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Newsletter Archive
Q1/6 Focus on ETFs
Q4/5 LW Canadian Equity
Q4/5 Saxon High Income
Q3/5 Saxon Small Cap
Q3/5 BG Income
Q2/5 Trimark Canadian
Q2/5 MB Fixed Income
Q1/5 BG Canadian Intrinsic
Q1/5 MB American Equity
Q1/5 Mawer N.C. Closure
Q4/4 Mawer Cdn Equity
Q4/4 Mawer Balanced RSP
Q3/4 Sceptre Equity Growth
Q3/4 Saxon World Growth
Q2/4 BG Small Cap
Q2/4 Mawer U.S. Equity
Q1/4 PH&N Cdn Growth
Q1/4 Leith Wheeler US Eq
Q4/3 iShares S&P500
Q4/3 BG Canadian Equity
Q3/3 North Growth US Eq
Q3/3 HSBC Mortgage
Q2/3 MB Cdn Eq Growth
Q2/3 Batterymarch US Eq
Q1/3 Saxon Stock
Q1/3 BG Balanced
Q4/2 Mawer New Canada
Q4/2 Perigee T-Plus
Q3/2 PH&N Dividend Inc
Q3/2 PH&N Bond
Q2/2 Leith Wheeler Cdn Eq
Q2/2 Perigee Diversifund
Q1/2 PH&N Cdn Equity
Q1/2 Mawer U.S. Equity







America For Less Than 2% a Year

Mutual fund investors who want to keep costs down should invest in funds that have low management-expense ratios (MERs) and avoid sales fees (i.e. look for no-load funds). If the fund you want charges a load then you should try to buy it through a discount broker who will waive the sales charge.

This month I look at foreign equity funds. The median MER for foreign equity funds in Canada is about 2.7%. To get a sense of which funds are inexpensive it is reasonable to look for funds with a MER of 2% or less. U.S. equity funds to consider include the McLean Budden American Equity and Leith Wheeler U.S. Equity funds. For international equities, consider, for example, the Mawer World Investment or Beutel Goodman International Equity funds. Sophisticated investors may also want to consider the North Growth U.S. Equity fund, which has maintained an impressive track record over the past ten years and only charges 1.2%.

In what follows I focus on the McLean Budden American Equity fund, which presents a good combination of sustained performance and low cost. McLean Budden (www.mcleanbudden.com) was founded in 1947 and has historically been a manager of institutional and pension accounts. The firm brings the same conservative asset management model to its family of eight mutual funds, which hold about $660 million in assets. All of McLean Budden's funds charge below-average MERs.

McLean Budden American Equity

During the bear market of the last three years the McLean Budden American Equity fund has significantly outperformed the index by an average of almost 9% annually. The fund was fortunate to have sold many technology stocks in early 2000, as well as a long-held position in Enron (ENE) in early 2001. However, Bruce Murray, one of the fund's managers, suggests that the fund was probably "too early" in starting to re-buy tech stocks in 2001. The fund's 18.9% drop during 2002, as a result of the general market decline that began in May, represents the first time in more than a decade that the fund has lost money during a calendar year. Mind you, it still beat the index by almost 4%.

Managed by a team of five portfolio managers the fund focuses on shares of large and medium-sized U.S. companies with at least $5 billion (U.S.) in market capitalisation. Stocks are selected by a team of 13 managers and analysts using a bottom-up stock-picking approach. Emphasis is placed on companies that are in a strong financial position with good business prospects. Those that have a record of stable earnings growth, good return-on-equity and strong growth potential are considered for inclusion in the portfolio. The overall style of this fund, which is characterised by McLean Budden as 'core large-cap', is best described as growth with a conservative bias.

To ensure adequate diversification the fund will generally not be overweight in any single stock (with respect to the S&P 500 index) by more than 4%. Stocks that are not members of the index are restricted to a 4% maximum weight.

At the end of the year the fund's top three sectors were Consumer Products, Financial Services, and Information Technology. Together these accounted for over one half of the fund's stock portfolio. The fund also held 2.1% of its assets in cash. Of the 50 stocks in the portfolio, the top three were Microsoft (MSFT), Prudential Financial (PRU), and Philip Morris (MO). The fund has been moderately active during the last few quarters. Recent big moves include the elimination of positions in Agere Systems (AGR), Qwest Communications (Q), and J.P. Morgan Chase (JPM). New purchases include positions in Apache (APA) and Citigroup (C).

The fund has also been making smaller adjustments to existing positions. Because of increased market volatility, particularly in the technology sector, a number of buying and selling opportunities have appeared. As a net result of these adjustments, the fund has reduced its exposure to the technology and industrial sectors, while increasing its positions in consumer products and energy. Nevertheless, it remains slightly overweight in technology.

Despite ongoing activity, the fund's turnover is not excessively high and averaged 59% over the past five years. It is also pleasing to note that the fund's MER has been on a deliberate downward trend for five years. During this period it dropped about 25%. The fund's MER in 2001 was a low 1.4%,fully 1.3% below the median MER for U.S. equity funds in Canada.

With a ten year average annual return of 11.3% the McLean Budden American Equity fund offers an attractive combination of long-term performance for a low cost. It's modest $10,000 minimum investment also puts it within the reach of most investors. If you plan to hold the fund in a RRSP account then keep in mind that it is considered foreign property. Because of its emphasis on growth stocks the McLean Budden American Equity fund is suitable for slightly more aggressive investors.

Remember, keeping costs down by investing in low-fee funds and buying load funds (if necessary) through a discount broker will help to ensure that more of your assets work for you. Over the long term these cost savings will have a significant impact on your gains.

Carl Wolfe, Ph.D.

February 2003

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