Below, we discuss four equity funds we think you should consider investing in in 2014. They may not outperform their respective indices over the next year, but they hold great appeal as excellent long-term investments.
As we embark on another year, the consensus among economists and market strategists seems to be almost uniformly upbeat. But this does not rule out the possibility of a sharp market correction sometime in 2014.
As for the global economy, most countries are in better shape than they were a year ago, and it looks like they’ll improve even further in 2014. In its latest quarterly economic forecast, TD Economics predicts the global economy’s real gross domestic product, or GDP, will expand by 3.4 per cent in 2014. That’s up from its forecast of 2.9 per cent for 2013.
As the global economy picks up steam, there’s a good chance that bond prices will once again fall as yields climb in response to more robust economic growth. That’s why we continue to urge you to invest directly in fixed-income securities, laddering your maturities from one to five years. This will help you sidestep the worst of the damage caused by rising rates and let you buy higher-yielding securities with a fifth of your portfolio as it matures in 2014.
Equities are more complicated
The outlook for equities is more confusing. Stronger economic growth, of course, spurs corporate profit growth, which, in turn, is good news for stock prices.
But there are also a few factors that may exert pressure on share prices. Whereas a year ago it was arguable that equities in many of the world’s markets were undervalued, they now look fully valued in certain markets, notably in the U.S. Fair valuation, however, does not warrant a great deal of concern. But it does place the burden on corporate profit growth do to the heavy lifting of markets from here on in.
Then too, more robust economic growth will put pressure on central banks to ease off of the more liberal monetary policies they’ve followed in recent years. That will especially be the case in the U.S. And we’ve seen how that has played out for markets in recent weeks, as expectations the Federal Reserve may soon engage in tapering has caused a good deal of nervousness in markets. On the more positive side, though the Fed’s tapering may exert near-term pressure on equities, stronger economic growth will hopefully trump the Fed’s tightening over the longer term.
Another potential concern is the fact that the U.S. market, as represented by the S&P 500 Index, has gained about 60 per cent these past two years without undergoing a correction. Vigorous market advances such as this are often occasioned by robust market corrections, and investors should be prepared for such an event in 2014.
For investors who engage in dollar-cost averaging programs, this should not pose a major problem. After all, equal-dollar purchases on a periodic basis will let you buy more shares at a lower price in the event of a correction. But if you also keep some powder dry in the form of a larger-than-normal cash reserve, you can also put some of this money to work in a correction.
Themes for 2014
The Canadian stock market underperformed its peers in the developed world in 2013, and it looks like it may continue to do so in the near term. That’s because global demand for commodities is not strong enough to eliminate a surplus of supplies. This is particularly true with respect to the sharp rise in U.S. energy production, which may keep energy prices from rising in the near term. And that, in turn, may limit potential gains among Canada’s energy stocks, which make up about a quarter of the S&P/TSX Composite Index.
Meanwhile, the housing market, which has fuelled the Canadian economy in years past, is likely to be a less significant generator of growth going forward, as houses are becoming less affordable to Canadians. On the other hand, a more robust U.S. economy will provide some stimulus to the Canadian economy.
In view of all this, conservative mutual-fund investors may want to emphasize equity funds that don’t have too much exposure to commodity-related stocks. MAWER CANADIAN EQUITY is one such Canadian dividend stock fund. Currently, it has just about 15 per cent of its assets invested in resource stocks. The S&P/TSX Composite Index, by contrast, has a 35-per-cent weighting in resource equities.
Mind you, the fund has about 38 per cent of its assets invested in the financial sector, and is, therefore, vulnerable to setbacks in this sector. But among its financial holdings, you’ll find high-quality blue-chip stocks such as TD Bank, Scotiabank, Royal Bank and Brookfield Asset Management.
High-quality holdings such as these have helped keep the fund’s volatility low and its performance consistently strong. Over the past 10 years, the fund has performed in the top half of the Canadian equity category in eight years. Its compound annual growth rate over the past 10 years is 10.6 per cent — a stellar return.
We think Mawer Canadian Equity is a buy for almost any investor’s portfolio. Just be sure you have an investment time horizon of at least five years before you invest. Buy.
More aggressive investors with a longer time horizon — say, 10 years — might want to take a look at IA CLARINGTON CANADIAN SMALL CAP FUND.
2013 was less kind to Canadian small-cap stocks than it was to the larger-cap segment of the market. That’s no surprise, given that the small-cap segment of the market is more concentrated with resource stocks than the large-cap segment.
But that hasn’t stopped IA Clarington Canadian Small Cap from profiting handsomely. Indeed, the fund has gained 39.5 per cent in the last year, handily beating the S&P/TSX Smallcap Index, which has barely budged at all this year.
Clarington Canadian Small Cap’s secret can be found in its portfolio. In comparison to the Index, the fund has generally steered clear of resource stocks. Currently, it has about 28 per cent of its portfolio invested in these issues. The Smallcap Index, by contrast, has nearly half its weight in resource stocks.
Then too, Clarington Small Cap has always emphasized “quality” in its search for small-caps. This has paid off for the fund over time. These past 10 years, its 11 per cent annualized return ranks in the top-quartile of Canadian small/mid-cap equity funds. It’s a buy for investors who want above-average gains but are also willing to accept higher risk to achieve them.
Invest in Europe and emerging markets
In 2013, emerging markets underperformed those in the developed world. But as growth in the latter improves, developing economies stand to benefit from stronger global growth. Meanwhile, emerging stock markets are more attractively valued than those in developed markets.
In the developed world, market valuations are higher. But there is still attractive values to be found, especially in Europe. Keep in mind, though, that European economic growth will likely remain fragile and vulnerable to setbacks. So there’s still some risk in the region.
One can gain exposure to emerging markets and Europe through MAWER INTERNATIONAL EQUITY FUND. It has about two-thirds of its assets invested in European equity, and around 15 per cent invested in emerging-markets equities.
Mawer International has been a stellar performer in the international equity category over the past 10 years. Over this time, the fund has performed in the top half of the category in nine years. Its annualized return of 7.9 per cent for the 10 years is a top-quartile performance. The fund is suitable for conservative investors seeking exposure to Europe and emerging markets.
For investors who want to tailor their exposure Europe and emerging markets, we recommend TRIMARK EUROPLUS and BRANDES EMERGING MARKETS EQUITY FUNDs, respectively. Both are top-quartile performers in their respective categories for the past 10 years. They’re a buy for aggressive investors.