Three quality-conscious Canadian equity funds: when it comes to the equity portion of a portfolio, sector diversification, quality and balance are essential

Money Digest, Oct, 2002 by Patrick McKeough

We feel the bulk of your fund portfolio should be in well-balanced, diversified mutual funds. These are funds that hold high-quality investments mainly in large, well-established Canadian and U.S. stocks. These funds are well-diversified among the five economic sectors -- finance, consumer, utilities, resources, and manufacturing and industry.

Funds such as those profiled below should make up between one third and two thirds of most fund investors' portfolios. We think you'll do better with a portfolio of these funds than with a collection of theme funds, heavily promoted funds, mutual funds with speculative, low-quality holdings, and funds that trade frequently to try and catch the latest price momentum trends.

Universal Canadian Growth Fund (Recent price: $13.83; Rating: conservative; Fund company: Mackenzie Financial Corp., phone number 1-800-387-0780; Web site: www.mackenziefinancial.com; Load fund -- available from brokers) is managed by two former Trimark managers, Dennis Starritt and Dina DeGreer. It invests in companies with strong management and sound business prospects. The fund invests in fewer than 40 stocks at all times.

Universal Canadian Growth Fund's top holdings include Bank of Nova Scotia, Fairmont Hotels & Resorts, Wendy's International, Nexen, Canada Life Financial, Industrial-Alliance Life Insurance, Finning International, George Weston, Bank of Nova Scotia, and EnCana Corporation.

The $1.4 billion fund is broken down by economic sector as follows: 22.8% in industrial products, 21.2% in merchandising, 13.9% in financial services, 7.2% in oil and gas, 8.5% in communications and media, 3.1% in metals and minerals and 2.9% in consumer products.

The fund's one-year loss is 4.1%. But that's better than the S&P/TSX Composite's loss of 12.7% over the same period. The fund's three-year gain of 4.0% annually is better than the S&P/TSX's Composite's loss of 0.87%. The fund's MER is 2.50%.

Universal Canadian Growth Fund is a buy.

Harbour Fund (Recent price: $11.77; Fund company: C.I. Mutual funds, phone number 1-800-268-9374, Web Site: www.cifunds.com; Load fund -- available from brokers) invests in only 25 to 40 high-quality Canadian stocks, and it may hold stocks for four or five years to realize their long-term value. Manager Gerald Coleman avoids low-quality issues, new issues and promotional issues.

The $1.7 billion Harbour Fund's top holdings include Royal Bank, Bank of Nova Scotia, Suncor Energy, TJX Companies, Talisman, Philips Electronics, Potash Corp. and Petro Canada. The fund's MER is 2.47%.

The fund is diversified by industry sector as follows: 22.6 in industrial products, 22.4% in oil and gas, 17.5% in financial services, and 12.3% in consumer products.

The Harbour Fund gained 2.9% over the last year. Its three-year gain of 9.3% annually is better than the S&P/TSX Composite's loss of 0.87%. The superior returns of the The Harbour Fund came despite the fund's large cash holding. Harbour Fund holds about 20% of its total assets in cash. We don't like the market timing aspect of holding a high cash balance. But it does leave lots of room for bargain hunting.

Harbour Fund is still a buy.

Ivy Canadian Fund (Recent price: $23.83; Rating: conservative; Fund company: Mackenzie Financial Corp, phone number 1-800-387-0780; Web site: www.mackenziefinancial.com; Load fund -- available from brokers) invests in high-quality, large-capitalization stocks. The $5.3 billion fund's top holdings include George Weston, Royal Bank, Berkshire Hathaway, Loblaw, Dupont Canada and Suncor Energy. Ivy Canadian's breakdown by sector is: financial services, 22.3%; merchandising, 15.1%; industrial products, 12.3%; oil and gas, 9.5%; communications and media, 6.7%; consumer, 5.4%; and transportation, 3.4%.

Ivy Canadian made 0.87% over the last year. Its three-year gain of 6.8% annually is better than the S&P/TSX Composite's loss of 0.87%. The fund's MER is 2.5%.

Ivy Canadian holds a high cash level of 20%. That's because manager Jerry Javasky has been waiting for stock prices to fall. We think Ivy Canadian's conservative approach is particularly well-suited for today's volatile markets.

Ivy Canadian Fund is still a buy.

Patrick McKeough is a fee-based investment manager and a publisher of investor newsletters. This article is extracted from the Canadian Wealth Advisor (ste. 977, 6021 Yonge St., Toronto M2M 3W2; phone 416-756-0888; toll-free 1-888-292-0296; fax 416-756-0379).