Most Canadian in-vestors have been blind to the attraction of foreign equity funds and instead have ploughed their money into income-yielding products. As oil prices slide and the commodity boom becomes a bit more uncertain, however, they may now be looking a bit farther afield.

One option: regional funds investing outside of North America. European markets, for instance, have recently leapfrogged the U.S. in terms of gains, and money managers remain bullish on the region.

Let’s take a look at two Euro-pean equity funds: CIBC Securities Inc. ’s $195-million CIBC European Equity Fund; and AIM Fund Management Inc. ’s $433-million Trimark Europlus Fund.

Returns on the Trimark fund have been quite consistent, producing first-quartile performance in three of the past five years. After posting a 23.9% return in 2004, the fund dropped off a bit in 2005, delivering a 3.2% gain. For 2006, its return of 35.6% eclipsed both its benchmark and the median performer in the category. Overall, that translates into a first-quartile five-year compound return to Dec. 31 of 13.7% compared with the median fund’s 6.7% return. The fund was a Canadian Investment Awards winner in both 2004 and 2005.

The CIBC fund has not fared nearly as well in the past five years. Up 7.6% in 2004 and 4.4% in 2005, it bounced back recently, gaining 28% in 2006. All in all, the fund has had a third-quartile five-year compound return of 4.6%.

As a result, both funds receive dramatically different risk-adjusted rankings from Morningstar Canada, with the Trimark fund earning four stars and the CIBC fund just two.

Dana Love joined Trimark in 1999, after working at Altamira Investment Services Inc. and Guardian Group of Funds Ltd. He became lead manager of Trimark Europlus in 2003. A bottom-up stock-picker, Love runs a concentrated fund that’s driven entirely upon the merits of the investee businesses themselves and their ability to produce sustainable high returns on capital. Countries don’t matter, and management doesn’t hedge foreign currency exposure.

Portfolio turnover tends to be about 20% to 25%, although Love added several new names to the portfolio last summer, including Nestlé SA, the world’s largest food and beverage company, and Bayerische Motoren Werke AG, one of Europe’s top automakers.

In terms of asset allocation, about 9% of the Trimark fund’s portfolio is in cash, largely because of the fund’s sudden burst in popularity, with the balance in stocks. Love finds most of his opportunities in Britain, which accounts for 23% of the fund’s assets. There is also a 12% weighting in Germany, 12% in Ireland and smaller holdings in Switzerland, Finland and Denmark.

Regarding the CIBC fund, Luc de la Durantaye joined CIBC Global Asset Management Inc. in 2002. Previously, he worked with RBC Private Counsel and CT Investment Management Group. A big-picture manager, de la Du-ran-taye actively manages both country and currency choices. He uses a quantitative model to identify the most attractive countries on a relative value basis, and gains exposure by investing in various indices as well as holding many individual stocks. Similarly, the management team tries to identify the most attractive currencies, trading them regularly.

About 23% of the CIBC fund’s portfolio is invested in Britain, followed by a 13% weighting in France, 6% in Germany, 6% in the Netherlands, 5% in Spain, with the balance distributed throughout the Continent.

There are few common names among the two funds’ bigger bets: the Trimark fund tracks about 30 positions at a time, while the CIBC fund can hold more than 200.

In terms of weightings, the Trimark fund is quite light on energy and materials but tilted toward consumer and industrial companies.

The CIBC fund’s larger bet is in financials, with an overall breakdown that is quite similar to the median fund in the category. As there is a very small stock selection component in the strategy, the fund’s sector weights generally mirror those of the MSCI Europe index.

Given the sharp differences in equity allocations, the funds also present sharply opposing risk profiles. With a five-year standard deviation of 14.7, the CIBC fund’s volatility has been equal to that of the index, although considerably less volatile than its Trimark counterpart.

The Trimark fund’s profile, on the other hand, is the riskier of the two, producing an 18.1 standard deviation over five years.

@page_break@The Trimark fund’s five-year Sharpe calculation of 0.65 underscores the fact that it has outpaced the median fund over most five-year periods. Similarly, the CIBC fund’s ratio of 0.19 reflects the weaker results achieved in recent years.

Although the Trimark portfolio’s average market capitalization has crept up in recent years, it still has a much lower average market cap than most of its competitors, sporting a higher P/E multiple at the same time.

With the exception of the CIBC fund’s higher market cap and dividend yield, all its other portfolio measures are largely in line with the index and the median fund in the category.

The Trimark fund is the least index-like of the pair, with a five-year R2 measure of 70, vs 99 for the CIBC fund. (The closer to 100 for the R2 measure, the higher the correlation with the index.)

In fact, de la Durantaye has kept the CIBC fund’s portfolio so close to the index that the fund’s returns have been almost completely correlated with the benchmark over the past five years. This lack of differentiation, combined with a 2.6% MER, makes it almost impossible for the fund to beat the benchmark. Over all trailing three-year periods in its 11-year history, Morningstar reports, the CIBC fund has failed to beat the index 99% of the time.

It’s difficult to see how the situation could change, given CIBC management’s current approach and the fund’s expenses, which suggests that CIBC European Index Fund, with its MER of just 1.04%, would be a better choice within the CIBC family.

On the other hand, the more actively managed Trimark fund has never had a negative three-year return since Love became involved, whereas the index has had eight over the same time period, Morningstar reports.

Such performance, coupled with a slightly below-median MER of 2.45%, makes the Trimark fund the hands-down favourite for investors interested in European exposure. IE