Mutual Funds/ETFs Update – May 2013

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PDF Copy of this Edition

 

WHAT’S NEW

Recommended List Review – Great start to 2013

By Dave Paterson, CFA

Only one fund posts a loss in the first quarter

The first quarter of 2013 rewarded investors handsomely as global equity markets surged higher. The U.S. led the way, with the S&P 500 rising by nearly 13% during the quarter, finishing at a record high. International equities were also strong, as the MSCI EAFE Index and MSCI World Index rose by 7.4% and 10.1% respectively. Were it not for the rise in the Canadian dollar, which moved from US$0.9723 to US$0.9846, these gains would have been even higher.

At home, the S&P/TSX Composite lagged its global peers, gaining a modest 3.3%. Much of this underperformance can be attributed to the materials sector, which continues to disappoint. With concerns over a slow economy in China and the European recession continuing to weigh on commodity demand, the situation is not expected to change in the near term.

Looking ahead, we remain cautiously optimistic, particularly on equities. With interest rates low and inflation well contained, the environment is more conducive for equities over fixed income. That is not to say that we suggest one abandon fixed income completely in favour of equities. We are still firm believers in using fixed income within a well diversified portfolio as a way to help manage the overall level of volatility. Instead, we suggest that investors consider taking an overweight position in equities in their portfolios as a way to help generate higher returns going forward.

Within the equity space, we continue to favour North America, particularly the U.S. With a modest recovery firmly entrenched, economic fundamentals continue to improve, which will likely provide a favourable environment for equities.

We are still positive on Canadian equities, but less so than with their U.S. brethren. The main reason for this is with Europe mired in recession and China still encountering difficulties, we expect that pressures will remain on commodity prices, which will continue to drag the Canadian indices.

Within Canada, we continue to like the yield plays, as we believe that investors’ seemingly insatiable demand for yield will continue to provide some level of support for prices. Still, one must be cautious on valuation and be careful not to overpay.

We also see continued opportunities within Europe and the emerging markets for those who have a higher tolerance for risk. While there may be too much uncertainty in the region for most investors, some may want to consider taking a small position to take advantage of the valuation levels. Those with lower risk tolerances are better to get this exposure through a high quality, well diversified global fund. Those with higher risk appetites may want to invest in funds that are specific to the regions.

Funds Removed from the List

PH&N High Yield Bond Fund (PHN 280) – The only reason that we are removing this fund from the list is that it has been capped for a number of years and is not expected to reopen anytime soon. It is our goal to keep our recommended list fresh and filled with funds that are open to new investment. With the fund itself, it remains a very solid, well managed mix of investment grade and high yield bonds. The managers have expressed some concerns about valuations, with spreads between high yield bonds and government bonds hovering around 500 basis points. This is quite narrow by historical standards, which may indicate that there is room for a pullback in the near to medium term. If you hold it, we would suggest that while some profit taking may be appropriate, you will want to keep some exposure to the fund so that you may add to your position later.

BMO Enterprise Fund (GGF 464) – Like the PH&N High Yield Bond Fund, the only reason we are removing this fund from our list is that it was closed to new investments by BMO on March 28. It was closed because the managers, Mawer Investment Management, believe they are approaching the maximum amount they are comfortable handling in the strategy. Capping the fund is in the best interest of the current investors. Because of this, we are removing it from the list going forward. It remains one of our favourite Canadian small cap funds and we have no immediate concerns about the fund, the process or its management. Those who hold it should continue to do so as long as it is appropriate for your particular circumstances. We will continue to monitor it and should it reopen, we will reconsider adding it back.

Funds Added to the List

Dynamic Advantage Bond Fund (DYN 258) – It is our opinion that this fund is very well positioned for the current interest rate environment for a number of reasons. First, it is heavily weighted to corporate bonds with some exposure to high yield. This will increase the yield generated by the portfolio, allowing for higher returns in a flat rate environment and better downside protection when rates begin to move higher. Second, approximately 10% of the fund is in investment grade foreign bonds, which will help to lessen the sensitivity to Canadian interest rates. Third, the manager is actively working to control duration by using a number of strategies including selling long bonds, selling bond futures short and the use of floating rate notes. In using these strategies, the fund has set itself up to provide better downside protection when rates rise. In reviewing the historic upside and downside capture ratios of this fund over the past five years, we found that it captured about 75% of the upside movements of the DEX Universe Bond Index, yet only experienced about a third of the losses. Another thing that we like about this offering is that it one of the few remaining bond funds that is available in a corporate class version, which means that investors in non registered accounts can better manage their tax burden. The fund code for the corporate class version is DYN 1800. This is a great core bond fund for most investors, particularly the corporate class version for non registered investors.

Trimark Floating Rate Income Fund (AIM 1233) – This fund invests in floating rate notes, which in very simple terms are notes are issued by large corporations where the coupon payment is based on the prevailing rate of interest in the economy. They can be great tools in helping to protect against rising interest rates and this Trimark offering is our top pick in the category. It is the oldest floating rate fund available, delivering modest longer term returns with the least amount of volatility within its peer group. It was hit hard in 2008, dropping by 27%, but has since more than made up for that decline. We believe that it should continue to be the best performing floating rate fund on a risk adjusted basis, although other offerings such as Manulife and AGF may do better on an absolute basis.

Franklin U.S. Rising Dividends Fund (TML 201) – This is a fund that invests mainly in U.S. based companies that have a demonstrated history of increasing dividends. To be considered, a company must have more than doubled its dividends in the past ten years without making any cuts during that period. They also consider the sustainability of the dividends and will only invest in companies that have a payout ratio of less than 65%. Performance on an absolute basis has been decent but when considering the lower than average level of volatility, it has been very strong on a risk adjusted basis. We view this fund much the same way we do the IA Clarington Conservative Canadian Equity Fund. We don’t expect it to shoot the lights out in rising market but we expect that it will provide strong risk adjusted returns over the long term. We see this as a great way for investors to gain U.S. equity exposure, but with less risk than the average fund.

Trimark Canadian Small Companies Fund (AIM 1683) – This new addition is meant to replace the BMO Enterprise Fund, which is being capped. This high quality small cap offering is managed using the Trimark discipline of building a concentrated portfolio of industry leaders with strong growth potential and stable financial structures, while ensuring they do not overpay. Performance, particularly over the long term, has been strong on both an absolute and risk adjusted basis. While we like the fund, we do have a couple of minor concerns. First is that it is a bit pricey, with an MER of 2.70%, which is a touch above the category average. Second, because the managers are sticklers when it comes to valuation, there may be times when the cash balance in the fund rises quite significantly. As of March 31, the cash balance sat at nearly 14% of the fund. Still, on balance, we believe that this is a great small cap offering for most investors that should deliver above average risk adjusted returns over the long term.

BMO Asian Growth & Income Fund (GGF 620) – Despite China’s recent slowdown in economic growth, the longer term growth picture of Asia looks very compelling. As the economic landscape evolves, there will be numerous opportunities to participate in that growth. With any emerging growth story, there are a number of risks and the potential for high levels of volatility. This fund is a great way for investors to access this growth story without taking on the full equity risk of the region. While technically classified as an Asia Pacific Equity Fund, in reality it is more of a balanced fund. As of March 31, it held 88% stocks, 10% bonds and 2% in cash. The majority of the bond holdings are in convertible bonds. The longer term numbers are strong on all counts, but you will notice that it has a tendency to lag in up markets. This is not unexpected, given the bond component. The bond portion of the fund has been declining in recent years for a number of reasons including a scarcity of convertible offerings and valuation levels.

Funds of Note

RBC Global Precious Metals Fund (RBF 468) – With gold plummeting more than 20% since October, it is not surprising that the performance of this fund has been pretty ugly of late. Between November 2010 and March 2013, the fund has dropped nearly 44%. As bad as this seems, it has done better than most of its peer group, with performance that has consistently been in the first or second quartile. If you are looking to have exposure to precious metals in your portfolio, this would be the fund to own. Now the question becomes should you have precious metals in your portfolio at all? For more on that, please see our article “Has Gold Lost its Luster?” elsewhere in this edition.

BMO Monthly Income Fund (GGF 70148) – One of our biggest beefs with this fund has been its high level of distribution payout. Last quarter, when we did our recommended list, the fund’s yield was north of 10%. Considering the yield of the underlying portfolio and its expected return profile, this is clearly unsustainable without some degree of capital erosion. Recognizing the problem, BMO finally stepped up and made a dramatic cut to the distribution. Effective May 16, the distribution will be cut from $0.06 per month to $0.024 per unit, bringing down the yield down from over 10% to a more realistic 4%. For those who are reinvesting their distributions, this change will have no effect. However, those who are receiving the distributions in cash will see their cash flow drop by approximately 60%. We believe that this is in the best interest of the fund.

Beutel Goodman American Equity Fund (BTG 774) – For that past few quarters, we have been bullish on U.S. equities. This fund has been our favourite in the category for some time now. It is a concentrated, high quality portfolio made up of companies that are leaders in their field. It is currently defensively positioned, with minimal exposure to commodities and deep cyclical, high beta stocks. Performance has been strong, generally outpacing the S&P 500 with comparable volatility. A couple of other key selling features are its stellar downside protection, and relatively low MER. For those willing to invest at least $5,000, this is a great U.S. equity fund to consider.

Dynamic American Value Fund (DYN 041) – While the long-term performance numbers have been strong, short-term numbers have disappointed. Much of this can be attributed to the manager’s extremely defensive positioning in late 2011 and early 2012. During that period, the fund held close to 40% in cash, which acted as a significant drag in a rising market. Since then the fund has tilted more towards growth, focusing on high quality cyclical companies. The manager isravoiding the more defensive sectors such as consumer staples, telecom and utilities because of concerns about valuation and lack of growth opportunities compared to other sectors. Looking at the recent rally, it was the more defensive sectors leading the charge in Q1, resulting in yet more underperformance. We believe that the manager’s style will produce strong risk adjusted returns over the long term; however, we would like to see a turnaround in short term performance. While we remain patient, that patience is quickly running out.

Trimark Global Endeavour Fund (AIM 1593) –We continue to like this mid cap offering that is managed by Jeff Hyrich. It is a concentrated portfolio of industry leaders with strong growth potential and stable financial structures. Further, Mr. Hyrich is very disciplined regarding valuation, and will only buy a company when it is trading well below his estimate of its true worth. He sticks to his style and as a result there are times when cash can make up a significant portion of the portfolio. The fund currently holds 17% cash after profit taking pushed it higher. Valuation levels make it difficult to find new investment opportunities. In a market rally, this high cash balance can drag performance, but it can also cushion against losses in a market selloff.

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FUND	FIRST MENTION	RESULTS         (to Mar   31)	Q1 Return	COMMENTS
Canadian Equity Funds
Fidelity Canadian Large Cap	Oct-11	12.2% (1 Yr.)	11.2%	Global equity holdings drove   outperformance
IA Clarington Cdn   Conservative Equity	Oct-11	7.5% (1 Yr.)	4.6%	Should benefit from ration   out of bonds
RBC North American Value	Jun-11	11.0% ( 1 Yr.)	7.0%	Managers beginning to favour U.S. over Canada
Fidelity Dividend	Sep-08	14.5% (4 Yr.)	3.8%	Quality portfolio helps   mute volatility
Leith Wheeler Canadian Equity	Jun-06	2.2% (6 Yr.)	5.2%	Valuation may cause short   term headwinds
Mawer Canadian Equity	Jan-05	8.2% (8 Yr.)	7.0%	Great pick for most market   environments
Canadian Small Cap Funds
Trimark Canadian Small   Companies	Apr-13	NEW	9.6%	Concentrated, quality   focused portfolio
Sentry Small Mid Cap Income	Jan-13	9.1% (3 mth)	9.1%	Small Cap exposure with   attractive yield
BMO Guardian Enterprise Fund	Jan-12	16.2% (1   Yr.)	8.1%	Capped March 28/13. Remains a great   pick.
Beutel Goodman Small Cap	Oct-03	8.7% (9 Yr.)	5.3%	More volatile than the   other small cap picks
Sector Funds
BMO Asian Growth &   Income	Apr-13	NEW	6.1%	A more conservative way to   play Asia
CI Global Health Sciences	Sep-11	43.5% (1 Yr.)	19.5%	Take some profits. Long   term outlook strong
RBC Global Precious Metals	Jan-06	6.0% (7 Yr.)	-14.9%	More downside expected near   term
Balanced   Funds
Mac Cundill Cdn Balanced	Apr-11	3.3% (2 Yr.)	6.1%	Strong performance   continues. Take some profits.
AGF Monthly High Income	Oct-10	3.1% (2 Yr.)	3.7%	Most aggressive balanced fund on list
Steadyhand Income	Oct-10	7.6% (2 Yr.)	2.2%	Could be used as a bond replacement
Fidelity Canadian Balanced	Feb-08	4.3% (5   Yr.)	3.0%	Keeps asset mix close to 50/50
Income Funds
TD Mortgage Fund	Apr-12	1.8% (1 Yr.)	0.6%	Low volatility. 2.3% yield
CI Signature High Income	Jan-12	11.3% (1 Yr.)	3.0%	Pays $.07 per month. 5.8%   yield
RBC Canadian Equity Income	Jan-10	13.3% (3 Yr.)	5.3%	More volatile pick. 4.4%   annualized yield
Sentry REIT	Dec-06	1.9% (6 Yr.)	1.4%	Despite outlook, REITs   continue to lag. 8.0% yield
BMO Monthly Income	Nov-05	3.7% (7 Yr.)	2.3%	Big cut to distributions.   Yield now around 4%
Mac Sentinel Income	Feb-05	4.2% (8 Yr.)	3.0%	7% yield. Conservative   positioning.
BMO Monthly Dividend	Oct-03	5.1% (9 Yr.)	3.2%	Holds nearly 60% prefs.   3.8% yield
RBC Monthly Income	Jun-03	6.5% (9 Yr.)	2.2%	Very balanced portfolio. 3.8% yield
Bond Funds
Trimark Floating Rate   Income	Apr-13	NEW	-1.1%	Coupon payments move with   interest rates.
Dynamic Advantage Bond	Apr-13	NEW	1.0%	Strong downside protection
RBC Global Corporate Bond	Jan-13	0.4% (3 mths)	0.4%	Well diversified. 10% high   yield exposure.
TD Short Term Bond	Sep-12	1.0% (6 mths)	0.7%	Lower minimum than   PH&N. Defensive pick
PH&N High Yield Bond	Feb-10	7.8% (3 Yr.)	1.7%	Continues to perform.   Closed to investors
PH&N Total Return Bond	Aug-08	7.0% (4 Yr.)	0.7%	Active approach should   preserve value
TD Canadian Bond	Jan-03	5.6% (10 Yr.)	0.6%	Corporate focus should help   when rates rise
PH&N Short Term Bond   & Mortgage	May-00	4.7% (13 Yr.)	0.8%	Remains our top short term   option
U.S. Equity Funds
Franklin U.S. Rising   Dividends	Apr-13	NEW	13.1%	Conservative, yield focused   U.S.   equity pick
IA Clarington Sarbit US Equity	Jan-11	6.8% (2 Yr.)	9.9%	High conviction portfolio.   Long term pick
TD US Small Cap Equity	Jan-11	11.4% (2 Yr.)	14.8%	Continues to be our top   small cap pick
Beutel Goodman American   Equity	Feb-09	14.2% (4 Yr.)	13.8%	A great U.S. value   pick
Dynamic American Value	Aug-06	1.6% (6 Yr.)	8.8%	Performance is a concern.   Hold for now!
International/Global/North   American Funds
Mutual Global Discovery	Jul-11	14.5% (1 Yr.)	8.8%	Conservatively managed.   Value focused
Trimark Global Endeavour	May-11	8.2% (2 Yr.)	5.3%	Cash level sitting at about   17% of fund
Dynamic Power Global Growth	May-11	-3.3% (2 Yr.)	3.1%	Continues to struggle. We   still expect a bounce
CI Black Creek Global   Leaders	Mar-11	3.5% (2 Yr.)	7.9%	Would be wise to take some   profits
Mawer International Equity	Oct-09	8.9% (3 Yr.)	6.0%	Consistently outperforms   its peers. Average risk
Chou Associates	Nov-02	6.8% (10 Yr.)	11.9%	All cap, value focus. Great   long term pick.
NOTE:
Funds highlighted in Green   are New Additions to the List.
Funds highlighted in Red   are funds that are being removed from the list.

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Has Gold Lost its Luster?

Longer term outlook better than short term

Since its peak in October, gold has flirted with bear market territory, dropping more than 20% from its high. Experts are divided on whether this is the end of the impressive rally that gold experienced between mid 2005 and mid 2011. During that time, the price of gold jumped by two and a half times.

There is little doubt that gold has historically been a great hedge against inflation. Many experts believe that inflation will rear its head sooner than later thanks to the staggering amount of liquidity central banks have injected into the global economy since the financial crisis in 2008. They believe that this liquidity influx will push inflation significantly higher. When this happens, the demand for gold will also move higher.

How much inflation will be created is dependent on central banks’ ability to effectively pull that liquidity out of the system. If they can do it in a timely and somewhat orderly fashion, inflation may not be as big an issue as expected. If they screw it up, there could be serious inflationary implications worldwide. Looking at the various scenarios, we expect that some inflation will be created, but certainly not the levels that some are predicting. This should still result in some increased demand for gold in the medium to long term.

Unfortunately, the near term outlook is considerably less rosy. Many central banks have openly begun pondering ending their massive quantitative easing programs sooner than predicted. Should this happen, it is likely that they can help keep inflation in check. Looking at the levels of economic growth around the world, which leave much to be desired, there is nothing to suggest that inflation is poised to make an immediate return.

There are other worries creating headwinds for gold in the near term. Historically, gold and the U.S. dollar have been negatively correlated, meaning that when the U.S. dollar strengthens relative to other currencies, the price of gold drops. The U.S. dollar has been gaining strength recently, which is not good for gold.

Another concern is that some heavily indebted European countries may be forced to sell their gold holdings to raise much needed liquidity. According to Dr. Martin Murenbeeld, the chief economist of Dundee Wealth, Portugal, Italy, Ireland, Greece and Spain hold more than 3,200 tons of gold. Europe as a whole holds 11,260 tons and the U.S. has more than 8,100 tons. If some of these reserves find their way into the gold market, it will be difficult for the price to grow until the excess has been absorbed.

Bottom Line: The long term outlook for gold is much stronger than the near term outlook. We expect that this will lead to high levels of volatility within many gold companies and that will continue for the future. It is our opinion that only those with a very high risk tolerance should consider investing in precious metals.

CI Global Health Sciences – Buy, Sell or Hold?

The answer depends on you

Q – Can you advise whether CI Global Health is still rated a hold? The returns look good and I’m looking to buy, but hesitating because of your hold recommendation.

A – This question highlights why I stopped putting Buy, Sell or Hold ratings on the Mutual Fund Recommended List. Depending on your particular situation, this is a fund that could be any of those ratings.

As with all the funds on the recommended list, there are no issues or concerns that I have come across when conducting my ongoing reviews. Each fund on the list is a high quality fund that can play a role in a well diversified portfolio.

In looking specifically at the CI Global Health Sciences Fund, it is our opinion that the macro themes supporting healthcare remain well entrenched and are expected to remain so for the next several years. These themes include the aging of the baby boomers and the continued development of the emerging economies, both of which should spur demand for healthcare related products and services for the next decade or more.

Another factor that we believe makes healthcare a good holding in a well diversified portfolio are its defensive characteristics. For most people, basic healthcare is not an option. This provides some level of basic support for the sales levels of many of the healthcare focused companies. Because of this, healthcare funds tend to be less correlated to the broader equity markets in periods of uncertainty. When used as part of a well diversified portfolio, a small portion invested in healthcare will often help provide downside protection in volatile markets.

Despite the sector’s defensive characteristics, it is not without risk. Perhaps the most pressing is the continuing threat of regulatory change in the U.S. as the Republicans and Democrats continue to bicker over healthcare. Fortunately much of that talk has been pushed to the back burner for now, allowing investors to focus on company fundamentals and growth prospects, both of which look favourable.

Another risk is one of valuation. Healthcare has been on a tear lately. It has been the best performing sector for the last few quarters. While there may be some legs left in the rally, there is a definite risk of a pullback. That is particularly true of this fund, which has gained 43% in the past year (to March 31), handily outpacing the index and the peer group.

Within the fund, the manager continues to deliver a portfolio that is diversified across the various healthcare sectors, and geographic regions. It is an all cap fund, allowing the manager the flexibility to invest in companies of any size. Still, the focus has predominantly been in the small and mid cap space, which currently make up just under 70% of the portfolio.

Is now a good time to buy the fund? That really depends on your reason for investing. If you are looking to add it as a diversifier to an already well-balanced portfolio and you have a long-term time horizon (seven years or more), then yes, I would say that now is an okay time to buy. In this scenario, the investor will have the time to recover from any potential sell off, and the overall diversification benefit to the portfolio would be expected to offset any increased risk.

If you are interested in healthcare as a short term trading opportunity, then I would be considerably more cautious. The fund has shown significant gains in recent months and despite the longer term outlook for the sector, may be poised for consolidation in the near term. In this scenario, I would suggest waiting for a drop in value, making it a hold.

Finally, if you have held this fund for a few years, it is highly likely that you have experienced significant gains. If that is your situation, you would be wise to consider doing some profit taking to sell down a portion of your holdings and redeploying the proceeds to other funds in your portfolio. In this rebalancing scenario, the fund is essentially considered a sell.

Bottom Line: We have no immediate concerns regarding the CI Global Health Sciences Fund. Whether now represents a good time to buy is completely dependent on your specific situation.

Tax Treatment of Distributions

Misleading information provided to investor from discount broker creates confusion

Q – I was considering buying RBC Canadian Equity Income Fund (RBF 591) for its monthly cash flow. In speaking with my discount broker, I was told that the monthly distributions were treated as regular income for tax purposes. For a fund that invests mainly in dividend paying Canadian equities, how can this be possible? Also, are there any recommended mutual funds where the dividend income tax advantage flows through to the fund holder?

A – I’m not sure where your broker is getting their information on the tax breakdown of the distribution, but it appears he or she is misinformed. If I look at page 4 of the Management Report of Fund Performance or the MRFP as it is commonly known, (available at http://funds.rbcgam.com/pdf/mrfp/annual/rbf591_e.pdf), a breakdown of the distribution by income type for the past five years is shown.

In 2012, the fund paid out $1.08 per unit, of which $0.11 was dividends, $0.66 was capital gains and $0.31 was considered return of capital. For 2011, it paid out $1.53, of which $0.13 was regular income, $0.15 was dividends, and $1.25 was capital gains.

	2012	2011	2010	2009	2008
Interest		$0.13	$0.07	$0.54	$0.87
Dividends	$0.11	$0.15	$0.31	$0.13	$0.09
Capital Gains	$0.66	$1.24	$1.51	$0.76
Return of Capital	$0.31
Total   Distribution	$1.08	$1.52	$1.89	$1.43	$0.96
	2012	2011	2010	2009	2008
Interest	0%	9%	4%	38%	91%
Dividends	10%	10%	16%	9%	9%
Capital Gains	61%	82%	80%	53%	0%
Return of Capital	29%	0%	0%	0%	0%
Total   Distribution	100%	100%	100%	100%	100%

Source: RBC Global Asset Management

Given the investment strategy of the fund, this certainly appears in line with what my expectations would be. Capital gains would be expected to be a major component of the distribution because the manager uses a very active trading strategy, resulting in high levels of portfolio turnover. For example, in 2008 and 2009, turnover was north of 500%, while last year was relatively tame with a “modest” 134% portfolio turnover. The higher the level of portfolio turnover, the more likely it is that a major component of the distribution will be capital gains.

The fund invests predominantly in a portfolio of dividend paying equities. According to information on Morningstar Canada’s Paltrak, the dividend yield of the underlying portfolio is 3.68%. This will translate into a reasonable stream of dividend income, which will also be expected to be a key component of the tax treatment of the distributions.

Regular income includes not only interest income, but also any dividends that the fund receives from non Canadian investments. The fund does have some foreign exposure (currently about 13%), which is it is likely to see some regular income included as part of the distribution.

All things considered, the distributions from this fund are reasonably tax efficient. Barring a change in the investment process used, we would expect that the distributions will continue to be tax advantaged going forward.

As far as recommended funds that will produce predominantly dividend income into the future, it is difficult to know in advance with any real certainty. If I had to pick, I would likely go with IA Clarington Canadian Conservative Equity and Fidelity Dividend as being two that would be expected to produce a higher level of dividend income compared to the other funds on the list. We should point out that the distribution yield paid by these two funds will be lower when compared to some of the more income focused funds on the list. Currently, the Clarington offering has an annualized distribution yield of 2.3%., while the Fidelity Dividend Fund comes in at just under 1%.

If you are looking to produce higher levels of tax advantaged cash flow, there are a number of funds on our recommended list that are available in a T-Series. T-Series funds provide distributions that are largely considered return of capital for tax purposes. With these funds, the distributions reduce your adjusted cost base, pushing your tax burden out to when you sell your units. At that point, you will be required to pay capital gains on the distributions plus any growth, but as we all know, capital gains are taxed more favourably than the other forms of income.

Mackenzie Reshapes Product Lineup

Dave Paterson, CFA

Reorganization will simplify sprawling fund lineup

On April 23, it was announced that Mackenzie plans to do a major overhaul of their product lineup. I for one applaud this move. To say that the Mackenzie product lineup is cumbersome and confusing is an understatement. If we look at all of their funds, including the multiple versions of some that are offered, the number of fund codes available is more than 1,300.

Further complicating matters are the number of brands that are offered including Ivy, Cundill, Universal, Saxon, Sentinel, Symmetry, and of course, Mackenzie. Under the new look Mackenzie, gone are the Saxon, Universal and Sentinek names. Mackenzie, Cundill, Ivy and Symmetry will remain, with great clarity around what each brand represents. For example, Cundill will be focused solely on deep value whereas Ivy will continue to focus on concentrated portfolios of high quality companies. Symmetry will offer managed portfolio solutions and Mackenzie will be a “catch all” for mandates that don’t fit in the other groups.

To help simplify things further, funds will be renamed to better describe what they are and how they are managed. The new fund names will include not only the asset class, but also geography and investment style. For example, the Mackenzie Founders Fund will be renamed the Mackenzie Diversified Equity Fund and the Saxon Stock Fund will be renamed the Mackenzie Canadian All Cap Value Fund. This is all seems very logical and should help make it simpler when looking at the fund options.

The number of funds will be reduced significantly. For example, there are currently 12 fixed income funds, 13 balanced funds, 19 Canadian equity funds, six U.S equity, 22 global equity funds, and eight sector offerings available along with seven managed portfolios. With all due respect, that is far too many and there is definitely room to cut. It is expected that 28 funds will be merged into existing offerings. This will have the affect of cutting the number of funds and reducing overlap, without negatively affecting the breadth of offerings.

Many of the better known, higher quality core funds such as Cundill Value, and Ivy Foreign Equity will remain untouched. Most of the funds that are being merged are smaller, lesser quality funds with relatively low asset bases and less than stellar investment returns.

We will see a big reduction in the available sector funds, which will be cut in half, from eight to four. A couple of these mergers are really “no brainers”. For example, the company offers two precious metals funds; Mackenzie Universal Precious Metals Fund, and Universal World Precious Metals Class. The funds for all practical purposes are identical, so merging them is the logical thing to do. Also gone will be the firm’s real estate and healthcare offerings, which will be merged into more broadly focused equity funds.

One thing that Mackenzie has done for years that always puzzled me was to have the lead portfolio managers of the balanced funds run the fixed income component, along with their duties of managing the equity sleeve and setting the asset mix. Under the new plan, the bond duties are being handed over to Mackenzie’s more than capable fixed income team. This should prove beneficial to investors as interest rates begin to rise.

What’s an announcement from a fund company without a new fund or two to make things interesting? Mackenzie will be bringing two new funds to market; the Mackenzie Strategic Bond Fund, which will invest in a mix of government and corporate bonds, and the Mackenzie Floating Rate Income Fund, which will invest in floating rate notes. While these funds may fill a hole in Mackenzie’s lineup, we’re not particularly excited about either given the availability of more established funds in each category. They are expected to be available in early May.

For taxable accounts, understanding the potential tax ramifications of such an extensive reorganization is critical. Fortunately, the majority of the planned fund mergers are not expected to trigger any immediate taxable events for investors. The one exception would be in a case where a corporate class fund is being merged into a trust fund, since the investor is leaving the corporate class structure. In all other cases, taxes can effectively be deferred until investors sell their funds, at which time they will have to declare their capital gain or loss.

These changes are expected to take place over the next several months.

Bottom Line: We really like this plan. A year and a half from now once all the dust has settled, we believe the result will be a more streamlined, focused fund family that continues to offer investors a wide range of investment choices. It should be much easier to understand and simpler to identify the investment objective and strategy of a fund.

However, getting there may be a bit of a challenge. There will no doubt be much confusion for investors and advisors alike while this transition takes place. To their credit, Mackenzie has created a website that lays out the details and the timelines for many of the changes, which should help to ease the transition. You can access this website at www.mackenzieinvestments.com/now.

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Mutual Funds / ETFs Update
Editor and Publisher: Dave Paterson Circulation Director: Kim Pape-Green
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