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Welcome to our most recent Recommended List Report. This report contains our most recent Recommended List of Funds, which includes our best fund ideas, asset mix suggestions and brief commentaries. We hope that you find this report to be helpful.
You may notice that we have changed the format of the report. The goal was to provide a great deal of pertinent information, commentary and opinion, but in a simpler format. I believe that this format accomplishes that.
In light of this new format, I would very much welcome your comments and feedback.
Additions
CI Cambridge Canadian Equity Class (CIG 2321 –Front End Units, CIG 3231 – DSC Units) – This new edition in the Canadian Equity Core category is managed by Brandon Snow of CI’s Cambridge Advisors Team. This Canadian focused equity fund invests in large and mid-sized companies that have a defensive business model, a history of intelligent capital allocation, and a management team whose interests are aligned with the shareholders. The bottom up approach is more growth focused, but valuation is a consideration. Portfolio turnover is typically higher when markets are falling, as they move to pick up quality names at cheaper prices. They can invest up to 49% of the fund outside of Canada, and at the end of March, just over 30% was foreign. The portfolio is concentrated, holding under 40 names, with the top ten making up just over 40%. They are very active in their management approach, with portfolio turnover averaging more than 225% for the past five years. Performance has been strong, but more impressive is that volatility has been significantly lower than the S&P/TSX Composite Index. The fund has also shown excellent downside protection. For the three years ending March 31, it only participated in 29% of the downside of the market, and for the past five years, it has experienced about half the downside of the index. The fund is part of CI’s Corporate Class structure, which will help to reduce the potential distributions paid.
TD Short Term Bond Fund (TDB 814 – Front End Units, TDB 870 – DSC Units) – This short term fixed income fund was added to the Income Options category as a replacement for the TD Mortgage Fund. As the name suggests, it invests in a mix of government and corporate bonds that have a term to maturity of less than five years. The current mix favours corporate bonds, which make up nearly 60% of the fund. It has a duration of 2.7 years, which while longer than the duration of the TD Mortgage Fund, is still considerably shorter than a traditional bond fund, which would be in the ballpark of 6.8 years. It pays a variable monthly distribution that has yielded approximately 1.6% in the past 12 months. I made the change because I expect that on a total return basis, this fund will outpace the Mortgage Fund. You aren’t sacrificing anything in the way of distribution yield, and the cost of this fund is also lower. While there is the risk it will be hit harder when short term yields move higher, I still that over the medium to long term, this will perform better than the fund it replaced.
RBC Canadian Index Fund (RBF 556) – This index offering was added to the list as a replacement to the TD Canadian Index Fund. The fund’s underlying investments are virtually identical, however this fund has an MER that is 17 basis points lower, which should mean stronger returns for investors.
Deletions
CI Harbour Fund (CIG 690 – Front End Units, CIG 890 – DSC Units) – I have long been a fan of the Harbour team, however given the departure of longtime manager Gerry Coleman, combined with a rough 2013, and a tough start this year, I felt it was time to remove the fund from the Recommended List. In recent years I have noticed that the risk reward profile of the fund has been eroding, with both three and five year alpha’s turning negative. Considering all factors, it is my view that there are more compelling Canadian equity funds available. I will continue to monitor it very closely, and if I see that things are improving on a risk reward basis, I will consider adding it back to the Recommended List.
CI Global Small Companies Fund (CIG 215 – Front End Units, CIG 815 – DSC Units) – While I like the fund, the management team, and the process, I have been less impressed with the fund’s overall risk reward profile of late. I believe that there are other global small cap offerings available that offer a more favourable risk reward profile that I would expect to outperform, on a risk adjusted basis going forward.
TD Mortgage Fund (TDB 2010 – Front End Units, TDB 2011 – DSC Units) – This is arguably one of the most conservative mutual funds around. It offers a very low duration, and is not expected to move significantly lower if we see a bump in yields. However, given the short duration, and the very high quality of the underlying mortgage book, the expected return and yield is also very low. I believe that in the current environment, those comfortable taking on a bit more duration risk will be better served with the TD Short Term Bond Fund. It has a slightly longer duration, a comparable distribution yield, and a much lower cost.
TD Canadian Index Fund (TDB 216) – The reason this fund was removed from the list is as basic as it gets – there is a near identical fund available with an MER that was 17 basis points less. With the lower cost, this fund is expected to provide investors with stronger performance over the long run. That being the case, the fund was removed from the list and replaced with the RBC Canadian Index Fund.
Funds of Note
Dynamic Advantage Bond Fund (DYN 258 – Front End Units, DYN 688 – DSC Units) – With the potential for the interest rate environment to one again become rather choppy, this fund, with its actively managed portfolio, and duration management strategy remains my top pick. I would expect that it will lag during a bond market rally, but will outperform during periods of higher than normal bond market volatility.
CI Signature Select Canadian Fund (CIG 677 –Front End Units, CIG 777 – DSC Units) – This was the top performing Canadian equity fund on our list in the first quarter, with a gain of 4.97%, outpacing both the category average and the S&P/TSX Composite Index. It has about half the fund invested outside of Canada, which helped boost performance, thanks in part to a falling Canadian dollar. It is fairly defensively positioned, underweight materials and energy, and overweight more defensive sectors like healthcare and consumer defensives. A recent selloff in healthcare may weigh on returns in the next few weeks. Looking ahead, I expect that this fund will continue to do what it has always done – deliver solid risk adjusted returns to investors.
Trimark U.S. Companies Fund (AIM 1743 – Front End Units, AIM 1743 – DSC Units) – This is a concentrated portfolio of attractively priced U.S. companies that have distinct proprietary advantages, strong management, industry leadership and a history of strong capital allocation policies. During the quarter, it gained more than 6.9%, handily outpacing the S&P 500 and most of its peer group. The main reason it outperformed was its technology and financial holdings, which posted strong gains. The fund’s currency exposure remains unhedged, which helped to boost the overall performance. Looking ahead, the managers believe that the economic recovery in the U.S. is continuing, and that the recent market selloff was the result of investors once again reevaluating their view on risk. It is expected that earnings growth, which the companies in the fund have plenty of, will take on a greater importance in the weeks and months ahead.
Brandes Global Small Cap Fund (BIP 152 – Front End Units, BIP 252 – DSC Units) – This deep value offering from Brandes had a very strong quarter, gaining nearly 9% in the quarter. The management team follows a very disciplined and repeatable process, and I expect it to continue to deliver strong returns for investors. On the surface, the fund appears to be more volatile than its peers, with a standard deviation that is considerably higher. However, if we look at upside and downside capture ratios, the fund still manages to do a good job at protecting investors’ capital.
CI Global Health Sciences Corporate Class (CIG 201 – Front End Units, CIG 701 – DSC Units) – After a heck of a run, the fund has been selling off in the past month or so. If you have held this fund for a while and haven’t taken profits recently, I would strongly urge you to do so. This will help you protect some of the gains you’ve seen in the past several months. I still like the long-term healthcare story, but expect more volatility in the coming weeks and possibly months.