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Undiscovered Value
The Mawer Canadian Equity Fund


Long-time readers of the Canadian MoneySaver magazine know that, over the long term, mutual fund fees matter. Frugal investors should, therefore, make every attempt to minimise fees. This means looking for funds that have a low Management Expense Ratio (MER). It also generally means funds that don't charge a sales fee of any kind (i.e. no-load funds). Some discount brokers will waive the sales fee though. E-Trade Canada, which charges no load fees for mutual fund transactions, is an example. So, if you can buy them without paying the sales charge then load funds with a low MER are certainly worth a look.

For context, the average actively-managed Canadian equity fund charges an MER of about 2.5%. However, to get a sense of really inexpensive funds, let's set the bar slightly higher and look for funds that charge no more than 2%. This is not to say that funds that charge more are necessarily bad, but simply that they are expensive in comparison. A quick survey of existing Canadian equity funds reveals that those that meet this criterion are few in number.

Three examples of good no-load Canadian equity funds with attractive MERs are the Philips, Hager & North Canadian Equity fund, the Leith Wheeler Canadian Equity fund, and the Saxon Stock fund. The fund families of which these funds are members generally feature lower than average fees. In what follows, I take a closer look at the Canadian Equity fund offered by Calgary-based Mawer Investment Management, which also offers an entire family of low-fee funds.

Mawer Canadian Equity Fund

Over ten years, this fund has outperformed the average Canadian large-cap fund by an average of about 2% annually. Over the last three years, as the tech bubble burst, the fund managed to hang on to most of its gains. In part this is because the fund started to sell its Nortel stake in 2000 well before the stock peaked. More recently, the generalised slide which drove down the markets through this fall has hurt the fund to a small extent. In 2002 it is down 2.2% to the end of November, which is nevertheless a strong showing compared to the 15% loss of the S&P/TSX 60.

Managed by Jim Hall and Martin Ferguson of Mawer Investment Management, the fund invests in common shares of Canadian companies with more than $500 million in market capitalisation. These managers select stocks using a growth at a reasonable price (GARP) style with a value bias. The focus is on selecting money-making companies that are undervalued, and that are in the right part of their business cycle. Once purchased, stocks are generally held for the long term. (Recently this has meant an average of four to six years for this fund.)

The managers also emphasise broad diversification to reduce risk. For example, as a general rule, the fund will restrict an individual stock's weighting in the portfolio to be no more than 5%. A 20% guideline is in place for individual economic sectors.

At the end of November the fund's top three sectors were financial services, materials, and energy. Thirty stocks were held in the portfolio, of which the top-three were Royal Bank (RY), Bank of Nova Scotia (BNS), and Petro-Canada (PCA). The fund also held a 1.8% cash position. Recent big moves include the elimination of a position in Bombardier (BBD.B) and a 50% reduction of the Enbridge position (ENB). At the same time, existing positions in AGF Management Ltd. (AGF.B) and Ensign Resource Service Group (ESI) were substantially increased.

Recently, the fund's managers haven't found any good new selections in the Canadian stock universe beyond the current holdings. Cash inflows have therefore been used to add small amounts to existing positions throughout the year. However, according to the managers, this has not led to any significant increase in the fund's turnover. The fund's historically low turnover reflects the managers' commitment to choosing stocks that can be held for the long term.

One issue of note concerns the minimum investment level. The fund can be purchased through dealers or brokers with a $5000 minimum initial investment. However, to purchase it directly from Mawer that minimum rises to $25,000 for residents of Alberta and Saskatchewan, and to $100,000 for those in British Columbia, Manitoba, and Ontario. Residents of other provinces have no option but to go through a dealer.

The Mawer Canadian Equity fund offers a record of solid long-term performance and a conservative approach focussed on undervalued money-making companies. With a low MER of 1.5% and no sales charge, it is a good candidate for those investors seeking conservative growth.

Remember that any money paid in fees is money that isn't working for you. Over the long term this recurring cost will have a significant impact on your gains. Therefore, whether investing in actively-managed funds such as the one discussed here or letting an index guide your returns, it is in the best interest of the frugal investor to keep such costs to a minimum.

Carl Wolfe, Ph.D.

January 2003

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