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Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
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Q2/5 Trimark Canadian
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Trimark Canadian
During the past twenty years the SC class of the Trimark Canadian fund has yielded an impressive average annual return of 10.09%. A suitable benchmark for the fund is a mix of 70% of the S&P/TSX Composite Total Return index and 30% of the S&P 500 Total Return index (in Canadian dollars). During the same period the benchmark returned an average of 10.03% annually, essentially on par with the fund. In the shorter term, the fund returned 7.28% annually over the past five years compared with the benchmark's 1% average annual loss, which was driven in part by the rise of the Canadian dollar. The fund's respectable performance in a difficult market was achieved under the direction of Ian Hardacre, who has managed the fund since 1999. Taking a bottom-up approach, Mr. Hardacre follows a value-oriented growth-at-areasonable- price (GARP) style to select stocks for the fund. Mr. Hardacre's ideal company has a strong balance sheet, a clear competitive edge within its industry, and a management team whose strength and long-term commitment to shareholders is unquestionable. Besides a strong underlying business, Mr. Hardacre also looks for a stock that is a bargain on the basis of its discounted expected free cash flow. Mr. Hardacre also points out that his approach sometimes takes on a contrarian flavour, and he emphasizes that he does not seek to match the fund's performance to any particular index. Indeed, the fund's three-year average correlation to the S&P/TSX Composite index, is a low 0.87. Such a low correlation is welcome support for the manager's claim that the fund doesn't seek to track the index. The fund usually holds no more than fifty to fifty-five stocks, ten to fifteen of which are foreign. In addition, the fund normally holds cash in the range of 5% to 8% of assets for flexibility. Once a stock is purchased it remains in the fund for about two years based on the fund's 50% average turnover. This time scale is consistent with Mr. Hardacre's stated long-term outloook. He indicates that only about four to five major changes are made to the portfolio each year. Mr. Hardacre also points out that the fund's recent turnover is, in fact, higher than he would like, being driven up by the Canadian stock market's strong cyclical component. Taken in aggregate the fund's portfolio was attractively valued compared to the S&P/TSX Composite index at the end of the second quarter. It's 4.5% earnings yield, which corresponds to a price-to-earnings ratio of 22.2, was slightly lower than the index's median earnings yield. On the other hand, it sported a much more attractive 1.9% dividend yield and a comparatively low price-to-book-value ratio of 1.8. All in all, the portfolio's properties are consistent with the fund's GARP style. The fund held about 53 stocks at the end of the quarter as well as a 6.9% cash position. Its top three sectors were financials, consumer stocks, and industrial stocks which together represented over 60% of the portfolio. The fund's top three stocks were TD Bank, The Bank of Nova Scotia, and The Thomson Corporation. During the first half of the year the fund was moderately active, adding to its Vincor position while selling Alliance-Atlantis and locking-in profits in Telus. It also sold energy stocks and reduced its energy holdings from 10% down to 5% of assets. Going forward Mr. Hardacre sees few good opportunities in the Canadian market that are not dependent on the price of energy, and in particular of oil. As already noted, he is not a great fan of cyclical stocks. In such a climate Mr. Hardacre admits that the removal of foreign investment restrictions on RRSPs may lead him to slowly increase the number of U.S. and international stocks in the portfolio to take advantage of better opportunities abroad. At the very least, he suggests, the move will raise the bar for Canadian stocks. Asked to name his favorite pick of the last few years, Mr. Hardacre points to Telus, which the fund has owned for many years despite a negative mainstream outlook. He takes some satisfaction in noting the stock's 'great' performance and that, in this case at least, the crowd was wrong. Marsh-Maclennan gets the nod for the stock that has most disappointed. The company looked good on paper but in fact fell well short of those expectations. It did well until the revelation of accounting irregularities and a subsequent investigation. Although not the fund's worst performer, it was the biggest disappointment relative to expectations. Going forward, Mr. Hardacre explains that the performance of the Canadian stock market will be tied to energy prices. In particular, the response of the broader economy to rising prices will be the key. Charging a low 1.64% management expense ratio (MER), the SC class of the Trimark Canadian fund is available everywhere in Canada through dealers and brokers for a $500 minimum investment. It is also, frankly, unusual among big-name funds. Indeed, its MER is the lowest of all load-carrying, open-ended, and activelymanaged Canadian growth funds. This situation appears to be mostly a result of the Series SC units of the fund paying only a small 0.3% trailer fee to advisors compared, for example, with the 1% trailer paid by the Series A units of the fund, which in turn charge a much higher 2.5% MER. Readers should note that Series SC and Series A units of the Trimark Canadian fund also differ in that SC units are available only through a frontend sales charge option. As usual, frugal investors should purchase any load fund through a dealer who will waive the load. For a low fee the Trimark Canadian-SC fund offers value-oriented and occasionally contrarian stock-picking that clearly distinguishes itself from the index. With an enviable track-record the fund is worthy of consideration as a core holding by moderately aggressive investors. FF: Q2 2005 |
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