Where do we go from here?
Top choices for your RRSP
The year 2000 gave stock investors one of the wildest rides in years as we saw market peaks in addition to numbing losses. Since the year appears to be ending on a sour note, many investors find themselves in a quandary when it comes to investing additional money. RRSP season, when most people top up their contributions, is fast approaching so here are my top choices for this year's contribution.
Over the past couple of years, aggressive investors have piled into high tech stocks and mutual funds. However, despite the staggering losses in technology stock prices this year, the outlook isn't all that great. In last week's article, we talked about how a slowdown in capital spending, bulging inventories, and still high valuations add up to significant risk over the next few years. Instead, aggressive investors may want to focus their attention elsewhere.
Though I'm not a fan of buying up a bunch of sector-specific funds, the fact is that aggressive investors can't resist the temptation to make some bets in their portfolios - despite warnings to the contrary. So, for those looking to make some portfolio bets, stocks and funds investing in financial services, defensive sectors (food, drugs, alcohol, and tobacco), and Europe may be worth a look.
Fidelity Focus Financial Services
Despite a bit of upward pressure on interest rates early in the year, this fund (along with other funds heavy in financials) just took off. Though it sounds odd, financial services stocks have done well for two reasons. The sector hadn't really recovered since the decline of 1998 and were trading between 7 to 9 times earnings - very cheap. Another factor was the expectation that rate rises had been nearing completion by the end of 1999. As it turns out, that's exactly what happened and many are calling for falling rates next year. Personally, I doubt that it will happen before the second half of 2001. Though financial stock prices have done well this past year, falling rates should be good news for this sector and this fund - which is predominately exposed to big cap US financials. Using Fidelity's traditional blended approach of growth and value, this fund has put up impressive numbers since its debut about four years ago.
If it's passive exposure you want to this sector, there are a few choices. As for Canada, Barclays will be launching its iFin fund in February - which will hold the biggest financial services stocks in the TSE 300. Alternately, you can look to the US for even more choices: Merrill Lynch's Bank Holders (RAH), Barclays Financial ushers (IPG and IF), and State Street's Spider Financial (ELF). If you go the US route, just make sure you factor the potential US estate taxes into your decision.
AIM Global Health Sciences
Though it's been through many name changes over the years, this fund's investment strategy has been consistent throughout. John Schroer runs this relatively conservative offering, which has historically focussed on pharmaceutical stocks. However, Schroer has been taking profits in the stellar performing pharmaceutical sector and redirecting the proceeds into biotechnology stocks with good growth potential. There is lots of appeal to a fund run by a team focussing on health science, invested in relatively defensive sectors, and with a deep a strong team of analysts. The biggest risk here is government policies relating to medical care.
Spectrum European Growth
Europe is an interesting region right now for a few reasons. Economic growth is moderately strong - but low enough to skirt inflation worries. The currency appears to be stabilized and is poised to strengthen. Global perception of the region is improving. Finally, tax reform was introduced at just the right time in countries like Ireland and Germany. There are always negatives to consider but Europe appears to have more positives in its favour. As such, this fund is a great choice.
Edoardo Mercandante of Mercury Asset Management is in charge of this Spectrum offering. Mercandate is a growth manager first and foremost. However, he won't pay lofty prices for stocks and also uses valuation as a main part of his sell criteria. The focus is on small-to-mid cap stocks in developed Europe (market cap under US$4 billion), along with a mix of larger and smaller companies in emerging Europe (maximum of 15 per cent). The approach emphasizes stock selection rather than on picking the best country in which to invest. The approach has worked well as the fund has outperformed most of its peers and the index. Another bonus: unlike most European funds that focus on larger stocks, this fund will nicely complement your other global and international stock funds.
If you're a conservative investor, the above three funds may not hold much appeal. However, there are more conservative ways to benefit from some of these trends. For instance, if you do expect falling rates but don't feel comfortable betting specifically on the sector there are a couple of ways to position your portfolio.
On the equity side, Canadian dividend funds which invest in common stocks are a good choice. They typically hold a core of financials and utilities, while diversifying the remainder among the country's largest companies. Don't expect these funds to throw off much income since yields remain low. Rather, this type of fund would be considered a conservative growth fund. Top picks in this category include Phillips Hager and North (PH&N) Dividend Income, Standard Life Canadian Dividend, and AGF Canadian Dividend.
All three are great picks but each is a bit different. PH&N's offering tends to trade more frequently than the other two (100+ per cent vs. 25 per cent). While PH&N and Standard Life each hold between 40 and 50 per cent in financial stocks, the AGF fund is more diversified due to its more flexible mandate. But all will have a value bias since these dividend funds, by definition, won't hold really pricey growth stocks - which typically pay little to nothing in dividends.
For Global equities, my top choices include Templeton Growth (see my December 15, 2000 article) and AGF International Value.
Don't forget bonds
In an environment of high returns on stocks, most investors have ignored the merits of diversifying by asset class (i.e. holding bonds). However, those investors who were well diversified entering the year were well-rewarded since the average bond fund returned about 7.7 per cent. While that's not too impressive, the better bond funds are in double digit territory so far this year. Before making any decision, it's important to keep in mind that fees are extremely important for more conservative portions of your portfolio. That means keeping an eye on the fees you pay for your bonds and other fixed income investments.
Hence, buying a bond directly is always a good way to go but make sure you shop around at various brokers to make sure you get a good rate. A big attraction for the conservative investor is the guaranteed return of direct bond investments, if held to maturity. However, if you have less than $25,000, you may want to consider an investment fund. For actively managed alternatives, you won't find anything better than these three funds: Beutel Goodman Income (management expense ratio or MER of 0.62 per cent), Perigee Active Bond (MER of 0.75 per cent), and PH&N Bond (MER of 0.58 per cent). All have awesome management, a strong team discipline, low fees, and terrific performance. In addition, Barclays recently launched their iG5 and iG10 bond exchange-traded funds (ETFs), which track government of Canada five and ten year bonds, respectively. No, these are not index funds but they are passive and they are cheap - MER of 0.25 per cent annually.
Remember that being a successful investor is all about structuring your portfolio in a manner that is consistent with your targets and expectations - i.e. asset allocation strategy. I know it sounds like a clichi, but you'll do yourself a favour by spending most of your time developing an appropriate strategy. Then, once that is determined, focus on the specific investments. At that point, I hope that my suggestions, both this week and in past weeks, will provide a little extra guidance in your decision-making process.
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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