Record high oil prices continue to send the Toronto stock market and the loonie higher, taking Canadian equity funds along with them. Some funds, however, have climbed more than others — largely because of their call on energy prices and the degree to which they invest outside of the country.

One core Canadian equity fund that has been getting things right is TD Asset Management Inc. ’s $3.1-billion TD Canadian Equity Fund. It jumped 18.9% in 2004, vs a rise of 14.5% for the S&P/TSX composite index, and continued to best the benchmark with a gain of 26.2% in 2005. In 2006, the fund was up 23.1%, again sharply eclipsing both the benchmark and the median fund, producing a first-quartile average annual compound return of 21.4% for the five years ended Sept. 30. So far this year, it has produced a 12% return.

Contrast this with Franklin Templeton Investments Corp. ’s $235-million Templeton Canadian Stock Fund. It gained a scant 3.0% in 2004 and climbed only 9.9% in 2005 before rising 8.6% last year, lagging the benchmark significantly each time and producing a fourth-quartile five-year average annual compound return of 11.4% as of Sept. 30. Year-to-date, however, the fund is up 5.8%.

The Templeton fund earns only a two-star ranking from Morningstar Canada, while the TD fund rates five stars, confirming that the latter has been by far the stronger risk-adjusted performer in recent years.

The TD fund’s manager, John Smolinski, joined TDAM six years ago, after stops at Royal Insurance and Mackenzie Financial Corp. Using a bottom-up approach that looks for growth at a reasonable price, he focuses on companies that will probably use surplus funds to augment their payouts to shareholders. This has led him to focus on three key “buckets”: resources stocks; mature stocks with the ability to increase dividends; and well-financed growth companies.

When Smolinski first took over the fund, he reduced the number of stocks in the portfolio, concentrating on larger, higher-quality companies, and reducing foreign exposure. Both moves have paid off. To manage risk, the fund is required to spread its bets over several sectors, resulting in a five-year R-squared measure of 90.

But Smolinski cannot be accused of simply hugging the index. The portfolio is currently underweighted in financials and information technology, while favouring energy, materials and telecom stocks.

The Templeton fund’s manager, Peter Moeschter, has been at the helm of Templeton Canadian Stock Fund for almost a decade. Prior to joining Templeton, he was an analyst at both the Workers’ Compensation Board of Ontario and Aetna Capital Management.

Holding predominantly large- and mid-cap stocks, Moeschter is a true believer in the value philosophy that has long characterized the Templeton organization. Looking ahead five years, he tends to buy companies after there has been unfavourable news — something that has been in relatively short supply during the commodity boom of the past few years.

Looking for bargains, Moeschter likes to spread assets across as many sectors as possible, without any firm limits on sector weightings. As a result, the portfolio doesn’t look much like the benchmark (its five-year R-squared measure is a non-index-like 70) — which is problematic, because the index has been the place to be recently.

Nonetheless, many of the companies leading the market tend not to satisfy his deep-discount criterion. While many investors are still willing to pay high multiples of earnings for energy companies, Moeschter is not among them. And this defensive stance has crimped the Templeton fund’s relative performance in recent years.

Leaning toward less economically sensitive stocks, the Templeton fund is overweighted in consumer products, health-care and technology stocks, and is tilted away from resources companies.

Although many Canadian equity funds are increasingly using foreign content in their portfolios, both these managers prefer to keep their money close to home.

The TD fund has roughly 6% of its assets invested outside Canada, predominantly in the U.S. By comparison, the Templeton fund has only 1.6% of its assets offshore, all of it directly south of the border.

Neither fund holds much cash as a rule, although both do have about 5% of their portfolios invested in income trusts.

Other than geography, the two fund portfolios show very few similarities. The TD fund holds twice as many positions as the Templeton fund (83 compared with 44), and the TD fund holds roughly 46% of assets in its top 10 holdings, whereas the Templeton fund’s top 10 account for around 37%.

@page_break@While the Templeton fund’s approach can definitely be described as “low turnover,” the same thing cannot be said of the TD fund’s “trade as required” strategy. Trading expenses, which are not included when calculating MERs, have made the TD fund less tax-efficient as a result, Morningstar notes.

The TD fund favours large-cap stocks, maintaining a market cap similar to that of the index. The Templeton fund, however, features more mid-cap stocks than its TD counterpart.

Both funds sport price/earnings ratios that are largely in line with the median fund and the index. However, the Templeton fund’s price/book measures are significantly lower.

These two funds exhibit somewhat similar risk profiles over the longer term, although the TD fund has recently been the more volatile. The Templeton fund posted a five-year standard deviation of 10.7, more than the 9.3 posted by the index, while the TD fund registered 11.3.

Despite this, the two funds’ relative five-year Sharpe ratios of 1.5 (TD) and 0.8 (Templeton) indicate that the TD fund has been the better risk-adjusted performer, slightly trailing the index but still in line with the median fund.

This steady record, along with an MER that is lower than those of most of its peers, suggests that the TD fund continues to be a sound choice for a core domestic holding.

The more defensive Templeton fund, on the other hand, has clearly lagged and carries a higher MER than the majority of funds in the category. But if the historic surge in commodity prices comes to an end, the Templeton fund would be poised to rebound. IE