OMEGA Consensus International Equity Fund

Analysis: The Omega Consensus International Equity Fund is an interesting fund that looks to identify the top 50 stocks that are ranked on a number of factors that are used by some of the most successful investors of all time including Warren Buffett, Peter Lynch, Ben Graham, and Martin Zweig.  Each of the managers uses a different style and approach and bases their investment decisions on different criteria.

Putting this into practice, manager John Reese has built a quantitative model that scores and ranks the universe of non north American companies according to the different criteria from each of the gurus. It invests in non north American stocks and ADRs. Once a year, the universe of companies is re-ranked and the top 50 are the fund’s holdings. Each will start with an equal weighting in the fund, and will be replaced or rebalanced if it exceeds various risk criteria set by the manager. The manager will not make any tactical calls on cash and will remain fully invested always.

It is heavily exposed to Europe, with 61% of the fund exposed to the region. Its biggest sector exposure is technology, with a 23% weighting, followed by communications and energy. Some of the names in the fund include drink maker Diageo, Forest Labs and Prudential. Despite being rebalanced only once per year, portfolio turnover has been high, averaging 100% a year.

Performance has been strong, outpacing the benchmark in every year except for 2011. In 2010, the fund was up 13.4% while the index was up 3.2%. For the three-year period ending May 31, it had an annualized compound return of 6.3%, outpacing the index’s 1.9% gain. It has been a touch more volatile than both its peer group and the index, but thus far has rewarded investors with stronger performance. According to information provided by National Bank, the fund has done well in rising markets, capturing more than 106% of the upside, while in down markets has held up better than the index.

The costs of the fund are very reasonable with a Management Expense Ratio of 2.05%, well below the category average of 2.50%.

Considering the above, we are initiating coverage of this fund with a rating of $$$. It can be a good core international equity fund for investors who have a medium to high-risk tolerance and a longer-term time horizon. Given the higher exposure to Europe, we expect that volatility will remain above average for the near term.