Managed Money Reporter Newsletter — Issue 159, May 2000

Editors: Carl Spiess & Allan McGlade

Featured Articles

What's happening with these markets??

The markets in recent weeks have seen dramatic fluctuations, but in most of our diversified client portfolios, fluctuations were minimal (depending on how much was in high risk funds or stocks).

The main cause of the market fluctuations has been attributed to the market correction in the tech sector, which was largely inevitable (see Mutual Fund Reporter, Issue 157).

As always, though, predicting tomorrow's market moves is largely a mug's game, focusing on building an appropriate portfolio is what matters in the long run.

Diversification has always been a key tool to minimize risk and maximize returns within a portfolio. There are many ways we accomplish this. Mutual Funds can be used in this process, as they allow for maximum diversification without having to pay commissions to buy several different stocks. Funds also save you the time required to then monitor the stocks.

Methods of Diversification to look for in your Portfolio

Mutual Funds offer many different ways to diversify. One way to diversify is by investment style. A mutual fund manager can focus on growth stocks, value stocks, a specific sector or a blend of stocks. For the first time, our investment options listing includes a column describing the management style of a particular fund. A growth fund would focus mainly on the up and coming high growth stocks to add to their portfolio without paying as much heed to the valuations in relation to earnings. Value managers focus on buying companies that are undervalued and not on trading at a high ratio to earnings.

The fund manager could also use what is called ‘top-down' or ‘bottom-up' management style. Top down management is where the manager looks at the industry from an economical perspective primarily and how the sector or sectors are doing as a whole. A bottom-up investment style focuses more on the fundamentals of the specific companies they are buying into.

Your account's risk factors are also a way to diversify. Having your portfolio divided between high, low and medium risk funds depending on your risk tolerance as well as taking into consideration how near you are to retirement are very important. Below we have a graph that shows the relation of risk relative to return of some of the mutual funds that we offer. In short, the more risk that is taken, the more likely that returns of a more aggressive portfolio will exceed returns of a conservative portfolio in the long term.

The fund managers will usually have a portfolio bias where they focus on Small Cap/ Mid Cap/ or Large Cap Companies. Small Cap refers to the size of the market capitalization of the companies in the fund. Some fund managers will have no bias for the fund and will hold a mixed portfolio. The size of the market capitalization is also directly related to risk. A large cap mutual fund would be lower risk than a small or mid cap fund. An example of large cap fund holdings would be companies such as BCE or one of the large Canadian banks.

There are also different styles and types of funds to choose from to meet all your investment needs. Equity Funds are based in stocks. Balanced funds are investments that have a mixed portfolio of stocks and bonds and are on the more conservative side. Bond Funds are fully invested in bonds and fixed income instruments and are for more conservative investors approaching retirement, or as a more conservative portion of the portfolio. (Generally we prefer to hold individual bonds instead of a bond fund, to minimize overall management fees in an account.)

Sector Updates

Financial Sector

ScotiaMcLeod continues to recommend an overweight position in financials. Bank valuations are extremely attractive and fundamentals are compelling. We expect the bank group to continue to internally generate capital at a healthy real rate under a number of difficult scenarios. Positive earnings surprises developed in the first quarter, with earnings expected to meet or exceed expectations over the next year. In addition, we expect interest rate fears to moderate. As a consequence, we believe bank share performance, after two difficult years, has the potential to provide strong absolute and relative returns. The bank sub-index has been building a very solid base in the past two years.

Our pick - AIC Advantage Fund/AIC Advantage 2 Fund. (Heavily based in financial stocks, which may have a good run, as several fund companies are in takeover / merger discussions.)

Small Cap Sector

Small cap stocks in Canada, whose performance is measured by the SPTSE Small Cap Index, have recorded a 4.7% price return since the beginning of the year. Despite this fairly good performance, these stocks continue to underperform the large cap stocks, which recorded a 14.7% increase over the same period. As it has now been the case for several months, many small cap companies have problems showing positive EPS growth. Therefore, we continue to recommend that investors stay cautioned and focus on companies that show a high quality of earnings and a solid potential for growth in their respective sector.

Technology Sector

We recommend an underweight in this sector. Prospects for long-term growth are good, but we are concerned with valuations across the sector. Technology company valuations are still well beyond all traditional measures. Our overall sector view suggests caution is warranted.

Fund News

Global Strategy has introduced a new balanced fund: Global Strategy Growth & Income.

Due to the C.I./BPI merger, there have been several name changes. Many funds that were under BPI or Hansberger have been renamed under the C.I. heading or under the Signature heading. Switches between funds are now available.

Mackenzie has launched eight new funds:

  • Universal Communications
  • Universal Financial Services
  • Universal Internet Technologies
  • Universal RSP Communications
  • Universal RSP Financial Services
  • Universal RSP Global Ethics
  • Universal RSP Health Services
  • Universal RSP Internet Technologies


Contact Us

T.  416.863.RRSP (7777)
F.  416.863.7479

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

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