John DeGoey, Portfolio Manager, Industrial Alliance Securities answers your questions about Risks in a TFSA vs an RRSP, his fixed income recommendation, cash weightings in a portfolio, and his thoughts on analyst price targets.
The average mutual fund sold in Canada, regardless of asset class or time span, underperforms its benchmark index, according to the fund tracking website Globefund.com.
Some funds, however, consistently beat their benchmark indices year after year. They have three things in common: low fees, a low profile, and … well, they're boring.
"If you want some excitement you can go to Las Vegas and play the craps table. Investing at its core should be boring," says Vijay Viswanathan, director of research at Mawer Investment Management in Calgary. He co-manages the Mawer Canadian Equity fund, which has posted an annual average return of 10 per cent over the past 20 years, compared with 5.8 per cent for the average Canadian equity fund and 7.2 per cent for the benchmark S&P/TSX total return index.
"We think very long-term when it comes to investing, and we have avoided some of the fads or torpedoes. It's sort of a win by not losing," says Mr. Viswanathan.
Mawer's official mantra is "be boring, make money." The firm achieves that objective by only buying stocks that pass three basic tests: good businesses, good managers and bargain prices.
"Buy high quality businesses run by excellent managers and don't overpay for those assets. It's not rocket science," Mr. Viswanathan says. "It's very simple in theory, but I think it can be very difficult to implement in reality."
On the surface, the Mawer Canadian Equity fund's top holdings look much like those of any other Canadian equity fund: big Canadian financial companies, railroads and energy firms. But Mr. Viswanathan says it's the smaller companies that have contributed to strong long-term returns. "We have had a significant number of names in the portfolio over time that are not large weights in the index and have done quite well."
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One smaller company that has helped lift the portfolio is Constellation Software Inc., which saw its stock climb 165 per cent since May of 2014. Other holdings are manufacturing service supplier CCL Industries Inc., up 700 per cent since November of 2012, and food manufacturer Saputo Inc., up 400 per cent since February of 2009.
Investors in the Mawer Canadian Equity fund are also rewarded with an annual fee, or management expense ratio (MER), of 1.2 per cent. That's well below the average Canadian equity fund fee of about 2.5 per cent. The minimum investment is $5,000.
Mr. Viswanathan says he's looking at bargains in the energy patch as low commodity prices push producers to cut costs. Whatever his team decides, don't expect any change in strategy, he says: "How we're going to do the next 20 years is very similar to how we did the last 20 years."
Another silent star among U.S. equity funds is the North Growth U.S. Equity fund. Over the past 15 years the fund has generated an 8.6-per-cent average annual return while the average U.S. equity fund grew only 3.2 per cent, and the S&P total return index gained 5.5 per cent (in Canadian dollars).
"We do zero marketing. We don't have a sales department. We are focused on long-term growth," says Rory North, chief executive officer and lead portfolio manager of North Growth Management Ltd. in Vancouver. Low operating costs mean investors with the $150,000 minimum initial investment requirement are treated to a 1.2-per-cent annual fee.
The strategy behind the North Growth U.S. Equity fund is to find stocks and sectors with the ability to grow revenue. From there it's a matter of finding those stocks trading at low prices – even if it takes time. "We have a long-term focus when we're selecting securities, and we simply stick to our growth-at-a-reasonable-price discipline," he says.
Mr. North says the fund's success, and the success of the broader markets, have created a problem anyone would love to have: high stock valuations. "Right now it's a challenge. There's been a very broad-based recovery in the market since 2009. Everything has gone up. There's no obvious area of really attractive valuations," he says.
As a result he's been trimming some of the fund's core holdings, which include technology giants Cisco Systems Inc., Apple Inc. and Microsoft Corp. He says the cash weighting of the portfolio, which is normally fully invested, has crept up to 8 per cent. "The trims or sells are piling up faster than the buys," he says.
Markets outside the United States have not advanced as quickly. European and emerging-market equities have lagged over the past two years, but that hasn't held back the Leith Wheeler International fund, which has posted a 7.6-per-cent average annual return over the past 15 years. In comparison, the average international equity fund has advanced 3 per cent and the benchmark MSCI EAFE Total Return index has advanced 5 per cent in Canadian dollars.
"We're definitely still finding pockets of value," says Michael Job, vice-president and portfolio manager at Leith Wheeler Investment Counsel in Calgary.
Top holdings in the fund include Swiss pharmaceutical giant Novartis AG, U.K.-based HSBC Holdings PLC and French energy multinational Total SA.
The Leith Wheeler International fund is sub-advised by Toronto based Sprucegrove Investment Management, value-focused investors with $20-billion in global equities under management. "They invest bottom up, company by company, placing a very high degree of emphasis on the quality and valuation of the companies they own," says Mr. Job.
He says Sprucegrove's deep pockets allow the fund to keep the annual management fee down to 1.63 per cent while covering a lot of ground to find the best bargains.
"If they can't meet with management from their offices in Toronto, their analysts will go to Japan or Brazil or Europe to meet with the companies or customers or suppliers to get what they feel is a comprehensive understanding of the business beyond what you can just glean from the financial statement."
The Leith Wheeler International fund targets high-net-worth investors with a $500,000 minimum investment requirement.