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Hidden Gems
Three of the most overlooked Canadian funds

If you look through the pages of Canada's largest business newspapers and magazines, you're likely to come across an abundance of ads boasting the merits and performance of the same mutual funds we all keep hearing about. However, there are many high quality funds that just get shunned by both individual investors and the investment media. Why? My guess is that they're not backed by a big marketing budget and strong distribution network. While marketing shouldn't matter in your investment decisions, mutual fund companies can bombard investors with ads to the point of ignorance when it comes to the industry's lesser-known stars.

Common characteristics

As some of you will have already guessed, the funds featured as "hidden gems" are all no-load funds, none of which are real popular with financial advisors, though they should be. Another important common denominator is that each fund is run by a firm that is best known in the institutional world of investing. That means their focus has been on managing pension money for various companies and the fortunes of some of Canada's wealthiest families. With that "institutional" focus, most of these firms will be unknown to many investors and advisors alike.

Mawer New Canada
(http://www.mawer.com/funds/02ncf.html)

The Calgary-based trio of Martin Ferguson, Jim Hall, and Bill MacLachlan runs this small cap Canadian stock fund using a disciplined, value-conscious growth style. Despite a more than twelve-year record of solid performance, this fund has only attracted about $39 million from Canadian fund investors. This fund has outperformed most of its peers in seven of the last ten calendar years, and has beaten the BMO Nesbitt-Burns Small Cap Index in six of the last ten years. That adds up to outperformance of the category average and the benchmark of 3 and 2 percentage points per year, respectively, over the last ten years. Annual fees (MER - management expense ratio) of 1.59 per cent per year gives this fund a full percentage point head start over its competition, which has an average MER of nearly 2.60 per cent per year. How does this team do it?

At the heart of this disciplined process is intensive fundamental research. For Mawer, that means scrutinizing a company's management, business model, and ability to carry current growth trends in cash flow into the future. In the end, their goal is to find a well-diversified group of about fifty companies that are adding true economic value to shareholders and trading at reasonable prices, in relative and absolute terms. While this is a great fund, bear in mind that it does hold smaller companies and, as such, has an above average level of risk. The average investor probably shouldn't hold any more than ten to twelve per cent of their total portfolios in a fund like this one. If going direct to Mawer, the minimum investment is $100,000 but that drops to $5,000 when bought through a broker, fund dealer, or financial advisor.

Beutel Goodman Small Cap
(http://www.beutel-can.com/funds/small.htm)

Like the Mawer fund above, this is another stellar small cap offering from a well-established money management firm. A younger fund, this gem has been around for five full calendar years so far, and has outperformed most of its peers in four out of five years, and beaten the benchmark small cap index in all of those years. A benefit with firms that are big in the institutional world is that they have a true team-based approach, and Beutel Goodman is no exception. All of the research used in the investment decision-making process is internally generated. While they also practice a blended approach of value and growth, this fund is more growth oriented and a bit more concentrated (fewer stocks and sectors) than the Mawer offering. Low fees (MER of 1.55 per cent), a disciplined team-based approach, and historical performance record make for a compelling argument for including this fund for a portion of a balanced portfolio (up to ten or twelve per cent of the total). The minimum investment is $10,000.

McLean Budden Fixed Income
(http://www.mcleanbudden.com/english/performance/mutualfund.html)

When it comes to choosing a quality Canadian bond fund, there are two key ingredients for which to look - low fees and great management. While fees on a growth-oriented equity fund shouldn't be your most important criteria, they should be near the top when choosing more conservative investments like income-oriented funds. As for great management, that's been discussed in detail many times in this space - a true team based approach that is consistent among all individual team members. Going by these two key factors, this fund earns high marks for its low MER of 0.70 per cent and its large and highly skilled investment team. Investors should not forget to include bonds for a portion of their portfolios and this fund is one of the best in its category. McLean Budden's approach has been proven in its ability to beat most of its competition in eight of the last ten calendar years. Also, it trails the Scotia McLoed Universe Bond Index by just a half of one percent per year over the last ten years. The minimum investment is $10,000.

Don't let advertising drive your investment decisions. Rather, develop your strategy based on your needs and expectations. Then implement that strategy prudently using quality investments, such as the ones featured above. If you invest through a discount broker or fund dealer, you should have access to these fine funds. If you rely on the advice of a financial advisor, don't be afraid to ask about these funds just because they are technically classified as "no load". Your advisor may not know about them but you can ask. Besides, each pays a trailer fee to advisors who recommend them to their clients.

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 dha@danhallett.com
 
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