The analysts shop

By Brian O'Neill | January 1, 2009 | Last updated on January 1, 2009
5 min read

Visitors to Morningstar’s website can easily see which funds our analysts like the most in our Fund Analyst Picks section. But it’s enlightening for readers to see that we put our money where our mouths are. First, I’ll share what I’m planning to buy this year, and then we’ll survey what a few of my fellow analysts are picking up. Note that we are all young and have fairly aggressive risk profiles, so some funds may not be appropriate for certain investors.

WHAT I’M BUYING Mawer World Investment – Calgary- based Mawer Investment Management has become one of our favourite shops, with top-quality management and a low-fee option via its direct of investor business. Gerald Cooper- Key, Morningstar Canada’s 2007 Fund Manager of the Year, has guided this fund to stellar long-term performance, with co-manager David Ragan gradually taking on more responsibility. The fund’s 35.8% loss for the first 11 months of 2008 is disappointing, but we’re confident that Cooper-Key’s experience in buying up quality companies on the cheap in murky markets will bode well for unitholders.

Chou Associates – Francis Chou’s deep-value style has taken its fair share of knocks, with this fund down 25.8% so far in 2008. But we haven’t lost faith in the former Morningstar Manager of the Decade. As stock prices have plummeted, he has been deploying cash toward opportunities that he deems cheap. The fund is typically equity-heavy, but Chou has recently been particularly excited about distressed debt. Though risky, we think his approach of scrounging for unloved laggards of all kinds at bargain-basement prices could provide a huge payoff once the market turns around. The 1.75% management-expense ratio makes it even more attractive.

Trimark Fund SC – Nobody seems to like Trimark’s funds anymore, but we think there’s still a lot to like about this offering, a version of which I picked up through our corporate pension plan. With four significant departures from the firm over a period of 12 months (including this fund’s lead manager Tye Bousada), there are some significant question marks. However, we are still high on current lead manager Dana Love, whom we identified as a rising star in the organization a few years back. Though we can’t say when, we think the Trimark discipline could find itself back on top once again. The SC version also sports a nifty 1.62% fee.

DAVID O’LEARY’S PICKS David’s first three choices are the same as mine. His other choice:

Ethical Special Equity – QV Investors Inc., another quality shop from Calgary, has won multiple awards for this mandate over the years, and for good reason. This is a relatively defensive small-cap fund that has protected well on the downside, yet can provide zest in a bull market. The team isn’t afraid to invest across the spectrum of value and growth stocks, and isn’t overly concentrated in one sector. Its 35.6% loss so far in 2008 is nothing to sneeze at, but it’s far better than the 49.7% drop in the BMO Small Cap Blended Index. Meanwhile, the fund’s long-term record is stellar.

PHILIP LEE’S CHOICES Mackenzie Cundill Recovery – James Morton’s aggressive offering has been hammered this year, partly because of its exposure to Russia, Ukraine and Italy. Occasionally bouts of severe underperformance should be expected, given that he strays far from the beaten track. Still, Morton has shown skill in identifying undervalued companies that have struggled, yet could be turning around. And with this fund holding about 30% cash (as of Oct. 31), he should be able to take advantage of the plethora of opportunities created by these depressed markets.

CI Signature High Income – This offering, headed up by the talented Eric Bushell, has an uncommon blend of equities, income trusts and high-yield bonds. Philip is particularly excited about the latter portion because he thinks it could pack some punch when non-investment-grade securities regain their popularity. Just be aware that this is not your typical conservative balanced offering. Instead, view it as an opportunity to buy a diversified global fund that uses a number of tools in the toolbox to generate an attractive risk-adjusted return. Plus, it’s a bargain with a 1.52% MER.

JORDAN BENINCASA’S PICKS Brandes Global Small Cap – Jordan, our resident value afi- cionado, sees tremendous opportunity in global small-cap stocks. In particular, he thinks U.S. president- elect Barack Obama’s massive economic stimulus plan will be advantageous for small companies south of the border, where 41% of this fund is allocated. Jordan is also fond of Brandes’s aggressive deep-value approach, which entails buying struggling stocks trading at huge discounts to management’s estimate of intrinsic value. Of course, this strategy of catching falling knives has wounded unitholders, as illiquid small caps have tanked. But when this fund bounces, don’t be surprised if it does so in a big way.

Trimark U.S. Small Companies – This is a more direct way for Jordan to play his call on U.S. small caps, yet with a management style that is complementary to Brandes’s. We are concerned about Trimark’s high-profile manager departures and sizable net redemptions. But even so, we like management’s contrarian approach and concentrated portfolio (typically consisting of around 30 names), and we believe that this fund will be a winner in the long run. Be warned, however, that big swings in performance are not uncommon.

AL KELLET’S CHOICES Al is a big fan of Mawer World Investment. His other picks are:

TD High Yield Income – The risks of this fund are clearly exhibited in the 39.4% loss of the past 11 months. But similar to Phil’s thoughts on CI Signature High Income, Al expects the non-investment- grade space to deliver outsized returns in the years to come, due to corporate credit spreads being at historic extremes. Although this fund has wallowed near the bottom of the High Yield Fixed Income category, it’s important to note that many of the grouping’s funds are more conservatively positioned, with portfolios that include investment-grade debt. This fund, however, is what we consider a true high-yield bond fund, as it is mostly invested in U.S. highyield bonds.

TD Japanese Index – Here’s an example of how a Morningstar fund analyst may choose to deviate from the Picks list from time to time. This investment – which Al has held for some time – is largely motivated by his expectation of currency movements. Al believes that hedge funds that had previously bought non-Japanese investments with borrowed Japanese currency (due to the country’s prevailing low interest rates) have been and will continue to be forced to liquidate these positions in order to meet redemptions and margin calls. As these positions are unwound, the yen will likely appreciate. Though it is sound in principle, we wouldn’t recommend this strategy for most investors.

Brian O’Neill is an analyst at Morningstar Canada.

Brian O’Neill