Relax: Your mutual fund manager probably caught the rally in banks and life insurers.
The median Canadian equity and large-capitalization equity mutual fund had 16.6 per cent of their assets riding on financial services shares at last report, which is in line with the sector's weighting of about 16.4 per cent in the Toronto Stock Exchange 300-share index.
That's good news for investors because banking and life insurance stocks are on fire amid signs that the U.S. Federal Reserve Board is done with its current round of interest rate increases, which began in June, 1999.
Stable interest rates traditionally bolster financial companies such as banks because they reduce the cost of loans, stimulating demand. And falling rates also ignite stock markets, an increasingly important source of "wealth management" revenue.
Stung by painful memories of problem loans, the banks have improved the quality of their asset portfolios in recent years, says Alastair Dunn of investment manager Connor Clark & Lunn Investment Management, which runs the $768-million Ethical Growth Fund. "I don't think they're going to have the big wallop we've seen" in the past.
The TSE's index of financial services shares, which also includes surging mutual fund company stocks, has gained 14 per cent since the end of July and 31 per cent this year.
Recent beneficiaries include Mackenzie Financial Corp.'s $461-million Industrial Horizon Fund, which had a heavy 26 per cent of its assets in financial stocks at the end of June.
The fund gained 21.6 per cent in the six months ended Aug. 31, compared with 17.5 per cent for the average large-cap Canadian equity fund.
The climb in financial stocks has now increased the fund's weighting in the sector to just over 30 per cent but manager Bill Procter says he's happy with his finance stocks. "Rates are now starting to come down, or at least they're not going up any more," he said. Meanwhile, banks stocks have been trading at "only 10 or 11 times next year's earnings. . . . It's still a good sector to be in."
The giant Canadian funds run by Phillips Hager & North Investment Management of Vancouver have also thrived on their big holdings of financial stocks, which account for more than one-fifth of the funds' assets.
As of Friday, the $1.1-billion PH&N Canadian Equity had made just over 28 per cent this year, topping the 21.7-per-cent return from the median Canadian equity fund. As of June 30, the fund had almost 28 per cent of its assets in financial stocks.
"We just like the fundamentals of the industry and at the same time we think valuations are quite reasonable," president Tony Gage said.
Some of the gains by mutual fund company stocks have been spectacular: AGF Management Ltd. of Toronto, which is taking over rival Global Strategy Holdings Inc. in a $438-million deal, has seen its shares soar 115 per cent to $25 this year.
Toronto-based C.I. Fund Management Inc. is up 89 per cent at $28.80.
Taking it to the bank
Canadian equity and large cap equity funds, over $200-million, with the largest weighting in financial services
Average
Net Return three-year.Financial
assets this annual services
Fund name ($million) year* return# weighting
AIC Advantage II $3,082.50 +28.2% +7.5% +60.1%
AIC Advantage 2,674.29 +28.5 +6.6 +58.8
Dynamic Infinity Canadian 359.82 +18.2 +5.7 +35.1
AIC Diversified Canada 3,515.93 +22.0 +13.3 +30.7
PH & N Canadian Equity 1,136.73 +28.3 +14.3 +26.7
Industrial Horizon 460.89 +21.2 +4.9 +26.0
PH & N Canadian Equity Plus 445.97 +21.4 +14.7 +25.8
Investors Retirement Mutual Fund 1,944.65 +15.7 -0.5 +24.9
Green Line Blue Chip Equity 421.7 +24.8 +7.5 +21.4
Industrial Alliance Ecoflex A 212.15 +20.1 +5.4 +21.1
Bissett Canadian Equity 768.18 +26.2 +12.1 +20.9
Canada Trust Stock-Inv 1,208.31 +22.9 +11.2 +20.8
Atlas Canadian Large Cap Growth 573.67 +25.6 +10.4 +19.8
C.I. Canadian Growth 963.03 +20.5 +17.4 +19.6
Ethical Growth 768.45 +15.4 +4.8 +19.4
Fidelity Capital Builder 323.59 +28.5 +14.0 +19.1
O'Donnell Canadian Large-Cap 215.09 +24.4 - +18.7
Fidelity Disciplined Equity 1,162.98 +25.6 - +18.6
GWL Canadian Equity (G) NL+ 292.7 +27.0 +14.6 +18.6
Trimark Enterprise 392.47 +19.1 - +18.5
Median Canadian equity and
Canadian large-cap equity fund +21.7 +12.2 +16.6 TSE 300 +32.5 +21.1 +16.1
-*Returns this year are to Friday; #Three-year return is to Aug. 31; +To Sept. 12