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Dateline: 09/09/97
My mailbox has been stuffed lately with the Semi-Annual Reports of the various mutual funds I have investments in. Amid all the talk of impending bear markets and general twitchiness about the prospect of Alan Greenspan sneezing, it’s interesting to see what the pros have to say.
It should be noted that mutual fund companies have a vested interest in keeping their clients invested. Massive redemptions would surely create problems for some of them. At the same time, professional money managers are very aware of market conditions. They can and do manage their portfolios accordingly. One fund I have shares in was 60% in cash before last spring’s correction. Currently Templeton Growth is 20% in cash. (To see what your fund’s investment mix is, check out Portfolio Analytics’s Website.)
And many, if not most mutual fund companies, have a varied mix of funds available - money market, bond, balanced, and international as well as domestic equity funds. They often have more than one equity fund with different investment objectives - growth, income, index, sector and regular equity funds. So an investor can switch between funds according to his perceptions of the market. With this tremendous mix of funds, fund companies cannot really be predisposed to one sort of investment over another. They have something for every investor in every type of market. The company management, then, can be expected to be reasonably objective in their assessment of current and future market conditions.
So what do some of the mutual fund companies have to say in their semi-annual reports? Here are some excerpts.
Dynamic Funds reports that their outlook remains unchanged. "For the longer term we are favorably disposed to the stock markets based on current positive economic fundamentals across the global landscape. The mini-correction that occurred during the first quarter of this year may be repeated, but the 1990s secular bull market in equities is not over."
They note that "contrary to our expectations, Canadian stocks have not outperformed their American cousins so far this year. Our outlook remains unchanged. We see good prospects for Canadian stocks over the next year or two."
Other insights from Dynamic:
One small fund I have an interest in is Multiple Opportunities Fund. (Available in B.C. only.) It is an aggressive small cap mutual fund focusing on the turbulent Vancouver Stock Exchange. (33% of equities are on the TSE, 67% on the VSE.) They are currently 34% in cash. Their equity mix is 66% resource (primarily junior stocks) and 34% non-resource. Up until the spring correction, MOF was one of the top performing funds in Canada in all time frames. Since then it has taken a severe hit. It went from a high of $3.09 in March to as low as $2.19, about a 30% drop. But over 3 years it has doubled in value in spite of this year.
MOF only manages one other fund, so they have more of a vested interest in keeping their clients confident in the small cap equity market. Nevertheless, their remarks in their semi-annual Letter to Unitholders are worth noting. Says President Donald MacFayden, "The interest rate fears that stalled the senior markets have subsided for the time being and we have recently experienced record highs in the senior stock indices. Unfortunately, the junior sector has not demonstrated the same resilience."
He goes on to say, "We expect to see a recovery in this sector as we head into the fall, but, more importantly, we expect to see some exceptional buying opportunities in preparation for the first quarter of 1998."
One question that naturally arises from Dynamic’s and MOF’s analysis is this: if we are due for a major correction due to overvalued markets, what of the small caps? Will they too suffer in a bear market? Or are they at rock bottom with only upside potential? My own view is that small caps have bottomed. I believe that small caps are set to play catch up with the seniors, even if there is a correction.
Nevertheless, I am not about to sell my senior equity funds and put the money in small caps. I’ll maintain the positions I have and let them balance each other out. Over the long haul, which is what I am interested in, I believe all the funds with good historic track records will do well.
Next week I’ll look at a some more semi-annual reports.