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Christopher Davis, director of research at Morningstar Canada, says companies with growing dividends tend to more financially stable. On the flip side, owning conservative stocks can mean lagging the benchmark in a bullish market. (J.P. MOCZULSKI/The Globe and Mail)
Christopher Davis, director of research at Morningstar Canada, says companies with growing dividends tend to more financially stable. On the flip side, owning conservative stocks can mean lagging the benchmark in a bullish market. (J.P. MOCZULSKI/The Globe and Mail)

Low-risk investing

Six stock funds offer least-volatile foreign exposure Add to ...

When it comes to investing, the world is your oyster.

Still, many Canadian investors prefer the comfort of owning home-grown companies. It’s great when resource and financial stocks are soaring because they make up a big chunk of the domestic market. But Canada only represents less than 4 per cent of the world’s total stock market value. Being a home body can mean losing out on investment opportunities and currency diversification.

For investors who are jittery about venturing beyond Canada’s borders, stock funds provide a less risky way to gain foreign exposure. Given a bewildering array of choices, we asked two investment experts for three conservative fund picks. Here are their choices that cover exchange-traded funds and mutual funds.

Christopher Davis, director of research at Morningstar Canada:

Vanguard U.S. Dividend Appreciation ETF:

This U.S. equity ETF, which invests in companies with growing annual dividends, has a history of offering downside protection, says Mr. Davis. This fund was launched only in 2013, but its older, U.S.-listed sister Vanguard Dividend Appreciation ETF, which follows the same strategy, fared better than the market when markets took a sharp dive in 2008 and 2011.

Companies with growing dividends tend to be more financially stable and have competitive advantages, he noted. On the flip side, owning conservative stocks can mean lagging the benchmark in a bullish market, he said.

The Canadian ETF, which charges a 0.30-per-cent fee, has returned an annualized 14.8 per cent for the three years ending March 31, versus 17.6 per cent for the S&P 500 in Canadian dollars.

iShares Edge MSCI Minimum Volatility Global ETF:

This equity ETF, which invests in developed and emerging markets, aims to give exposure to the least-volatile, global portfolio possible, says Mr. Davis. It invests in all market sectors in the MSCI All Country World Index. The ETF differs from many peers that try to own the least volatile stocks, he noted. These rivals can end up very overweight in areas like utilities and telecom stocks that can get hurt by rising interest rates as higher-yielding bonds hold more appeal.

The iShares fund, which is 70 per cent invested in the U.S. market, posted an annualized return of 15.1 per cent for three years ending March 31. Because the ETF owns more defensive names, it may lag when interest rates climb, he said. It also charges a 0.48-per-cent fee which is pricier than a market-cap weighted ETF.

iShares Edge MSCI Minimum Volatility EAFE ETF:

Because this stock ETF invests outside of North America, it will appeal to investors who already have exposure to both the Canadian and U.S. markets, says Mr. Davis.

The fund tracks stocks with lower volatility than those in the MSCI EAFE [Europe, Australasia, and Far East] Index. The result is that this ETF is now close to 30 per cent invested in Japan, versus 23 per cent in the benchmark index. The trade-off for a less volatile portfolio is taking on other potential risks, such as added exposure to Japan, or rising interest rates that can affect the ETF’s defensive names, he noted.

The ETF, which charges a 0.37-per-cent fee, owns stocks such as Nestle SA and Nippon Telegraph and Telephone Corp. It earned an 11.1-per-cent annualized return for the three years ending March 31.

Dan Hallett, vice-president, who oversees research and portfolio analysis at HighView Financial Group

BlackCreek Global Leaders Fund:

This global equity fund is a “great core holding” and less risky than owning a single-country or regional offering, says Mr. Hallett. The fund, which invests in developed and emerging markets, is overseen by veteran manager Bill Kanko of BlackCreek Investment Management.

The portfolio, which holds 25 to 30 names, has done well longer term, although yearly returns can be a bit streaky, he noted. For 10 years ending March 31, the class A version returned an annualized 7.5-per-cent return versus 6.3 per cent for the MSCI World Total Return Index in Canadian dollars. The fund’s 2.46-per-cent fee is competitive with other advisor-sold funds, he said. Still “investing in stocks involves risk and uncertainty so asset mix [how much is allocated to stocks, bonds and cash] is really the way to control risk.”

Guardian Global Dividend Growth Fund:

This global stock fund, which invests in companies with growing dividends, has a history of “roughly keeping up with the market in good times, but outperforming in really tough markets,” says Mr. Hallett.

Using a quantitative strategy, Guardian Capital screens for companies showing positive fundamental changes and whose stocks are reasonably valued, he said. Top holdings include Bank of America Corp. and Apple Inc. The fund is only available through certain financial planning firms, but the managers also use the same strategy to run BMO Global Dividend Fund sold by Bank of Montreal, and the Horizons Active Global Dividend ETF.

The Guardian fund’s W series, which charges a 1.93-per-cent fee, posted a 10.7-per-cent average annual return for five years ending March 31. The fund requires a minimum $5,000 investment.

Mawer Global Small Cap Fund:

This global small-company equity fund “hit a couple of potholes” last year, but its long-term returns remain very strong, Mr. Hallett says. It posted a 20.9-per-cent annualized return for the five years ending March 31. The fund, which can invest in companies with up to $3-billion U.S. in market value, was hurt last year by the sharply falling stocks of NCC Group PLC and Home Capital Group Inc.

Smaller-cap companies can be riskier and more volatile, but managers Paul Moroz and Christian Deckart of Mawer Investment Management don’t bet the farm on any macro-economic theme, Mr. Hallett noted. The managers look for the investment merits of growing businesses trading at reasonable prices, he said. The series A fund, which charges a 1.8-per-cent fee, requires a minimum $5,000 investment.

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