Canadian stock funds present challenge
Foreign content rules, and the variety of policies of its use have created a
benchmarking problem for Canadian equity funds. The Investment Funds Standards
Committee (IFSC) recently introduced the Canadian Equity Pure category in part
to address this issue. However, issues remain in longer-term comparisons of
Canadian stock funds.
Beginning in 1990, the Canada Customs and Revenue Agency (CCRA) granted
permission to pension funds and Canadian mutual funds to invest in foreign
property, up to 10 percent of book value. This limit rose by 2 percentage points
per year, until it hit 20 percent in 1995. Finally, the limit was bumped up in
1999 and 2000 to 25 and 30 percent, respectively. Currently, the limit remains
anchored at 30 percent.
While the Canadian equity pure category helps to address this issue, itís
only a partial solution. For instance, prior to 1990 all Canadian equity funds
in existence were Ďpureí by the IFSCís definition since no foreign property was
allowed in products eligible for RRSP and other tax deferred savings plans.
Canadian equity funds maximizing foreign content today requires a benchmark
with variable weights of foreign content to reflect the variable limits over
As noted in this
older article, policies on what to do with cash are all over the map. Some
managers consider it their duty to invest in the asset class covered by its
mandate. Others are of the opinion that cash should be held in the absence of
investment opportunities that meet their criteria.
Foreign content issues aside, some managers are rarely, if ever full
invested. During his fifteen-year career as a money manager, I estimate U.S.
equity manager Larry Sarbitís average cash position at close to 20 percent.
Jerry Javasky, manager of Mackenzie Ivy Canadian (among others) consistently
seems to hold a similar cash position. Many others are in the same boat.
These seemingly perpetual cash positions should be incorporated into
benchmarks against which performance is measured. The TSX Composite index, for
instance, is a terrible benchmark for Ivy Canadian. With just a 53 percent
current weighting in Canadian stocks and a historically low correlation to the
index, itís a wholly inappropriate benchmark.
Changing policies and styles
Changes in money managers can result in a performance history which actually
occurred under quite different investment policies, let alone different styles.
One classic example is CI Canadian Equity fund. Jerry Javasky and Gerry Coleman
managed this back in the 1970s when it was the United Canadian Equity fund. They
donít hesitate to pile cash when opportunities become scarce. In 1992, Kiki
Delaney took over. She tends to hold a bit of foreign content but well below the
maximum Ė and tries to stay fully invested. The ďforeign-content-maximizingĒ
McLean Budden took over in 1999 and they tend to stay fully invested. Finally,
Kim Shannon took over last year. She tends to hold very little foreign content
and to stay fully invested.
This one fundís historical record is not only made up of four different
management teams with diverse styles, but also of varying foreign content and
cash policies (though the latter has been somewhat consistent for many years).
This presents significant challenges when evaluating past performance. The
simpler solution in this particular case is to look to the longer-term record of
the manager Ė not always an option.
Itís important to know that, sometimes there will be no suitable benchmark
available for comparative purposes. In other cases, knowing a fundís history is
very relevant to getting at least an accurate picture of past performance.
Dan Hallett, CFA, CFP is the President of Dan Hallett and Associates Inc., an independent investment research firm based in Windsor, Ontario. Dan can be reached at email@example.com.