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During the quarter, we made a number of changes to our list. They are:
Dynamic Advantage Bond Fund – During the quarter we removed the Dynamic Canadian Bond and replaced it with the Dynamic Advantage Bond Fund. In reviewing the two funds, it is our opinion that the Dynamic Advantage Bond Fund is better positioned for the current environment. First, it has significantly higher exposure to corporate bonds, and some exposure to high yield bonds will increase the yield. This will allow for better potential returns in a flat rate environment and better downside protection when rates do begin moving higher. Second, it has some foreign holdings, which lessen the interest rate sensitivity to Canadian rates. Third, the manager is actively working to manage duration, which will provide downside protection when rates rise. To do this, they use a number of strategies including selling long bonds, selling bond futures short and the use of floating rate notes. Finally, they are managed by the same management team. The duration of the fund is approximately 4.8 years which is lower than the index, and the Dynamic Canadian Bond Fund. Based on these factors, it is our opinion that the Dynamic Advantage Bond offers a more compelling risk reward profile for the current and expected rate environment.
BMO Guardian Enterprise Fund – During the quarter, it was announced that BMO would be capping the fund effective March 28. This move was done because Mawer, the fund’s managers believe they are approaching their capacity. As a result, we will be removing it from the list going forward. We do not have any concerns regarding the management or the quality of the fund. Those who hold it should continue to do so. However, since it is no longer available for new purchases, we will be removing it from our Recommended List. We will monitor this fund, and should it reopen, we will reconsider adding it back.
Trimark Canadian Small Companies Fund – We added this fund to replace the BMO offering that is being capped. We believe that this fund offers investors a compelling small cap offering. It 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. While we like the style, we do have a couple of minor concerns. First is that it is a bit pricey with an MER of 2.70%. Second, because the managers are disciplined around valuation, there may be times when the cash balance in the fund rises quite significantly. It is currently nearly 14% of the fund. Still, on balance, we believe that this is a great small cap offering for most investors.
Dynamic American Value Fund – We placed the fund UNDER REVIEW due to concerns about its performance. It has lagged with no sign of a turnaround.
Mackenzie Universal U.S. Blue Chip – We added this fund to our list this quarter. The managers use a process that combines top down thematic investing with bottom up, company specific opportunities. Compared to other funds on our list, it is more growth focused, yet the managers have done a great job in keeping volatility in check. It is our view that this can be a good core holding for investors looking for U.S. large cap exposure.
Franklin Rising Dividends Fund – Another new addition, it focuses on companies that have a demonstrated history of increasing dividends. To be considered, a company must have at least doubled its dividends in the past ten years, but cannot have had any cuts to dividends during that time. They also focus on sustainability of the dividends and will only consider companies that have a payout ratio of less than 65%. We view it the same way we view the IA Clarington Conservative Canadian Equity – we don’t expect it to shoot the lights out, rather, it should provide strong risk adjusted returns over the long term.
Fidelity Small Cap America – Since taking over the fund in May 2011, Steve MacMillan had done a great job, outpacing not only the benchmark but also the peer group. He made some changes to the fund, namely dramatically reducing the number of holdings, and increasing the average market capitalization of the names in the fund. This is expected to bring volatility down, without negatively impacting returns. To date, he has done just that.
Templeton Global Smaller Companies – We remain concerned about the performance of the fund, and are keeping it UNDER REVIEW for the near term.
Trimark Global Endeavour Fund – This fund was added to our Recommended List during the quarter. We believe it offers a compelling risk reward profile. Managed using the Trimark discipline, it offers a concentrated portfolio of industry leaders with strong growth potential and stable financial structures. Further, they are very disciplined with respect to valuation, and will only buy a company when it is trading well below their estimate of its true worth. The managers stick to their style and as a result, there are times when cash can make up a significant portion of the portfolio. For example, the fund currently sits at around 17% cash after taking profits in a number of names that are approaching full valuation, but are unable to find a suitable home for the proceeds. Still, on balance, we believe that this is a very compelling mid cap focused offering for most investors.
AGF Emerging Markets – While we have been impressed with the job that the management team led by Stephen Way have been doing with this fund, we continue to keep it UNDER REVIEW for the near term. We note that the fund has outperformed the Westwood Emerging Markets Fund, which former manager Patricia Perez-Coutts is currently managing. We continue to watch the AGF offering for any erosion in the risk reward profile of the fund.
Brandes Emerging Markets – For those looking for an alternative to the AGF fund, this deep value offering from Brandes might just do the trick. Managed using the Graham and Dodd style of value investing, they look for companies that are out of favour with investors and whose share prices have been beaten down by the market. It is a very diversified portfolio, holding more than 70 names. In looking at the EM category, this is the next best thing to the AGF offering in terms of both absolute and risk adjusted performance. Although, you will find that it is considerably more volatile, this may be a consideration for those investors with more moderate risk tolerances. Like any sector type fund, portfolio exposure should be based on how comfortable the investor is with risk.
In the coming weeks, we will be reviewing the model portfolios and looking to simplify those. Our goal will be to improve the expected risk profiles without giving up anything in the way of expected return.