Last time, I looked at the core equity funds that I found to have the highest upside capture ratios. This time, I’ll highlight the core equity funds that I found to have the lowest downside capture ratios in our mutual fund universe.
In ranking our fund universe, I looked at the performance for the most recent 60-month period ending July 31, 2012. Only funds that had a five-year track record were included in my search. Other criteria that I used to screen the universe included a downside capture ratio of less than 66%, and the fund could not have experienced a decline of more than 10% in any one month.
The accompanying table shows the list of the funds meet these criteria.
BMO Guardian Monthly Dividend Fund (GGF 411). This fund invests at least 60% of its assets in preferred shares. As of July 31, it held near the minimum allowed in preferreds and 31% in high yielding, blue chip Canadian equities. It pays investors a regular monthly distribution of $0.035 per unit.
NexGen Canadian Dividend Manager Rob McWhirter uses a bottom-up, cash-flow-driven growth style in managing the fund. They invest in companies that have a history of paying dividends and can invest up to half the fund outside of Canada. The fund is not currently taking advantage of that option, as the entire fund is invested in Canada. Perhaps not surprisingly Financials make up the largest component of this fund. A unique twist is that NexGen offers the fund in a registered version and in a tax-managed version. Within the tax-managed version, investors have the option to select the type of income they would like to receive from the fund; capital gains, return of capital, dividend, or compound growth.
Mackenzie Ivy Canadian Fund (MFC 083). The first of three Ivy entries on our list, the Ivy Canadian Fund invests in a concentrated portfolio of high-quality businesses with strong balance sheets, quality management teams, and that are generating healthy earnings. The managers have also not been afraid to take on higher-than-normal cash positions in periods where valuations are high. A couple of concerns that we have with this fund are that there has been significant management turnover since 2009 and the fund has been dreadful in rising markets. That said, downside protection is a key component of the Ivy brand, and they do that better than almost anybody out there.
Sentry Diversified Total Return Fund (NCE 722). This is a very actively managed fund that invests in Canadian and U.S. mid- and large-cap companies. Manager John Kim took over the lead manager duties of the fund in August of last year, taking over from Andrew McCreath. Portfolio turnover has been north of 100% in every year since 2009 and it has a very flexible mandate. It uses short selling on a regular basis, and can invest in leveraged and inverse ETFs. While volatility has been low on a historic basis, it does have the potential to be volatile.
Mackenzie Ivy All Canadian Fund (MFC 1016). This fund is very similar to the Ivy Canadian Fund, except that it invests exclusively in Canada.
Mackenzie Ivy Foreign Equity (MFC 081). This has been one of our favourite global equity funds for the past couple of years. We like the Ivy approach for volatile times, but they tend to lag in rising markets. This fund has shown better numbers in rising markets than the Canadian-focused mandates and is a great place for investors looking for conservative global exposure.
Dynamic Global Dividend Fund (DYN 031). Managed by David Fingold, who has long been one of our favourite managers, this fund looks for well-managed companies that are capable of initiating or growing their dividends and are attractively valued. Long-term performance numbers have been strong on a relative basis, outpacing the global equity category by a reasonable margin.
Bottom line: I believe it was Warren Buffett who said that there are only two rules to investing. Rule number one is to never lose money. Rule number two, never forget rule number one. Not losing money in the short term, particularly in equities can be a near impossible task. But there are equity funds that have done a great job preserving capital in down markets. By having some exposure to those funds in your portfolio, you put yourself in a better position to obey Buffett’s rule number one.
Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson's Top Funds Report and Mutual Fund and ETF Update offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.
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