Diversification by type, sector and size are among the benefits of this trio of best Canadian mutual funds. Lack of exposure to resource stocks in one portfolio is offset by resource stock holdings in another. The third is one of the best diversified equity funds in Canada.
In building their portfolios, many folks often scant mutual funds, choosing instead to focus on individual stocks.
And, at first glance, this isn’t necessarily wrong, given that an investor, for example, may want to construct his portfolio to generate the biggest possible income stream both now and in the future.
But top Canadian equity mutual funds shouldn’t be overlooked. Given the many different stocks that make up a typical fund, a fund can often offer an investor broader diversification than an individual’s basket of equities.
And because many top equity mutual funds are invested in all types and sizes of stocks, they can level out the lows that are any company’s inevitable lot.
So, here are a few funds investors might consider. Not only are they run by established investment companies, but the funds have successfully weathered market ups and downs. Moreover, these funds have an appreciation of risk and an eye for value.
Our three picks are conservative, given that in sizing up any fund most investors would look first for safety and stability.
CI Canadian Investment Fund
This is Canada’s oldest equity mutual fund. Although this may mean little to today’s investor, a succession of strong portfolio managers, including the last two, have done their predecessors proud.
Since CI took over Spectrum Mutual Funds in 2002, the company has renamed the funds, merged many into existing CI portfolios, while shuffling the fund managers themselves. But to manage this fund, it stuck with Kim Shannon.
Indeed, Ms. Shannon started her own money-management outfit, running the fund for CI on a contractual basis.
And when Ms. Shannon left for a smaller firm in late 2006, CI inked a similarly successful arrangement with Daniel Bubis, another independent fund manager.
Mr. Bubis hasn’t disappointed. Over the past five years, he’s led the fund to four successive above-average performances.
Although the fund rose only 0.5 per cent in the first half of 2015 when markets contracted, it still ended up in 74th place among 349 Canadian equity funds.
Over the past few months, Mr. Bubis has been a disciplined value investor — something that’s served the fund well. It has also paid off handsomely over the long term.
Over the past decade, for example, the average Canadian equity mutual fund grew at an annual compound rate of four per cent. Mr. Bubis, though, came in 180 basis points higher.
In sum, the fund’s disciplined investment style makes it a good core holding for most portfolios.
Besides four of Canada’s big-five banks, the fund owns Manulife Financial Corp., Canadian National Railway Co. and Magna Intl. Inc. In fact, all seven are among the fund’s 10 biggest holdings.
And although the fund’s performance can fall when growth investing is the flavor of the month, it’s an excellent buy for the long term.
Phillips, Hager & North Dividend Income Fund.
Like CI’s Canadian Investment fund, this portfolio also makes a good core holding — and, for the same reason. It puts the odds in your favour.
By investing in a well-diversified basket of Canadian securities that offer dividend income and a relatively high yield, the PH&N fund aims to provide both capital growth and income over the long term.
Although the fund invests mostly in Canadian common stocks, it can also invest in preferred shares and bonds.
In sizing up candidates, the fund’s managers generally look for superior stewardship, industry leadership, sound financials, a high level of profitability, strong earnings and dividend growth, as well as a reasonable valuation.
The fund’s managers steer clear of market timing, looking instead for stocks with attractive valuations relative to their long-term growth prospects.
Moreover, because of the fund’s focus on dividend payments, the managers typically look for businesses that are relatively mature, but still growing.
As such, the fund has little exposure to growth companies that are early stage, companies that need a lot of capital, or firms with high rates of internal reinvestment.
So, compared to most Canadian stock funds, the PH&N portfolio is typically under-represented in small caps, resources, high tech and communications.
But it’s a good match for the CI Canadian Investment fund, given the latter’s strong exposure to Canada’s resource sector. In effect, the fund is a good counterweight.
Because of its big exposure to energy and financial services, the PH&N dividend income fund delivered a tepid performance over the past year.
Indeed, since the start of 2015, the fund has inched up 0.1 per cent. Yet, the banks, in our opinion, remain high-quality conservative institutions offering good value now, along with strong potential over the next few years.
Moreover, with a management expense ratio of just 1.2 per cent, the fund is well-positioned to outperform its peers over the long term.
Mawer Canadian Equity Fund
One of the best diversified equity funds out there, this vehicle invests in companies with market caps of $500 million-plus.
It does so with the aim of totting up long-term returns that are both attractive and risk-adjusted.
To achieve this, the fund’s managers create a broadly diversified portfolio of wealth-creating companies, or companies whose return on capital tops the cost of capital.
Not only do the managers look for companies with excellent executive teams, but they also look for companies that can be bought at a discount to their intrinsic value.
Once selected, the companies are held for the long term in order to build up investor recognition, allow for corporate growth, as well as minimize transaction costs.
Over the past 10 years, the fund has done well — a testament to its manager, Jim Hall, who’s been in the driver’s seat since 1999.
Not only has Mr. Hall succeeded in delivering a compound annual growth rate of 9.7 per cent, but he’s also managed to snag a berth in the top quartile.
Moreover, he did so with a high degree of consistency, keeping the fund in the top half of its peer group in eight of the last 10 years.
Mr. Hall has also managed to keep the volatility level low — in fact, well below the group average. Specifically, on a scale of one to 10, the fund’s volatility rating is four.
And if this isn’t enough for the hardest-to-please investor, this diversified equity fund’s MER is just 1.2 per cent.
Investor’s Digest of Canada, MPL Communications Inc.
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