U.S. stocks have slumped recently on concerns about the mortgage market, an ongoing credit crunch and disappointing profit forecasts from bellwether stocks such as Wal-Mart Stores Inc. What prognosticators worry about, of course, is what will happen if American consumers stop spending.
Nonetheless, on the theory that most Canadians keep too much of their money in this country, investors looking to buy on the U.S. dip may want to consider the following two mutual funds.
San Diego, Calif.-basedBrandes Investment Partners’ US$110-million Brandes U.S. Equity Fund, a clone of a long-standing U.S. fund that has often done well when the overall market has stumbled, has had a volatile history in Canada. Brandes has long enjoyed a loyal following among financial advisors and their clients because of the outstanding performance of funds such as AGF International Value. Brandes parted company with AGF Funds Inc. a few years ago, however, and support for the newer offering has been more modest.
The Brandes fund rose 3.8% in 2004 before dropping 9.5% in 2005. Last year saw a big rebound, with the fund delivering a stellar 25% gain, which helped it eclipse both the median fund and the benchmark for the five years ended July 31. So far this year, however, the fund is down almost 9%.
A similar-sized alternative is the $196-million Dynamic Power American Growth Fund sponsored by Dynamic Mutual Funds Ltd. A top-quartile performer in 2004 and 2005, when it returned 14.5% and 21.5%, respectively, it fell precipitously in 2006, to 1.5%. Year-to-date, the fund is up a startling 16.1%.
The fund’s average annual compound rate of return for the five years ended July 31 is a shining 11.2%, well above the median fund’s 1.7% and the market as a whole, landing it in the first quartile.
By contrast, the Brandes fund has produced a five-year average annual compound return of just 3.9%, which still places it in the first quartile. The fund has provided decent upside returns while sidestepping huge losses during market downturns, reports Morningstar Canada, which nonetheless gives it a three-star ranking. The Dynamic fund earns a five-star ranking, largely on the back of its recent strong performance.
Brandes uses a team approach to portfolio management, with all decisions made by the firm’s investment committee. The key to Brandes’ style is classic value investing, based on in-depth company-specific research, calculating intrinsic value and a price target, and adopting a long-term stance with little turnover.
The Dynamic fund, on the other hand, is largely the product of Noah Blackstein, a committed growth manager who, following a start with now-defunct BPI Mutual Funds, has been with Goodman & Co. Investment Counsel Ltd. for the past decade.
The No. 1 factor that drives stock prices is earnings growth, says Blackstein, an active trader who pays little attention to the big economic picture. He looks for companies with financial strength relative to their industries, as well as above-average returns on assets and shareholders’ equity.
The rise of the Canadian dollar has been a drag on the performance of both funds, but many analysts think the worst is over in terms of currency risk. The two funds don’t hedge the risk, although Dynamic offers a hedged version of the portfolio in a parallel fund.
Running a concentrated fund, Blackstein has about 60% of assets in the top 10 holdings, whereas Brandes’ fund is roughly half that amount. The Dynamic fund holds about 20 positions, while the Brandes fund tracks about three times as many.
Both funds favour mid- to large-cap stocks, but the Dynamic fund has a significantly lower average market cap than most of its peers. Butits price/earnings and price/book ratios are much higher. Portfolio measures on the Brandes fund are largely in line with the benchmark and median fund in the category.
Looking for earnings growth, Blackstein steers clear of the energy, materials and telecom stocks found in most Canadians’ portfolios, preferring to explore high-growth areas such as technology and health care. Recently, the fund had a 54% exposure to tech names including Apple Inc., Google Inc. and Research in Motion Ltd. He has another 18% in health care and about 9% in financial services.
The Brandes offering is slightly heavier in financials, yet much less than its benchmark. It has a significantly larger tilt toward consumer stocks, with an above-average weighting in technology stocks. Major holdings include Ford Motor Co., General Motors Corp., Intel Corp. and Verizon Communications Inc.
@page_break@The Dynamic fund, largely because of its concentrated portfolio, doesn’t look much like its benchmark. Its five-year R-squared measure is 48 (the closer to 100, the higher the correlation), vs 78 for the Brandes fund.
The two funds do, however, exhibit similar risk profiles. The Dynamic fund posted a five-year standard deviation of 16.8, higher than the 11.6 posted by the benchmark, while the Brandes fund registered 16.5, placing both among the most volatile funds in the category in the past five years. But the statistic can be misleading, considering much of Dynamic’s recent volatility has been on the upside, Morningstar notes.
The Dynamic fund delivers performance. While clearly more volatile than its peers on a five-year basis, its risk-adjusted return over the period beats almost 90% of the group, Morningstar data show. The fund’s five-year Sharpe ratio of 0.54 pushes it ahead of the Brandes fund’s 0.13 by a significant margin.
While a strong C$ has masked its attractions, the U.S. is still home to many sectors and industries that don’t exist or are under-represented in Canada. And the outperformance of value funds in recent years suggests many investors may not be properly diversified when it comes to growth stocks.
If this is so, the nod here has to go to the Dynamic fund, even though Brandes has shown itself to be a resilient value manager.
Investors comfortable with some increased risk and willing to swallow a high MER and performance fee — Dynamic’s fund management fee is 2%, plus a 10% bonus on returns in excess of the benchmark — should find the fund an excellent diversifier to a value-biased portfolio, notes Morningstar. IE
Bumpy U.S. stock market offers a few possibilities: Includes Chart
Comparing Brandes U.S. Equity and Dynamic Power American Growth pits value against growth styles
- By: Gordon Powers
- August 28, 2007 October 30, 2019
- 12:13