Shake the urge to chase winners
Go out on a limb. Buy a loser.
Turning the opposite direction down a one-way street takes a lot of guts. While that's a dangerous move when driving, going against the flow of traffic can be a smart investing manoeuvre. This RRSP season, there are three types of investments that advisors and investors should consider for some new money this RRSP season. But they're not pretty recent performers.
Foreign equity funds
Over the past three years, overseas stocks have returned just 2.1% per annum. Over five years, they've lost 4.6% annually. Global stocks, which include the U.S., look even worse thanks to a sagging greenback. Other types of stocks - namely Canadian issues, including income trusts - have performed much better over the past few years.
Data from the Investment Funds Institute of Canada (IFIC) show that the broad group of foreign equity funds (which encompasses many categories) is the most unpopular class of funds. Last month's net redemptions of more than $658 million was the worst on record - both in dollars and percentage terms. Since July 2002, investors have yanked more than $6 billion from foreign funds. More detailed data from IFIC indicates that global, European and other overseas stock funds are feeling the brunt of the red ink.
Investors' dislike for foreign stocks has even penetrated Canadian stock funds, as "Pure" funds attracted $51 million in December, while those holding a healthy dose of foreign content saw more than $400 million walk out the door.
I have to admit that given investors' poor timing in the past, that sales trends alone cause me to look favourably upon foreign stocks. But when the fundamentals are examined - namely that overseas stocks are notably cheaper than in North America - it makes the class look all the more attractive.
Not counting multiple versions, my firm's recommended list contains just thirteen global funds, six international funds, and just six other foreign (non-sector) funds.
Health care funds
Suspected heart risks from the world's two best selling pain killers - Vioxx and Celebrex - clobbered the stock prices of the worlds largest pharmaceutical companies during 2004. Just half of health care equity funds tracked by Morningstar Canada's Paltrak software managed to stay above water, with no fund touching double-digit territory. Hence, investors have also been pulling money from this fund category.
And while this type of specialty play isn't for everybody, it should be considered for a modest position in more growth-oriented portfolios willing to hold for several years. There are just three health care funds on my firm 's recommended list.
GARP equity funds
The broader group of portfolio managers that seek to pick up quality companies at reasonable prices (GARP - growth at a reasonable price) have not fared well during the 2003-2004 market recovery. Funds managed by Trimark and CI's Harbour team, for instance, have managed just modest returns; while growth managers and stricter value investors have fared much better.
But quality managers like those above and others like Mawer Investment Management, Harris Associates, and Thornburg Investment Management should never be counted out. They are quality managers that will eventually be back in favour. If you wait until they hit a good streak, you'll be too late.
Research Feature: Big Funds To Dump Today
Want to know which funds to dump? That's the sort of advice that's all too rare in the fund industry. However, our latest quarterly report provides just this sort of research. Combining DH&A's rigorous qualitative manager research with old-fashioned number-crunching, this 'top ten' sell list is uniquely positioned to help advisors tighten up sagging portfolios.
To purchase this report visit www.danhallett.com
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at firstname.lastname@example.org
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