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Mutual funds are down, but not out

Investors can examine model portfolios at BMO InvestorLine and use them to form their own plans, says Connie Stefankiewicz, its president and CEO.



Mutual funds are down, but not out

Battered investors give funds a long, hard look

Dianne Maley

So you've fired your investment adviser and are hell-bent on going it alone.

It's a big responsibility. You take a deep breath and gaze out over the investment landscape, dazzled by the array of choices - stocks from every industry and country in the world, bonds of all sorts, gold, treasury bills, exchange traded funds, mutual funds. "Mutual funds!" you snort. "No thanks. Not after last year."

As stock markets crumbled last October, Canadian investors sold a staggering $8-billion worth of mutual funds in a single month, preferring to take their losses rather than suffer more sleepless nights.

While it seems investors are creeping back into mutual funds, so far the inflow is being stashed mainly in short-term money market funds.

Yet the argument for mutual funds is as strong as ever: At their best, they let a person with as little as $1,000 buy a fully diversified, balanced portfolio managed by some of the smartest people in the business - for a modest fee.

"Mutual funds are a tremendous way for an individual investor to build a comprehensive portfolio," says Connie Stefankiewicz, president and CEO of BMO InvestorLine, the online brokerage arm of the Bank of Montreal.

BMO investors can choose from among more than 9,900 mutual funds with no commission to buy or sell. (Brokers make money from trailer fees paid to them by fund companies out of the management expense fees they in turn charge investors.)

Low-fee funds sampler

Online brokers are benefiting mightily from the move to do-it-yourself investing.

"We opened more new accounts in January than any January in our history," Ms. Stefankiewicz says.

Where to buy them

If you have enough money, you can buy mutual funds directly from some top-rated, low-fee fund companies.

Phillips, Hager & North, for example, requires a minimum investment of $25,000 for investors who open accounts directly with the company. The minimum purchase of a PH&N fund through a broker is $5,000. (The Royal Bank of Canada now owns PH&N.)

Money manager Mawer Investment Management Ltd. requires a minimum investment of $50,000.

Other low-fee firms that sell their own mutual funds directly to the public include institutional money managers Beutel, Goodman & Co. Ltd., McLean Budden Ltd., Leith Wheeler Investment Counsel Ltd., and Saxon Mutual Funds (now owned by Mackenzie Financial).

But there are advantages to using a broker.

You can buy these low-fee funds in smaller amounts, and you can buy and sell stocks, bonds and exchange traded funds (ETFs) all in the same account.

Ms. Stefankiewicz says investors will find other advantages as well: "Your holdings are consolidated so you can see how your portfolio is performing in aggregate and against the benchmarks."

The fee question

Naturally, you will want to keep mutual fund fees - known as management expense ratios or MERs - as low as possible. But fees aren't everything. Sometimes a fund is worth paying for. Cast a glance over the nearly 60 mutual funds selected as top picks by analysts at Morningstar Canada ( AnalystPick.aspx)and you'll see low-fee funds alongside ones with higher MERs.

In drawing up its list, Morningstar weighs management, strategy and stewardship as well as fees, says Brian O'Neill, senior fund analyst. The list is helpful in sorting the wheat from the chaff.

"I'm not a proponent of the average mutual fund in Canada," Mr. O'Neill says. "Most are overpriced. A lot are just index huggers and don't offer much added value over an ETF."

Choosing the right fund

Choosing the best fund to fit your portfolio means doing your homework. After all, you're on your own now so the responsibility for your financial future lies solely in your hands. Think seriously about risk.

Learn about bonds. Immerse yourself in the financial media for information about the economy and interest rates, where they're headed and which businesses, countries and sectors are expected to do well over the next few years.

Most online stockbrokers have a range of tools, including analysts' research, to help the do-it-yourself investor. BMO InvestorLine, for example, has model portfolios that vary depending on your risk tolerance, investment style and financial goals.

"This helps investors make better decisions about asset mix and the holdings in their portfolio," Ms. Stefankiewicz says. The next step is to choose your funds. Remember, mutual funds are not securities in themselves, but rather pools of money invested in a wide array of different securities.

Scan through a list of mutual funds in different categories and choose a few. Go to the firms' websites, look at the array of funds offered, read the manager's philosophy and goals, and check out past performance. Look at the fund's holdings and how they're broken down by country and region - Canada, the U.S., emerging markets - and industry sector - health care, banking, resources. Then compare their MERs. (This information may be slightly out of date because fund companies only report their holdings quarterly.)

If you have only $25,000, you could invest it in a single, balanced mutual fund. But even in these most conservative of funds there are potential pitfalls, Morningstar's Mr. O'Neill warns. The manager may be a stock picking genius, but "Do they have bond experts?" he wonders, adding that "PH&N has one of the best bond shops in Canada."

Equity funds

Fund companies offer a wide choice of stock funds: Canadian, U.S. and international equity, big cap, small cap, emerging markets. You can simplify things by buying a global equity fund - one that can invest anywhere in the world, including Canada.

Suppose you decide you would like a little more Canadian exposure than most global funds offer. You could add a Canadian equity mutual fund or an ETF that tracks the main Toronto stock index.

Or you could drop the idea of a global fund altogether and build a stock portfolio of two or three different funds; for example, the Mawer World Investment fund and the Beutel Goodman Canadian Equity fund. Or a combination of Canadian, U.S. and international stock funds. You could buy all the funds from one manager or mix and match. You can add specialty funds or ETFs for a little zip.

Mutual funds won't protect you from market crashes, but a well-managed fund in a diversified portfolio can cushion the losses and allow you to share in the gains when markets recover.

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