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During the quarter, I made a number of changes to the list. They are:
PH&N Short Term Bond & Mortgage Fund – With increased volatility in the fixed income markets likely from here on in, many investors may be looking to shorten the duration of their bond holdings. This is one of the best ways to do that. It invests in short term bonds with less than a five year term to maturity. The duration of the fund is 2.3 years, much shorter than the 6.8 years for the DEX Bond Universe. This means less interest rate sensitivity. While this is a less risky alternative to a traditional bond fund, it is not immune to losses. Still, losses should be less than what would have been experienced in traditional bonds.
TD Canadian Core Plus Bond Fund – During the quarter I replaced the TD Canadian Bond Fund with the TD Canadian Core Plus Bond Fund. The reason that I made the move was that I believe that the Core Plus Bond is better positioned for the current and expected fixed income environment. About 70% of the Core Plus Bond is managed in a near identical fashion to the TD Canadian Bond Fund. This portion invests in investment grade bonds. Up to 30% of the fund can be invested in tactical investments including global bonds, high yield bonds, emerging market debt and global real return bonds. It is my view that this tactical portion of the fund will put it in a position to be able to deliver decent relative returns compared with the TD Canadian Bond Fund. I do expect that the Core Plus strategy will carry a higher level of potential volatility. If this is a concern, you should likely consider the one of the other bond offerings.
BMO Guardian Enterprise Fund – As I said last quarter, the BMO Enterprise Fund was dropped from the list because it was capped. I still believe that it is a very high quality fund, and do not have any concerns regarding the management or investment process used. If you hold it, you should continue to do so, assuming it is still in line with your investment objectives and risk tolerances. I will continue to monitor the fund, and if it reopens, I will consider adding it back.
Dynamic American Value Fund – After a great deal of thought and analysis, I reluctantly came to the decision to drop the fund from the Recommended List. I really like the process and approach that David Fingold uses when looking at stocks. He has a unique view and has historically done a great job at protecting investors’ capital. Still, something isn’t working in the process. He has consistently lagged the index, and his peer group. After the market drop in mid 2011, it was flat until the end of 2012, and has risen since then, but considerably less than the index and the category. In the past 12 months, the fund has only outperformed the S&P 500 one time, and in the past 24 months, has only outperformed five times. In the past 24 months, the fund has only participated in 30% of the upside movement of the market, and 70% of the downside. Considering the above, I really have no other choice but to remove the fund from the Recommended List.
Templeton Global Smaller Companies – The process that manager Martin Cobb is very sound. It is a value focused, bottom up approach that looks to identify names that are undervalued relative to their assets or earnings. But, when I look at the results since he took over, they are well below average. There has been a turnaround in the past year, and it had a very strong second quarter. Volatility has been on the upswing, and is now above the category average. I will be keeping the fund UNDER REVIEW for at least one more quarter while I try to get a better sense if the recent turnaround is for real.
Mackenzie Cundill Recovery Fund – The mandate of the fund is to invest in opportunities that are undergoing some sort of a recovery. This has always been an interesting mandate, and that hasn’t changed. But I am increasingly concerned with two things – volatility and the overweight exposure to China, particularly in real estate. With the exposure to the floundering China real estate market, I expect that volatility will move even higher, with no guarantee of increasing returns. Considering the above, I am removing it from the list.
PH&N Monthly Income Fund – I am switching this fund into the list to replace the RBC Monthly Income Fund for two main reasons. The first is that the RBC Monthly Income Fund is not available in registered plans, while this fund is. Second, I believe that this fund is better positioned than the RBC offering going into a potentially higher rate environment. The equity component can range between 40% and 60%, which is higher than with the RBC option. It’s currently sitting at 49% equity, and 41% bonds. It has a higher allocation to corporate and high yield bonds, which is more favourable in the current environment. It pays a monthly distribution of $0.0435 per unit, which is an annualized yield of just north of 5%. While it is more expensive than the RBC fund, but I believe it’s a better alternative in the current environment. I expect that it will carry a bit more risk than the RBC offering, but there is the potential for stronger returns.
AGF Emerging Markets – While I have been impressed with the job that the management team led by Stephen Way have been doing with this fund, I continue to keep it UNDER REVIEW for the near term. I am becoming increasingly concerned about the emerging market sector in general, as we continue to see many cracks in the story, particularly in China. Under Ms. Perez-Coutts’ management, the fund did a stellar job in preserving investors’ capital relative to its peers. I am watching its performance closely during this period of heightened volatility to see how it holds up. That will hopefully give me the comfort surrounding the new management team’s ability to effectively manage the fund going forward.