Mutual funds newb here...

[quanta]

Prologue: I have a few mutual funds, mostly tied to an RRSP or a bank, which is fine for the long-term. I'm young so I'm content on letting those grow slowly.

However, I'm also interested in putting the rest of my cash lying around my PCFinancial account into a higher-return, more exciting mutual fund. So I've done a bit of research, but still have a couple questions in my mind.

1. Is there a reason NOT to invest in a fund that has 5 stars from Morningstar and Globefund? If these ones have such great MERs, why would anyone get a sucky 2% one from their bank?

2. Sometimes when I see Rate of Return charts, the numbers wildly fluctuate between years, i.e. Year 1: 13%, Year 2: -4%, Year 3: 9%, etc. What do they signify?

Thanks for your guys help!

[ilfsoy]

1. MER's, 2%, and bank ... not sure I follow your attempted question. Having a low MER helps returns, improving a funds chance of outperforming. However not all 5 star funds have low MERs, 2% as an MER or even a return isn't always bad, and banks funds don't all suck.

Morningstar skewers to 5yr returns, globefund puts the heavier weighting on more recent returns resulting in a good 3yr return scoring best. Obviously consistent and longterm outperformance with lower risk guarantees a 5 star rating. The reason not to buy a 5 star fund is because it has been outperforming and since future returns aren't guaranteed all you guarantee is that you're buying higher than you may need to be. Other variables such as a change in manager, or high tunover, or too much variation form mandate etc. can also be concerns.

2. Markets like any investmest (or life) has its ups and downs, nothing ever goes straight up or down. BTW the return numbers you posted are not very extreme. The ideal time to buy is when a longterm 5 star has a rough patch, and is just starting to reverse back up (as many longterm standouts will). Market timing is a suckers game though.

[TrevorK]

Prologue: I have a few mutual funds, mostly tied to an RRSP or a bank, which is fine for the long-term. I'm young so I'm content on letting those grow slowly.

However, I'm also interested in putting the rest of my cash lying around my PCFinancial account into a higher-return, more exciting mutual fund. So I've done a bit of research, but still have a couple questions in my mind.

1. Is there a reason NOT to invest in a fund that has 5 stars from Morningstar and Globefund? If these ones have such great MERs, why would anyone get a sucky 2% one from their bank?

You have to keep in mind, most people who buy mutual funds buy the recommended ones. If you go into CIBC, they are going to recommend CIBC funds. If you go to RBC, they are going to recommend RBC funds.

That's why there are quite a few ****** funds (And even funds, that are rebranded with a higher MER) that are "popular".

2. Sometimes when I see Rate of Return charts, the numbers wildly fluctuate between years, i.e. Year 1: 13%, Year 2: -4%, Year 3: 9%, etc. What do they signify?

Thanks for your guys help!

Those numbers signify the return - return flucuates every year.

You'll see a more wild variation in riskier mutual funds (That invest heavily in stocks) as opposed to safer ones (Income funds, bond funds).

[quanta]

Thanks for your thoughts.

ilfsoy: Sorry, something got truncated there. I thought there was a correlation between MER and star rating. I have also noticed that while 5-star funds usually rack in double-digit returns, the run-of-the-mill bank ones generally do not. I've noticed that one of my bank funds is performing so badly, I could have just thrown my money in an ING savings account.

I agree, that market timing is a sucker's game. Sort of like holding off on a computer, because there is always a newer, better one around the corner.

TrevorK: Are there any neutral, fund-agnostic mutual fund specialists out there? Also, do the return figures specify past performance, i.e. Year 1 = last year, Year 2 = two years ago, etc.? Or is it estimated future performance?

[ItzMe]

If you have the QuickTax 2003 cd, check out the hidden books folder on the CD (root dir afaik) and read up Gordon Pape's guide to Mutual Funds & Gordon Pape's guide to RRSP's ... great intro information and background stuff on mutual funds in general, as well as breakdowns of a ton of different mutual funds in a huge variety of categories with all sorts of info...

There's a ton of info out there on a variety of mutual funds and the like...morningstar's 5 star rating isn't the be all end all (globefund.com also issues ratings btw...) - often morningstar will issue a poor rating to a well performing fund simply because it underperforms a misplaced category (ie a fixed income fund got 2 stars because it was stuck in the divident fund category, most of the funds there are full of common stocks of blue chips making them much riskier than a plain vanilla bond fund :P!)...so be careful and do lots of research

Past performance is no indication of future gains! Generally 1, 3, 5 etc year performance #'s take into account all gains as wel as distributions (ie return of capital, dividends, etc.) ...

Developing a portfolio breakdown or asset allocation is important - once you know what you want to invest in (ie x% cdn equity, x% us equity, x% fixed income, x% global equity, x% emerging markets, x% small cap, etc.) - you can then choose the individual funds to match your needs for each category...different co's may have different best fund performers in the categories (ie Phillips hager & north excells in dividend/income but their equity lineup is weaker...Saxon has a great CDN equity lineup but their fixed income entry is new so don't know to much about it, Chou funds only offers equity lineups (which have done really well)...CIBC has some great income offerings but its equity showing is fairly weak...etc. etc. etc. ...)

Taxation may also figure into your fund choices if its a non-registered account you may wish to search for funds that have more tax advantaged returns as opposed to pure interest income, or may wish to take more risk as you can deduct capital losses, etc...

There's a thousand other topics to write a book on here, so the best bet is to pick up a couple of good books on the topic! My recommendation is definately Gordon Pape's stuff...it's fairly basic but gives a great intro to the topics he discusses...

[TrevorK]

Thanks for your thoughts.

ilfsoy: Sorry, something got truncated there. I thought there was a correlation between MER and star rating. I have also noticed that while 5-star funds usually rack in double-digit returns, the run-of-the-mill bank ones generally do not. I've noticed that one of my bank funds is performing so badly, I could have just thrown my money in an ING savings account.

I agree, that market timing is a sucker's game. Sort of like holding off on a computer, because there is always a newer, better one around the corner.

TrevorK: Are there any neutral, fund-agnostic mutual fund specialists out there? Also, do the return figures specify past performance, i.e. Year 1 = last year, Year 2 = two years ago, etc.? Or is it estimated future performance?

If you want to get an unbiased view of mutual funds, you'll need an independant financial planner - and most of them require a minimum portfolio size before they deal with you.

Yes - those figures are for PAST performance.

Maybe if you share some of your goals (longterm, shortterm, registered, non registered, amount to invest, etc...) we can recommend some funds to look into...

[quanta]

Lessee...short term, less than $10K to start, risk is okay as long as I perform a bit better than the index. Would prefer a fund that's easy on the taxes (I believe this means I prefer registered).

I've read around and heard Sceptre, Ivy and Sprott come recommended names.

[Rehan]

If you want to get an unbiased view of mutual funds, you'll need an independant financial planner

For a real unbiased view you don't want just any independent financial planner, but a fee-only planner. Most planners get hefty commissions from selling you various funds...and sometimes their suggestions are for their own best interest rather than yours. (Yes, there are some commission-based planners that the client as the top priority, but with a fee-only planner you can be sure of that.)

But a fee-based financial planner will charge something like $200/hour, so it's still not worth it for a small portfolio.

[ItzMe]

Lessee...short term, less than $10K to start, risk is okay as long as I perform a bit better than the index. Would prefer a fund that's easy on the taxes (I believe this means I prefer registered).

I've read around and heard Sceptre, Ivy and Sprott come recommended names.

Definately need to come up with an asset allocation plan - there's many financial planning books (those by Delloite & Touche, Gordon Pape come to mind) - that will help you determine what %'ages you want to allocate to what types of funds (depending on your age, risk tolerance, etc.)...statistics abound state that upto 90% of your returns come from a good asset allocation so it's pretty important ...I wouldn't recommend going with the default ones on the 'net especially if your younger as they generally give your age in fixed income and the rest to equities - while they assume (perhaps rightly so) that you can ride out downturns in the market, a big loss can be a huge setback to a younger investor, and so a higher %age of fixed income may be more suitable (maybe with some more aggressive types like the monthly income funds as well as less aggressive bonds/bond funds)...but up to you

As for registered vs. non-registered - registered means RRSP in this case - it's a tax shelter that gives you a tax deduction ... non registered means basically your holding the funds outside your RRSP...first ya need to get around that and its tax advantages etc. before you can decide which way you want to go ... generally one may want to be less aggressive in an RRSP as capital losses cannot be deducted...in a registered portfolio all income is tax sheltered - non registered interest income is the highest tax level, with dividends, capital gains, etc. receiving more preferential tax treatment...

There's way to much to type in one post! lol so need more info if you want more specific info... ...

[crazyboie]

Sorry to come into this thread halfway, but I'm sort of in the same boat as quanta. I have my RRSP maxed out but still have some money that I'm just putting into my 2% (or whatever) PCF Savings account ..

Judging by the tax implications, what do you guys think would be a good starting figure to invest in a Non-Registered Mutual Fund? I was thinking of getting something with a mix of Money Markets for fixed income and some Dividend Funds because apparently they have better tax implications?

However, is it worth my while if I only have like $2K or should I wait until I have a more substantial amount ($5K, $10K??) and take Rehan's advice and discuss this with a Fee-Only financial planner?

How did you guys get started in Non-Registered funds and what type of issues did you encounter with regards to advice and/or taxes? RRSPs are pretty simple compared to the NR plans.. throw money in, take out later in life...

I basically want my Non-MF to provide some income (as it grows) and some long-term stability. I'm young, so I have time to experience market fluctuations ...

Thanks in advance,

[ItzMe]

*** DISCLAIMER***

None of what I say should be in any way construed as financial advice of any kind...remember to always check with your broker/financial planner before making investment decisions, and past performance is not an indication of future gains...

Sorry to come into this thread halfway, but I'm sort of in the same boat as quanta. I have my RRSP maxed out but still have some money that I'm just putting into my 2% (or whatever) PCF Savings account ..


Thanks in advance,

Judging by the tax implications, what do you guys think would be a good starting figure to invest in a Non-Registered Mutual Fund? I was thinking of getting something with a mix of Money Markets for fixed income and some Dividend Funds because apparently they have better tax implications?

Many mutual funds can be "gotten in on" with as little as 500$ initial investment, and often if you commit to a monthly contribution plan, you can get in with a mere 25$ per month.

Money Market funds are pretty plain vannilla and good for safety, but remember if you hold them in a non-registered plan you will pay your full marginal tax rate on the interest earned...
Bond funds and even income trust funds can be another source of fixed income to add some additional returns to your fixed income side as MMF's generally have the lowest (but safest) returns ...

Dividend funds come in a few different varieties so be careful - some are just blue chip common stock funds in disguise and as such are of a much higher risk than a dividend fund that invests in preferred shares and trusts etc...Phillips Hager & North comes to mind when considering that...make sure you check out what they invest in and the like before making your final choice...you are correct in that they do offer tax advantaged returns ... (pretty attractive)...also potential for some capital gains depending on the fund...

However, is it worth my while if I only have like $2K or should I wait until I have a more substantial amount ($5K, $10K??) and take Rehan's advice and discuss this with a Fee-Only financial planner?

I firmly believe its worth it even if you only have 2k, as long as you can commit to monthly contributions...one option might be to look at a balanced fund that generally invests in 20 to 40% fixed income, and the balance in equities - making it almost a one stop shop for lower amounts of investment capital...you'd have to take a look at them individually to choose which one is right for you...

Also you can take advantage of monthly contribution plans even at companies with high minimum investments - for example, Saxon requires a 5000$ investment (that can be split amongst all of their available funds if you wish), however, if you have less than that, you can commit to contributing 500$ per month until your account balance reaches 5000 at which point you can reduce your monthly contributions to as low as 100/month or stop them all together...an attractive feature to get in on some excellent performing equity funds!...

A financial planner is always a good choice if you don't have the time to do the research, or want a 2nd opinion - the fees can be steep, but you can hold them down by doing alot of research on your own first so they don't have to review the basics with you when you go in...often they'll also have you setup your own discount brokerage account and do the transactions yourself lessening the time commitment as they only give you the planning then...attractive so long as you don't want access to the "F" series of advisor-only funds (but you can always get in on it later as your account portfolio grows in a couple years and it becomes more important...for now at 2000$ a 0.x% difference in MER for a year or 2 shouldn't mean too much...)

How did you guys get started in Non-Registered funds and what type of issues did you encounter with regards to advice and/or taxes? RRSPs are pretty simple compared to the NR plans.. throw money in, take out later in life...

Many of the same issues that I had setting up a registered portfolio actually! ...
One huge mistake I've heard come down the grapevine was about a planner who setup 2 seperate accounts for a client, one registered, and one non-registered, and then duplciated the investments / funds for both of them, with no consideration of the taxation issues! This is a huge mistake, as most of the interest paying securities/funds could have been sheltered from the high marginal tax rate, and dividend paying/capital gains funds etc. could have been outside the registered plan receiving favourable tax treatment...so remember to take your *entire* portfolio registered and non-registered into account! An RRSP is just a "shell" for a huge variety of investments...I'm firmly against treating it as just a savings account or the like and believe to maximize your retirement income you should be carefully considering the types of investments that go into it so that you maximize the compounding effect, and minimize your taxes payable

Remember, interest income will be taxed at your marginal rate, while dividend income, capital gains, and the like will be treated much more favourably, so if you hold your fixed income interest paying items in your registered plan, and the others outside it, you could benefit greatly from a tax perspective (as well as having more risky investments outside your registered plan means that in the event of a capital loss you can still obtain some tax relief!...)

I basically want my Non-MF to provide some income (as it grows) and some long-term stability. I'm young, so I have time to experience market fluctuations ...

Do you want the income to live off, or to reinvest as it comes in? You can generally choose to have distributions reinvested, but remember you're still liable for taxes payable even though you didn't actually receive the income as it was reinvested...

Proper asset allocation will let you sleep at night, give you your long term stability, and some excellent growth at the same time...I can't emphasize enough how important I think getting the right balance between fixed income, equities, and the sub-classes is...

IE in fixed income you could have cash (ie MMF, canada savings bonds, etc.), GIC's, short term / medium term bonds, bond funds, income trusts, income trust funds, dividend funds, etc.

In equities you can have Canadian, Global (incl. Canada/US), International (excludes Canada/US), emerging markets, small cap, mid cap, large cap, etc.!

Then there's also "style" diversification - ie some equity funds in the "growth" style, some in the "value" style - enhances your diversification...some funds like RBC's O'Shaugnessy Canadian equity combine both the growth and value approach to stock selection with some pretty decent results...

Finally remember that outside your registered plan you aren't hampered by the foreign content limitation in your RRSP - while presently Canada is fairly attractive and the US isn't as much due to our strong dollar, it isn't always like that, and international markets shouldn't be ignored either!...

Some funds to give you an idea...(V for value, G for growth) - dates refer to performance stat ie Jan/04 + 0.6% means up .6% from jan 04 to oct ...

Canadian Equity Funds

CI Canadian Investment (V) Jan/04 + 0.6% (6 mo) Protecting capital effectively
Mackenzie Cundill Canadian Security (V) Apr/03 +12.6% (1 yr) Holding up well
Chou RRSP (V) Nov/02 +10.7% (1 yr) Conservative style
Trimark Select Can. Growth (V) Sep/02 +12.5% (1 yr) Continues to be strong
RBC O’Shaughnessy Canadian Equity (V/G) Sep/02 +17.4% (1 yr) Continues to impress
Saxon Stock (V) Aug/02 +11.6% (1 yr) Off a bit recently
Mackenzie Ivy Canadian (V/G) Dec/00 + 3.0% (3 yr) Protects capital base
Bissett Canadian Equity (G) Nov/00 + 4.3% (3 yr) Looking good
ABC Fundamental-Value (V) July/97 +14.5% (5 yr) Results continue strong ***TOP PERFORMER***
PH&N Dividend Income (G) April/96 +15.4% (5 yr) Still doing well ***TOP PERFORMER***

Canadian Small Cap Funds

Ethical Special Equity (V) May/03 +20.3% (1 yr) Bit of a drop-off
Saxon Small Cap (V) July/01 +16.8% (3 yr) Pulling back a little

Sector Funds

Front Street Energy Growth Ser. 1 (G) Dec/03 + 3.9% (6 mo) One of strongest labour funds

Balanced Funds

Saxon Balanced Aug/04 - 0.5% (1 mo) Early days
Dynamic Focus+ Balanced June/03 +10.0% (1 yr) Doing well now
Renaissance Canadian Balanced Value Sep/02 + 8.7% (1 yr) Holding up well
Mackenzie Ivy Growth & Income July/02 + 7.2% (1 yr) Performing as expected
Trimark Global Balanced Feb/02 +16.5% (1 yr) Continues to beat the averages
Fidelity Canadian Asset Allocation Aug/01 + 4.1% (3 yr) Beating the category average
ABC Fully-Managed April/97 +11.2% (5 yr) Outperforming in big way ***TOP PERFORMER***

Income Funds

RBC Monthly Income June/03 +11.8% (1 yr) Performing as expected
CIBC Monthly Income Nov/02 + 9.6% (1 yr) Strong cash flow

Bond Funds

Friedberg Foreign Bond May/04 + 1.3% (3 mo) Doing all right
PH&N High Yield Bond Apr/04 + 1.9% (3 mo) Well-managed
CIBC Can. Short-Term Bond Index Nov/01 + 4.9% (3 yr) Solid and safe
PH&N Short-term Bond & Mort. May/00 + 5.5% (3 yr) Safe place for money ***TOP PERFORMER***
PH&N Bond Aug/98 + 7.3% (5 yr) Has rallied nicely

U.S. Equity Funds

RBC O’Shaughnessy US Value Aug/03 +14.7% (1 yr) Very strong results
Chou Associates (V) Nov/02 + 6.1% (1 yr) Beating the averages
ABC American-Value (V) June/02 +29.1% (1 yr) How does he do it? ***TOP PERFORMER***

*** CONTINUED IN FOLLOWING POST ***

[ItzMe]

Post got too long so had to continue it here

European Equity Funds

None right now but Chou has recently launched one that may be worth watching...excellent track record, and has lowered the MER until proven results are shown...!

International/Global Equity Funds

Templeton Global Smaller Co. Aug/04 - 1.0% (1 mo) Should do fine
Saxon World Growth (V) Aug/02 + 9.4% (1 yr) A bit weak lately
Trimark International Companies (V) May/02 +15.5% (1 yr) Some recent weakness
Mackenzie Cundill Value C (V) Feb/01 + 5.7% (3 yr) Strong performer

Money Market Funds

Altamira T-Bill June/04 + 0.5% (3 mo) One of the best MMFs

Exchange-Traded Funds (ETFs)

EnerVest Div. Income Trust Oct/04 New Yields 11.35%
G5 iUnits Aug/04 + 1.4% (1 mo) Defensive position
Diversified Preferred Share Trust Jan/04 - 0.1% (8 mo) Quarterly dividend 31c a share

[TrevorK]

Lessee...short term, less than $10K to start, risk is okay as long as I perform a bit better than the index. Would prefer a fund that's easy on the taxes (I believe this means I prefer registered).

I've read around and heard Sceptre, Ivy and Sprott come recommended names.

Is it going to be held in an RRSP - if not there are no tax issues to worry about, but if it is there are quite a few different options for tax - effective investing...

[Jovi]

Sprott Canadian Equity

Fund Name 1 mo rank 3 mo rank 1 yr rank 2 yr rank 3 yr rank 5 yr rank 10 yr rank

Sprott Canadian Equity Fund 34/594 101/589 1/571 12/533 1/452 1/304

Its been on a tear lately, but too bad all new investments have been capped.

Go to www.fundlibrary.com and browse away.

[ItzMe]

Sprott Canadian Equity

Fund Name 1 mo rank 3 mo rank 1 yr rank 2 yr rank 3 yr rank 5 yr rank 10 yr rank

Sprott Canadian Equity Fund 34/594 101/589 1/571 12/533 1/452 1/304

Its been on a tear lately, but too bad all new investments have been capped.

Go to www.fundlibrary.com and browse away.

AFAIK Sprott does require a 100K minimum investment to purchase through them, or 25K to purchase through dealers as well...also, that specific fund has tended to foccus on small to mid-cap equities, meaning its risk level is higher than your run of the mill CDN equity (although it performed really well when gold went up as it had picked out a considerable # of jr issues / mining co's to invest in...)