Continue to pursue a dollar-cost averaging program, emphasizing conservative, diversified, large-cap funds. Emerging markets hold appeal for aggressive investors.
OUR CURRENT THINKING: Notwithstanding the possibility of a sharp market correction occurring in the near term, we think the overall market outlook for equities remains positive. That’s because global economic growth should continue to gradually improve this year, and again in 2015. That, in turn, should help corporate revenues and profits rise, thus lending support to equity markets.
One potential problem, however, is that many equity markets, after trading at significant discounts to fair value in the years following the financial crisis of 2008, now seem to be fairly valued. The S&P 500, for example, now trades at 17 times earnings, slightly above its average multiple of 16 since the 1950s.
Current stock valuations in the U.S. suggest that investors have priced the ongoing economic recovery into share prices. They’re no longer fearful about a relapse into the dark days of several years ago. Thus the market’s valuation multiple reflects more normal economic conditions.
There’s no reason to expect market multiples to continue to rise from here on in. It will probably be up to companies, then, to provide the major impetus for rising stock prices through the revenue and profit gains that typically accompany better economic times. Even so, these gains are likely to prove insufficient to drive stock-market returns like those the U.S. experienced last year.
INVESTMENT STRATEGY TO ADOPT
As economic conditions normalize, we recommend you continue to add to equities through a dollar-cost averaging program of purchasing equal dollar amounts of fund units at regular intervals, such as, say, once a month. That way you’ll be able to buy more units at a lower price if markets correct anytime soon.
Make sure that the bulk of your equity portfolio is invested in conservative, diversified, large-cap funds that invest in Canada and abroad. Canadian companies should benefit as global economic conditions, particularly those in the U.S., improve. Canadian diversified large-cap funds we like now include Franklin Bissett Canadian Equity, Mawer Canadian Equity and NEI Northwest Canadian Equity Funds.
For conservative foreign investing, we like Capital International – Global Equity, Mawer International Equity and Templeton Growth.
Typically, we recommend you plan on holding such funds for at least five years, to give them sufficient time to achieve the desired results. However, if you have a longer investing time frame of, say, 10 years, and a tolerance for higher risk, you may want to put a smaller portion of your portfolio in more aggressive funds such as Brandes Emerging Markets Equity.
This Mutual Fund Planning Guide goes out each month to subscribers of the Canadian Mutual Fund Adviser. It forms the basis of our approach to investing in mutual funds: build a portfolio based on your needs and your investment temperament, using a selection of the best funds available for Canadian investors. Above you’ll find our current thinking on where to put new money. It’s based on our assessment of current financial-market conditions. We include our recommended strategy to adopt under these conditions.
On the following three pages, we’ve chosen our ‘Top 40′ funds from among Canada’s more than 5,000 available mutual funds, based on the quality of their portfolios. Our recommended list is not static, and will change as we find better funds or as funds change in nature. We’ll alert you to additions and deletions. From time to time, Canadian Mutual Funds Adviser will recommend buying funds not on this list. But this list represents what we believe to be the best mutual funds to buy in Canada this month.