Mutual fund sales could soar to record levels this year, some strategists are boldly predicting. The question is, will investors have the courage to step out of the cozy comfort of their money market funds?
More than $60-billion is resting in such safe havens in Canada alone.
Analysts are urging investors to venture out of money markets and into stocks, hedge funds and international economies.
Raynor Burke, an analyst at National Bank Financial Inc., believes markets in 2002 could be volatile, but not as crazy as they were in 2001.
"You can bet your bottom dollar it won't be like last year."
Mr. Burke said that mutual fund companies could have a tough time selling funds in 2002 when investors take a look at 2001 performance numbers.
"It will be tough for them to be aggressively courting the money, but I think history is on their side and market wisdom will be on their side."
The analyst points out that people who buy into funds now will be getting a better bargain, for the most part, than people who bought in 12 months ago.
"It really pays to be invested at the end of a recession or end of a downturn."
In 2002, Mr. Burke believes the market will favour managers who can leave the index aside and find the best-performing stocks. Indexes have been volatile recently, he points out, but historically, companies have posted long-term annual growth rates of about 5 to 7 per cent.
Investors who want to beat that 5-per-cent return will have to look beyond passive investing and choose a manager with a knack for picking the winners, Mr. Burke believes.
"It's going to be very important to make good sector bets -- but it's going to be particularly important to know the companies within that sector."
Mr. Burke also expects to see a swing back to mutual funds that emphasize growth stocks, as beaten-down value stocks attract more of investors' money.
"A lot of the value plays are getting a little outside their valuations."
Mr. Burke notes that some value managers are actually finding bargains among stocks that would traditionally fall into the growth camp.
He likes Templeton Canadian Stock Fund, for example, because manager Peter Moeschter has been trimming some defensive holdings and moving into some of the technology names that could provide added horsepower in coming months.
Mr. Burke said the Templeton team did some "judicious" buying of names such as Nortel Networks Corp., ATI Technologies Inc. and GSI Lumonics Inc. when the stocks were more reasonably valued.
"They didn't necessarily choose these same names when they were stratospheric."
For investors who want to aim their money at a particular niche, Mr. Burke expects health care to continue to be hot. He notes that portfolio manager Martin Hubbes, for example, who manages the highly rated AGF Canadian Stock Fund, has moved holdings into such names as Genentech Inc., Pfizer Inc. and Bristol-Myers Squibb Co.
Meanwhile, the analyst recommends that investors avoid utilities and the energy sector.
"It's going to be a long time before demand picks up for resources."
Investors who want to sit on the fence for a while could take a look at the Mackenzie Managed Yield Fund, Mr. Burke said, which he calls a "tax-advantaged cash substitute." The fund won't shoot the lights out, he cautioned, but it does provide a balanced stream of return and offers distributions classified as capital gains.
Mr. Burke also thinks 2002 could be a good year to invest in a labour-sponsored venture capital fund. In addition to tax advantages, the funds have the potential to offer a good rate of return in the coming year because many of them were so badly hammered by their exposure to technology, the analyst said.
Mr. Burke likes the labour-sponsored funds offered by Covington Capital Corp. because the managers are extremely thorough in their research.
He notes that 2001 was "the year of the hedge fund" because the category was one of the few to offer good returns. The funds, which sometimes use alternative strategies such as selling stocks short, are traditionally volatile and are suitable for only 10 per cent of an investment portfolio, Mr. Burke cautions.
The analyst acknowledges that just the term "hedge fund" would strike fear into the hearts of many investors, but for those who want a hedge fund and can afford the stiff $150,000 minimum investment, Mr. Burke recommends the Goodwood Fund, which posted a one-year return of 39.7 per cent for the year to Nov. 30. The fund is more conservative than many of its peers, the analyst believes.
Investors who have a lesser amount to invest could consider the Argentum Canadian Long/Short Equity Portfolio Fund, which has a minimum investment of $500, Mr. Burke said.
He said the past year has shown that hedge funds can even out returns more effectively than the standard strategy of diversifying by geography.
"Lo and behold, holding technology in Europe and holding technology in the United States looked remarkably similar."
James Gauthier, an analyst for Fundmonitor.com., believes a mixture of good and bad news in recent economic data is a harbinger of a turnaround.
"Generally, when you see mixed signals like this, it's usually a sign that you could be moving from recession into recovery."
The analyst said the past nine recessions suggest that the market bottom typically occurs about five months before the economic bottom. If stocks bottomed in September, as many market watchers believe, that would put economic recovery in late February.
Investors with cash sitting in money market funds should consider putting that money to work in stocks, he believes. An economic upturn would favour growth stocks over value, Mr. Gauthier contends.
He adds, however, "I'm not saying they should throw caution to the wind, because there's still uncertainty out there."
Dollar-cost averaging is a good strategy for the average investor, he said, because it allows people to put money into the market in regular increments.
Mr. Gauthier believes a fund such as the CI Landmark American should do well because manager Derek Webb looks for earnings momentum. Price momentum in the stocks will follow as the recovery crystallizes, he adds.
Mr. Webb has lowered his cash holdings from 43 per cent on Oct. 31 to 20 per cent on Nov. 30, Mr. Gauthier notes, which suggests that the manager has been taking positions in stocks that he thinks are poised to take off. The remaining 20 per cent in cash means the manager still has some money to play with, he adds.
Mr. Gauthier also likes the prospects for Warren Lammert, manager of the Janus American Equity Fund. Mr. Lammert's growth bias should serve him well as markets turn, the analyst says.
For a Canadian growth fund, Mr. Gauthier ranks the Mackenzie Universal Future Fund and its manager John Rohr among his top picks. The fund offers a diversified growth portfolio with less risk than some other funds, in Mr. Gauthier's opinion.
Analyst Dan Hallett of Sterling Mutuals Inc. in Windsor, Ont., believes fund investors want to see a category do well before they put their money into it. Therefore, the cash currently sitting on the sidelines will likely end up chasing the hot performers.
"Relatively short-term performance tends to drive sales."
He notes that investors started piling back into science and technology funds in October and November, for example, after the stocks started to rise.
Mr. Hallett believes investors should ignore the latest trend and keep their core holdings in value-oriented funds.
"That style has more consistent returns over the very long term," he said.
Mr. Hallett points to such names as the CI Harbour Fund managed by Gerald Coleman and the Mackenzie Cundill Value C managed by value investing legend Peter Cundill.
Mr. Hallett acknowledges that value funds went through long periods of stagnation during the 1990s. Investors who feel impatient with their lacklustre value funds when growth is in favour might want to put a small portion of their assets in growth stocks, he concedes.
"Having a bit of growth could make you feel better."
Mr. Hallett adds that investors should have international exposure. Emerging markets are volatile, he says, but they deserve a place in most portfolios.
"Better to be a bit early than to join the party after it's over."
Mr. Hallett says he had high hopes for Europe last year and -- for the most part -- those hopes did not pan out. But he continues to like Spectrum European Growth and the stock-picking abilities of its manager, Edoardo Mercandante.
Mr. Hallett also names Mawer World Investment Fund as one of his top recommendations. Manager Gerald Cooper-Key does a good job of blending growth and value, the analyst believes, and the fund's fees are relatively low.
Steve Kangas, an analyst at Fundlibrary.com, believes that investors will continue to tilt toward value investing until they see strong evidence of a turnaround.
"Until they see some traction in the market, I think they're just too nervous."
Charles Brandes, who manages the highly rated AGF International Value Fund, and Mr. Cundill will likely continue to draw money, he believes.
Mr. Kangas adds that a quest for income could favour funds such as the Clarington Canadian Income Fund or the Stars Income Fund offered by Middlefield Group.
The analyst also expects investors' fascination with hedge funds to continue.
He points to Mackenzie Alternative Strategies as a relatively conservative bet in that category because it has a team of managers.
"It's a good place to start."
Oh, and be prepared to put away more cash in order to meet financial goals, he advises, as stock markets settle down to more conservative returns than we saw in the 1990s.
"You're going to have to save more."
Over all, Mr. Kangas believes that investors shouldn't even try to determine the direction of financial markets at the moment.
Balanced asset allocation and diversification are still key, he believes.
"The only thing that makes any sense fundamentally is to sit down and have a really good portfolio."