February 18, 2006

A longer-term report card
Past advice is evaluated

I no longer make many specific recommendations in public articles. I now reserve that for clients that pay for my research and advice. But my past articles still contain a lot of specific fund recommendations that deserve some follow up. In this article, I'll review some of my firmer recommendations.

Canadian stock funds

In early February 2003 I wrote an article called RRSP fund picks, which outlined a number of Canadian fund selections. The broad based Canadian equity funds recommended therein produced an average gain of 17.2% per year for the nearly three years ending December 31, 2005. While this beat most other Canadian stock funds, it lagged the annualized gain of 22.1% for the TD Canadian Index-e fund (the only investable version of the S&P/TSX Composite Index that existed throughout the period).

My Canadian small cap recommendations generated an average gain of 23.8% per annum through December 2005. This trumped most Canadian small cap funds but trailed the 25.6% per year ascent of the BMO Nesbitt Burns Small Cap Index (weighted). (Note: there is no way we know of to invest in this or any Canadian small cap index.)

Bond, balanced, & foreign funds

While no specific bond funds were recommended in that same early 2003 article, we recommended that only bond funds with MERs of 0.8% or less be purchased. Looking at all broad based Canadian bond funds with MERs of 0.8% or less would have produced an average return of 6.7% through December 2005. Here, the picks trounced the competition with a return in the top 10% of all Canadian bond funds. This about matched bond index funds. This isn't rocket science since fees are a major factor impacting performance for bonds and other conservative asset classes.

The three recommended balanced funds produced an average annualized return of 12.3%, compared to the median's gain of 9.8% per year.

Annualized gains of 10.8% and 14.9% for global and overseas stock funds, respectively, were ahead of each group's peer group. Global funds beat the index while the overseas funds tracked investable index alternatives.

Clarington Canadian Income

In December 2001 I wrote two articles (Phantom Yields and Reality Check) about how Clarington Canadian Income could not sustain its $0.08 per unit monthly distribution. In fact, I gave the fund no more than two years before it would have to cut the generous payout. Despite getting lots of grief on these pieces, I was proven correct within eight months. While the continuation of the bear market in 2002 helped a lot; better markets might have only deferred the inevitable.

Even stronger markets and a lower distribution haven't stopped the fund's unit price from falling. Its 7% per year return over the past four years (ending December 31, 2005) not only placed in the bottom quarter of all Canadian balanced mutual funds; but it also is less than the rate of distributions the fund paid out over the same period. That's why its unit price has fallen in the face of positive returns - which pushed the distribution yield toward an annualized rate of 9.5%. At that level, the distribution remains at risk of being cut further.

Templeton Growth

Rewind about five years to December 2000. Templeton Growth fund had been through a couple of tough years and had just seen its second manager change in months (after having the same manager for more than a decade). Many that were down on the fund used the less than stellar performance and manager turnover as reasons to recommend selling this oldie in favour of more growth-oriented alternatives. However, I took a different view, concluding that the fund remained a solid global holding (even if it wasn't my favourite).

Fast forward to today and Templeton Growth sports a return of 0.5% per year for the five years ending December 31, 2005. It's nothing to write home about but it's good compared to most global funds. It places ahead of 75% of other global funds and the MSCI World Index (C$) which lost 2.4% per year over the same period.