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A-grade funds for the long term
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David West is a veteran financial adviser, journalist, and teacher. He covers the waterfront on the nuts and bolts of investing in mutual funds and ETFs.

By David West  | Thursday, September 06, 2012


Last time up, I broached the subject of mutual fund holding periods. The central theme was that it usually doesn’t make sense to switch back and forth between good investments. (I related this to something called Ettore’s Law, which draws a principle from a phenomenon we’ve all experienced: As soon as you switch to the seemingly faster-moving queue, it slows down! And both lines arrive at the counter at about the same time.) A well-known quote from legendary investor Warren Buffett adds weight to the argument that it’s probably better to hold on to a good investment through thick and thin. When asked the ideal holding period for a good investment, the Oracle of Omaha replied, “Forever.” So what kinds of investments are worthy of a “forever” hold?

Academic evidence supports Mr. Buffett. Professional investors tend to get it wrong when switching from underperforming managers to outperforming managers, on balance making the switch at the very worst time. As I offered in my previous article, if the experts can’t get it right, then hopes are not high that we retail investors can do any better.

The natural conclusion is that it is better to buy funds with a good long-term track record and hold them for the long term, rather than trying to replace them after a brief period of underperformance. When chronic underperformance and high costs are already general problems with mutual funds, we don’t want to exacerbate them by adding injudicious switches to the mix. Stick with your original horse throughout the race.

Now I’d like to present some fund choices that I feel meet those criteria: good relative long-term performance and a reasonable cost.
Equity funds

I searched for any type of Canadian equity funds with a 3-year, 5-year, and 10-year return of 0% or greater, and came up with only three funds that have a Fundata FundGrade® of "A."

Bissett Canadian Equity Corporate Class A (Fund Code TML930) has a 10-year compound return of 5.8%, which puts it in the second quartile. It carries an MER of 2.58%, which gives MER Coverage of 2.25 times. (MER Coverage is a metric I developed that gives fund investors a way to measure the performance of a fund relative to the fees paid. I explain more in my previous article.)

Bissett Canadian Equity Fund A (Fund Code TML202) has a 10-year compound return record of 5.9% and an MER of 2.58%, for an MER Coverage of 2.29 times. This is basically the same fund as the one above, and is for those who don’t qualify for the corporate class fund version.

Mawer Canadian Equity Fund Class A (Fund Code MAW106). It’s a no-load fund, has a 10-year compound return of 9.0%, which is first-quartile, and its MER is 1.25%. That works out to an MER Coverage of 7.20 times.

The choice is clear. For Canadian equity funds with good long-term performance at a reasonable cost, the Mawer fund gets the gold medal.

Fixed-income funds

Using the same search criteria for Canadian Fixed Income funds, there are nine funds that qualify. Excluding GIF funds and one Quebec-centric fund that otherwise does not disclose its geographic diversification, the list narrows down to these candidates.

Acuity Pooled Fixed Income Fund (Fund Code AGF9750) is a front-end load fund with a 10-year compound return of 8.0% with an unreported MER. The minimum investment is $150,000, or you must be an accredited investor to buy this fund, so we’ll remove it from consideration in this list.

AEGON imaxx Canadian Bond Fund (Fund Code AFM201) has an MER of 1.86% and, coupled with a first-quartile 6.2% ten-year compound annual return, therefore has an MER Coverage of 3.33 times.

Beutel Goodman Corporate/Provincial Active Bond Fund D (Fund Code BTG971) specializes in corporate and provincial bonds. Its 10-year compound return is 6.7%. Its MER is 0.77%, and that translates into an MER Coverage of 8.70 times.

GBC Canadian Bond Fund (Fund Code GBC896) is a front-end load fund with a 10-year return of 5.7% compounded. Its MER is 0.94%, so it has an MER Coverage of 6.06 times.

For a straight Canadian fixed-income fund, if you can take the extra perceived risk of corporate and provincial bonds rather than Canadas, the Beutel Goodman fund would be my top pick to consider. Otherwise, the GBC fund is a good choice as well.

You might wish to use this same process to look for quality US equity funds, or Canadian dividend/income funds and other categories you’re interested in.

David West, CFA, FCSI, has more than 30 years’ experience in the financial services industry as an adviser, trainer, writer and commentator. He has written for The MoneyLetter and Canadian Business Online among others, and is a regular contributor to the Fund Library.

Notes and Disclaimers

© 2012 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.  The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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