North American equities expected to outpace global equity and fixed income.
Looking ahead, we are cautiously optimistic for the New Year. We expect that we will see modest economic growth in North America and the emerging markets, and we believe that inflation will remain well contained. The U.S. Federal Reserve has also pledged to keep interest rates on hold for the year.
Under this scenario, we are expecting low single digit returns for bonds, while we are forecasting mid to high single digit returns for North American and emerging market equities. For Europe, until meaningful progress is made in fixing their debt problem and pulling the region out of recession, we don’t expect much in the way of meaningful returns. We also expect that all regions will be prone to periods of very high volatility as there is much headline risk remaining in the global markets.
With that as our backdrop, we are highlighting some of our best Mutual Fund and ETF ideas for the coming year. They include:
PH&N Total Return Bond Fund (PHN 340) – This is a great, low cost way to access an actively managed bond portfolio. It is quite similar to the PH&N Bond Fund, except it can use a few nontraditional strategies including the use of high yield bonds, mortgages and derivative strategies. It holds about 50% of its assets in corporate bonds while provincials make up about one-third of the fund. It offers an MER of 0.60%, which is one of the lowest options out there.
iShares DEX Universe Bond Index Fund (TSX: XBB) – For investors looking for diversified fixed income exposure at a low cost, this is, in our opinion, the best option out there. It replicates the performance of the DEX Universe Bond Index and has a rock bottom MER of 0.33%. The drawback to this ETF is that it only has about 30% exposure to corporate bonds, which increases the interest rate sensitivity to it compared with the mutual funds listed above.
IA Clarington Canadian Conservative Equity Fund (CCM 1300) – Like the name suggests, this conservatively managed fund looks for a concentrated portfolio of high quality dividend paying stocks that have quality management, strong earnings and cash flows. The fund will hold up well in flat and volatile markets, but will likely lag in a big market rally.
RBC North American Value Fund (RBF 554) – Unlike the IA Clarington offering above, this fund can invest up to 49% of its assets outside of Canada. It is well diversified and has consistently outpaced both the broader market and most of its peer group, and done so with less volatility.
Mawer Canadian Equity Fund (MAW 106) – Managed using a growth at a reasonable price approach this large cap focused Canadian equity fund has been one of the better performers in the category for years. While it is a touch more volatile than the other two funds listed, it is still less volatile than the S&P/TSX Composite Index and the category average.
Beutel Goodman American Equity Fund (BTG 774) –Over the years, this concentrated value focused portfolio has done a decent job of protecting investors’ capital. For example, in 2008 when the S&P 500 dropped by more than 23%, this fund was down only 10%. Now it won’t shoot the lights out in up markets, but its disciplined management style, relatively low volatility and low MER make this a great, solid choice for investors looking for U.S. equity exposure.
Trimark U.S. Companies Fund (AIM 1743) – While the Beutel Goodman American Equity Fund is a great conservative choice, this fund offers investors U.S. equity exposure with a bit more pop. It is more volatile and tends to outperform in up markets while underperforming in down markets. The process that is used is the traditional Trimark approach, but with a bit more of a growth filter on it. The result is a good fund for those with a higher appetite for risk.
iShares S&P 500 Index Fund C$ Hedged ETF (TSX: XSP) – For those looking for basic, no frills, cheap exposure to U.S. equities, you’ll be hard pressed to find a better choice than this ETF. It is designed to replicate the performance of the S&P 500 while at the same time hedging out the currency exposure. All of this for the rock bottom MER of 0.25%.
Mackenzie Ivy Foreign Equity Fund (MFC 081) – A hallmark of the Ivy style is capital preservation, and this fund sets the gold standard. It is one of the least volatile global equity funds around and it performs very well in flat and down markets. Given that we continue to expect markets, particularly global markets, to be volatile, we continue to like this stable offering for those investors looking for conservative global equity exposure.