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Home-run hitter tops bewildering list of equity funds

by Wayne Cheveldayoff, 2005-01-13

One of the hardest parts of RRSP investing is choosing the right stocks, or equity mutual funds, to achieve the long-run performance one needs for a comfortable retirement.

Some investors take on the challenge of doing their own stock picking but most Canadians instead seek to hire a portfolio manager by selecting from a bewildering list of mutual funds numbering more than a thousand.

The choice has become even more difficult recently due to the growing list of closed-end funds traded on the TSX. Some of these funds are simply replicas of mutual funds managed by the same managers while others are truly unique.

Adding to the confusion is that some mutual funds now are able to short stocks in a limited way, thereby becoming quasi-hedge funds. One needs to read the fine print for every fund to know exactly what they can do with your money.

Some of the closed-end funds were set up with the authority to borrow up to 20 per cent of net asset value. The leverage is supposed to work to the benefit of the investor, but could produce a nasty surprise in a down market.

For both closed-end and mutual funds, hybrid versions combining both equities and income trusts have appeared, with some funds including high-yield bonds in the mix.

While these recent twists have complicated the fund-picking process, the style of the manager will be the most important in determining your return in the coming year or two.

To use a baseball analogy, some managers aim to hit singles. They stick close to the index they are measured against and look to get a modest edge here or there with their sector picks or weightings. For them, doing a little better than the index is success.

At the other end of the spectrum are the home-run hitters. Every time they are at bat (choosing a stock), they aim to hit the ball out of the park. It leads them to pick stocks that they think will triple, quadruple or better in a short period of time. They donít care which stocks are in the index.

One such home-run hitter is Eric Sprott, whose Sprott Canadian Equity Fund has produced compound annual growth of 40.8 per cent over the five years ended last November 30, according to Globefund (www.globefund.com).

Considering he did this over a period including the market meltdown, itís a spectacular performance that earned him recognition recently as the No. 1 mutual fund manager in Canada.

Contrast that with the performance of what are considered very solid equity mutual funds in Canada Ė CI Mutual Fundís Habour Fund, which returned 10.25 per cent annually over that period, or Mackenzie Financialís Ivy Canadian Fund, which recorded annual growth of 6.82 per cent for its loyal unitholders.

These funds are managed by Bay Street veterans thought to have good long-run track records. However, while they beat the S&P/TSX total annual return of 5.42 per cent for the period, their singles look inconsequential compared with Sprottís home run.

Itís doubtful that sticking with those who try for singles or index-linked funds will work out for the best in 2005.

The current stock market cycle has put in two years of recovery and now has entered a more difficult phase where overall market gains will be much harder to come by, especially with interest rates likely moving higher.

The broad stock market indices, like the S&P/TSX Composite and U.S. S&P500, are likely to show little net change for the year, and those investors whose equity investments are officially or unofficially linked to the indices are likely to be disappointed.

A lot of advisors stick with singles-hitters because such funds have less volatility and donít trigger as much negative feedback from clients in down markets.

But itís your RRSP. Do the research or find a good advisor who can help you find a number of home-run hitters for your portfolio.

Yes, they may strike out some years and so you may want to balance them with some singles hitters. But over time, as Eric Sprott has shown, a home-run hitter can win the ball game for you.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.








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