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
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
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
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.