The best core equity funds for a market drop
Quick – what has been the worst month for the stock market? If you’re like most people, you probably said October. With such memorable drops as “Black Tuesday” happening on October 29, 1929, and “Black Monday” occurring on October 19, 1987, it’s not surprising that most people pick October.
However, if we look at the historic returns of the S&P 500 over time, we see that it is actually September which has been the worst month for investors. Between January 1950 and July 2012, the average return in September was a loss of -0.57%. Somewhat surprisingly, October, which is perceived to be the worst month, has rewarded investors with an average monthly return of +0.78%. If we look at volatility, it has been October, which has shown bigger drops. The biggest decline in October has been -21.76% compared to -11.23% for September.
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Performance of the S&P 500 from January 1950 to July 2012 |
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|
Average Monthly Return |
Worst Monthly Return |
Best Monthly Return |
Range of Returns |
|
| January |
1.10% |
-8.57% |
13.18% |
21.74% |
| February |
-0.12% |
-10.99% |
7.15% |
18.14% |
| March |
1.18% |
-10.18% |
9.67% |
19.85% |
| April |
1.49% |
-9.05% |
9.39% |
18.44% |
| May |
0.14% |
-8.60% |
9.20% |
17.80% |
| June |
-0.02% |
-8.60% |
8.23% |
16.83% |
| July |
0.96% |
-7.90% |
8.84% |
16.74% |
| August |
-0.04% |
-14.58% |
11.60% |
26.18% |
| September |
-0.57% |
-11.93% |
8.76% |
20.69% |
| October |
0.78% |
-21.76% |
16.30% |
38.07% |
| November |
1.52% |
-11.39% |
10.24% |
21.62% |
| December |
1.71% |
-6.03% |
11.16% |
17.19% |
Source: Yahoo Finance
Regardless of how one determines the best or worst month for investor, the next few months have the potential to be the most volatile months of the year. Considering the global environment, the likelihood of big market swings is only heightened. With the lingering debt crisis in Europe, the slowdown in China, the U.S. election and the potential for the U.S. “fiscal cliff” there will much uncertainty in the minds of investors.
The challenge then becomes positioning your portfolio in the most appropriate manner. Obviously, the best way to avoid any market swings is to remain invested in cash or even fixed income. For most investors though, making that move just doesn’t make sense. First, most will need at least some equity exposure to help provide some investment return in their portfolios. Second, while the likelihood of a big market drop exists, it is far from a sure thing, and by being fully in cash you will have missed out on any gains which may occur.
With that in mind, we went out to find the best core equity funds to hold when markets drop. To determine this, we looked at a measure which is known as the “Downside Capture Ratio.” This measure shows how much of the market decline the fund has experienced when the benchmark has posted a losing month. If the ratio is lower than 100%, the fund has outperformed the benchmark in a falling market. If it is over 100%, the fund has underperformed the benchmark. In other words, a lower downside capture ratio is preferred to a higher ratio.
In ranking our fund universe, we looked at the performance for the most recent 60 month period ending July 31, 2012. Only funds that had a five year track record were included in our search. Other criteria that we used to screen the universe included a downside capture ratio of less than 66% and the fund could not have experienced a decline of more than 10% in any one month.
Our list of the funds which meet these criteria are:
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Best Funds for Down Markets |
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| Fund |
Fund Type |
Downside Capture Ratio |
Worst Monthly Return |
| BMO GDN Monthly Dividend Fund |
Canadian Equity |
31.69% |
-9.84% |
| NexGen Canadian Dividend & Income |
Canadian Equity |
35.58% |
-4.43% |
| Mac Ivy Canadian Fund |
Canadian Equity |
39.66% |
-7.28% |
| Sentry Diversified Total Return Fund |
Canadian Equity |
43.39% |
-7.89% |
| Mac Ivy All-Canadian |
Canadian Equity |
43.61% |
-7.27% |
| Mac Ivy Foreign Equity Fund |
Global Equity |
45.74% |
-5.91% |
| Dynamic Global Dividend Fund |
Global Equity |
56.47% |
-9.40% |
Source: Paterson & Associates database, Fundata
BMO Guardian Monthly Dividend Fund (GGF 411) – This fund invests at least 60% of its assets in preferred shares. As of July 31, it held near the minimum allowed in preferreds and 31% in high yielding, blue chip Canadian equities. It pays investors a regular monthly distribution of $0.035 per unit.
NexGen Canadian Dividend & Income – Manager Rob McWhirter uses a bottom up, cash flow driven growth style in managing the fund. They invest in companies that have a history of paying dividends and can invest up to half the fund outside of Canada. Currently the entire fund is invested in Canada. Perhaps not surprisingly Financials make up the largest component of this fund. A unique twist is that NexGen offers the fund in a registered version and in a tax managed version. Within the tax managed version, investors have the option to select the type of income they would like to receive from the fund; capital gains, return of capital, dividend, or compound growth.
Mackenzie Ivy Canadian Fund (MFC 083) – The first of three Ivy entries on our list, the Ivy Canadian Fund invests in a concentrated portfolio of high quality businesses with strong balance sheets, quality management teams and that are generating healthy earnings. The managers have also not been afraid to take on higher than normal cash positions in periods where valuations are high. A couple of concerns that we have with this fund are that there has been significant management turnover since 2009 and the fund has been dreadful in rising markets. That said, downside protection is a key component of the Ivy brand and they do it better than almost anybody out there.
Sentry Diversified Total Return Fund (NCE 722) – This is a very actively managed fund that invests in Canadian and U.S. mid and large cap companies. Manager John Kim took over the lead manager duties of the fund in August of last year, taking over from Andrew McCreath. Portfolio turnover has been north of 100% in every year since 2009 and it has a very flexible mandate. It uses short selling on a regular basis, and can invest in leveraged and inverse ETFs. While volatility has been low on a historic basis, it does have the potential to be volatile. The fund is currently defensively positioned, holding 30% in cash and 11% in fixed income.
Mackenzie Ivy All Canadian Fund (MFC 1016) – This fund is very similar to the Ivy Canadian Fund, except that it invests exclusively in Canada.
Mackenzie Ivy Foreign Equity (MFC 081) – This has been one of our favourite global equity funds for the past couple of years. We like the Ivy approach for volatile times, but they tend to lag in rising markets. This fund has shown better numbers in rising markets than the Canadian focused mandates and is a great place for investors looking for conservative global exposure.
Dynamic Global Dividend Fund (DYN 031) – Managed by David Fingold who has long been one of our favourite managers, this fund looks for well managed companies that are capable of initiating or growing their dividends and are attractively valued. Long term performance numbers have been strong on a relative basis, outpacing the global equity category by a reasonable margin.
Bottom Line: I believe it was Warren Buffett who said that there are only two rules to investing. Rule number one is to never lose money. Rule number two, never forget rule number one. While losing money in the short term, particularly in equities can be a near impossible task. But there are equity funds that have done a great job preserving capital in down markets. By having some exposure to those funds in your portfolio, you put yourself in a better position to obey Buffett’s rule number one. Next month, we’ll take a look at some of the funds that have historically done well in rising markets.