We don’t hear a lot of talk about mutual funds these days. The critics say it’s an outdated industry, plagued with expensive fees, underperforming products and high-pressure sales tactics. ETFs are the future, offering low costs, liquidity and transparency.
There’s just one problem with this scenario. Canadians have about $1.4-trillion invested in mutual funds. The total for ETFs is $164-billion. Clearly, mutual funds and their performance still matter to a lot of people.
So, here are four mutual funds that I like right now. All offer stability and above-average performance. Yes, the fees are higher than those of ETFs. But in these cases, you’re getting the quality you’re paying for.
Beutel Goodman American Equity Fund D Units (BTG774)
Background: This fund focuses on large-cap U.S. stocks. It is conservatively managed, so its risk rating is better than average.
Performance: The fund is one of the better performers in its category, despite the below-average risk. Over the three years to Feb. 20, the average annual return was 12.2 per cent. The 10-year average annual return was 15.1 per cent.
Portfolio: The fund is almost fully invested with only a 1.7-per-cent position in cash. Top holdings include Verizon Communications Inc. (6.2 per cent of assets), Oracle Corp. (5.6 per cent), Omnicom Group Inc. (5.5 per cent), American Express Co. (5.4 per cent), and AmerisourceBergen Corp. (5.2 per cent). Technology stocks account for 17.2 per cent of the assets, with financial services at 16 per cent and consumer cyclicals at 13.7 per cent.
Key metrics: The fund was launched in March, 1991, and has assets under management of $1.4-billion. The management expense ratio is 1.5 per cent, low for a U.S. mutual fund. Minimum initial investment is $5,000.
Tax efficiency: Excellent. In 2017 and 2018, more than 95 per cent of the distributions were received in the form of capital gains. However, the proportion can change from one year to the next.
Outlook: As long as the U.S. market remains strong, this fund will continue to generate good results. When markets slump, the defensive nature of its management should minimize any losses. This is an excellent choice for a long-term, conservative investor who wants exposure to U.S. large-caps.
Fidelity Canadian Balanced Fund B Units (FID282)
Background: This is a true balanced fund with about 49 per cent of its assets in bonds and cash and the rest in stocks. The fund’s conservative approach makes it appropriate for low-risk investors.
Performance: We have monitored this fund for more than a decade and the results have been pretty much as expected – stable returns, with no big ups or downs. The average annual return over the past 10 years is 7.8 per cent, very acceptable for a low-risk fund of this type.
Portfolio: The stock portion is 75 per cent in giant or large-cap stocks, including companies such as Canadian-Pacific Railway Ltd., Toronto-Dominion Bank, Royal Bank and Suncor Energy Inc. This is almost exclusively a North American portfolio with 78 per cent of the assets in Canada and 19 per cent in the United States. On the bond side, 80 per cent is investment grade (rated triple-B or better).
Key metrics: The fund was launched in 1998. It’s a mega-fund, with $6.3-billion in assets under management. The MER is 2.05 per cent, which is not cheap, however the fund’s long-term results make it acceptable. The minimum investment is $500.
Tax efficiency: The fund only makes one annual distribution, in December, and the amounts vary greatly. However, they are tax efficient. The 2018 distribution of 53 cents a unit was almost equally divided between capital gains and dividends.
Outlook: More of the same. This fund has been a consistent performer over many years and there’s no reason to expect any change. It will never deliver outsize returns but neither will it hit you with big losses.
Leith Wheeler Canadian Equity Fund B Units (LWF002)
Background: Leith Wheeler is a small Vancouver-based company that focuses on high net worth investors. This fund invests primarily in large-cap Canadian stocks.
Performance: The latest year was somewhat rocky, with the fund down 5.3 per cent over the 12 months to Jan. 31. However, the three-year return is much better at 9.9 per cent annually. That’s the same rate as the 10-year results. Over the past decade, the fund has been profitable for seven years and lost ground three times.
Portfolio: The top three holdings are major banks (Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia). Other companies in the top ten include Toromont Industries Ltd., Canadian-National Railway Co., Saputo Inc., Brookfield Asset Management Inc. and Constellation Software Inc.. The portfolio is almost fully invested, with only 0.25 per cent held in cash.
Key metrics: The fund has $2.9-billion in assets under management. That is impressive for a small, Vancouver-based boutique house with a $25,000 minimum investment requirement. The MER is 1.49 per cent, which is low for a Canadian equity mutual fund.
Tax efficiency: Distributions are paid annually and vary considerably from year to year. In 2018, the fund paid out 68 cents per unit, 40 cents of which were capital gains and the rest eligible dividends.
Outlook: The fund is off to a good start in 2019 with a gain so far of about 12.35 per cent (to Feb. 21). That almost compensates for the 12.8-per-cent decline in 2018. This is a good choice for a high net worth investor looking for a well-managed equity fund. Note that it is not available to retail investors east of Ontario and in the Territories.
Mawer Canadian Equity Fund (MAW106)
Background: This is a pure Canadian equity fund run by Calgary-based Mawer Investment Management whose motto is: “Be Boring. Make Money."
Performance: This fund may indeed be boring, but it sure has been profitable. Over the past three years, it has gained almost 9 per cent annually (to Jan. 31). The 10-year average annual compound rate of return is 13.1 per cent.
Portfolio: The focus is on mid- to large-cap companies, with only a smattering of small-cap stocks in the mix. Top holdings include Royal Bank, TD Bank, CP Rail, Brookfield Asset Management and Telus Corp.
Key metrics: The fund was launched in 1991 and has $3-billion in assets under management. The MER is 1.17 per cent, very low for a Canadian stock mutual fund. The minimum initial investment is $5,000.
Tax efficiency: This is not a fund to hold in a non-registered plan. Distributions are made annually, and they are usually fully taxable. Keep this one in an RRIF, RRSP or TFSA.
Outlook: This fund has been a remarkably stable performer. It lost 9.8 per cent in 2018, which was only its second down year in the past decade (the other was a 0.27-per-cent decline in 2015). This one falls into the “invest-it-and-forget it” category.
This is just a small sampling of the quality mutual funds that are available. It’s not time to write them off your list just yet.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.