund’s currency exposure.

He scours the world for undervalued stocks, using classic value measures such as price/book and price/cash flow, favouring companies that are trading below book value and have been otherwise beaten up.
The fund maintains roughly a 45% allocation to mid-sized U.S companies. The balance of its assets is spread out across Britain (17%), Europe (12%), Asia (10%), and Australia (5%). Cash is 13%. Major holdings include Marathon Oil, Pfizer and KIA Motors.

The Saxon fund generally contains fewer than 75 stocks — substantially less than the median fund in the category. Both funds generally plant about 22%-25% of assets in their top 10 holdings, resulting in greater concentration for Saxon unitholders. Given their different approaches to valuation, the two funds have virtually no common holdings among their major choices.

The TD fund is the more volatile of the two.
For the past five years, it has had a standard deviation of 14.9, whereas the Saxon fund has a 13.6 standard deviation. Overall, Tattersall has managed to keep the Saxon fund’s volatility quite low relative to its competitors. Coupled with exceptional returns, the funds’ respective Sharpe ratios indicate that Saxon supporters have been better rewarded over the five-year period, earning considerably more money than most other fundholders but with less aggravation.

@page_break@Both funds could provide sound diversification for Canadian investors, offering a value and a growth tilt. The past five years have seen the worst underperformance of growth relative to value stocks in history and the future spread will probably be reduced. Nonetheless, the Saxon fund’s stellar record, coupled with a 1.87 MER that is one of the lowest in the category, makes it a front-runner — with one
caveat.

Two years ago, Tattersall and partner Richard Howson sold a majority interest in their investment management firm to CMA Holdings Inc., which runs the MD fund series for the medical profession. Since then, Saxon funds have become available to investors across the country instead of just in Ontario, and the company recently decided to go public. This raises the question of what impact a heavy influx of new investment dollars will have on the performance of Saxon funds. Successful small funds don’t always make the transition to successful larger funds. Right now, however, it’s hard to quibble with the results. IE