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During the quarter, I made a number of changes to the Recommended List of Funds. They include
Additions
PH&N Total Return Bond Fund – During the quarter, we removed the PH&N Bond Fund and replaced it with the PH&N Total Return Bond Fund. I believe that the PH&N Total Return Bond Fund is better positioned for the current environment. The majority of the fund is managed in the same way as the PH&N Bond Fund, however, the managers may also invest in high yield bonds, mortgages and derivatives. The addition of these in the portfolio is likely to provide stronger returns when yields are flat, and better downside protection when they move higher. The downside is that it may be more volatile than the PH&N Bond Fund over the long term.
Deletions
CI American Value – Despite gaining nearly 40% the fund again trailed the S&P 500 and was right around the category average. Its relative risk reward profile has been falling, and given the makeup of the portfolio, I don’t expect that there will be a meaningful improvement in the next few quarters. I still believe that this is a decent fund, but I believe that there are better options available that can provide a more favourable risk reward profile. I will continue to follow this fund for any improvement.
AGF Emerging Markets – After doing a more detailed review of the fund, I have decided to remove it from the Recommended List. The new management team has stepped in and done an admirable job. There has not been a substantial change in the overall risk reward characteristics of the fund. However, it is my view that the Brandes Emerging Markets Fund is better positioned for any rebound in the emerging markets than this fund. I have also noticed that the AGF fund has been experiencing much more of the downside of the market than it has in the past. Another contributing factor is that the MER of the fund is just too high, coming in at 3.11%.
CI Signature Global Resources Fund – Resources have struggled for the past few years, and more volatility is expected in the near term. The long term outlook, particularly for energy, appears to be favourable. With this fund, the risk management has been strong, but I believe that there are other resource funds that offer a more attractive total risk / reward profile. Unfortunately I have not been able to fully complete my review of those funds as my deadline for this report approached. Given that I do not believe this is the best fund in the category, I had to remove it from the list. I will have a substitute fund for my next update.
Funds of Note
CI Harbour Fund – In December, the CI Harbour Fund was placed UNDER REVIEW. While this has been a favourite of mine for a long time, I have been very unimpressed with its performance of late. In 2013, the fund gained 12.26%, underperforming the 12.99% gain of the S&P/TSX Composite Index. This is particularly troubling because the fund has approximately 20% invested in U.S. equities and 11% in international equities. The fund should have posted a return that was much closer to the 20% mark. Given this significant underperformance, combined with the recent change in management within the Harbour Advisors group, I am growing increasingly concerned with the fund. I will be monitoring it closely in the next quarter or two.
IA Clarington Canadian Conservative Equity Fund – Despite being downgraded to an F this quarter, (largely because of a change to its benchmark), this fund remains on the Recommended List. It is a fund that is designed to provide exposure to Canadian equities with much less volatility than the broader market. It has live up to this objective. Its level of volatility is well below the broader market, and has historically participated in less than half of any market declines. It is on the list as an option for more conservative investors who want some Canadian equity exposure, but not all the volatility. If you are comfortable with more risk, the other Canadian equity funds may be more appropriate. However, if you are risk averse, this is a good choice.
Franklin Templeton Rising Dividends Fund – I look at this fund in much the same way that I view the IA Clarington Canadian Conservative Equity Fund. It provides relatively low volatility exposure to the U.S. equity markets. It provides strong downside protection with modest upside participation. That makes this a good fund to hold in periods of volatility, but you must be comfortable with the probability that it will underperform when markets move higher. While the “F” rating is a minor concern, this fund is more suited for conservative, risk averse investors. I will continue to monitor it for any erosion to its risk reward profile.
CI Global Smaller Companies Fund – During the quarter, the fund was placed UNDER REVIEW. I have begun to notice that the risk reward profile of the fund has begun to show signs of erosion. I will monitor the fund to determine whether this is a shorter term issue or a longer term trend.