(01/16/12) Pick Up This Canadian Fund for Diversification

Mutual funds can be very effective tools to help diversify away from your US and international exposure, and also give you some diversity in your Canadian equity allocation, writes David West of Money Reporter.

Perhaps you want to take an extended trip around the world, and don’t want to keep track of all your individual stocks while you’re away. A good, solid Canadian equity fund could be just the ticket.

Or perhaps you aren’t going away, and you do want to keep your equity selections intact, but based on your capital market expectations you want to increase your equity allocation. How can you do that without disturbing your existing holdings? A good, solid Canadian equity fund could be just the ticket there as well.

We recently looked at the iShares S&P/TSX 60 Index Fund (Toronto: XIU), which we think is a great passive choice. Today, we look at an actively managed alternative, the PH&N Canadian Equity Fund Series D (fund code PHN130(NL).

This fund distinguishes itself in two ways. First, at 1.14%, it charges the lowest management-expense ratio among all our actively managed Canadian equity fund choices.

Second, and somewhat related to the first, it also has traditionally had the highest MER coverage among those same funds (though currently they’re all at zero, given the tough market we’ve had).

MER coverage is a measure of our own invention that seeks to compare fund performance relative to the cost to the investor to get that performance. Specifically, one-year MER coverage measures by how many times the fund’s one-year return exceeds the fund’s MER.

Over the past year, the return has been less than the MER (in fact, it’s been negative), so the current one-year MER coverage on this fund is zero. Looking at the longer term, at the end of calendar 2010, the PH&N fund’s five-year and ten-year MER coverages were three times and 5.3 times respectively—both the best among this actively-managed group, in addition to the one-year MER coverage being the best.

The sole investment objective of the PH&N Canadian Equity Fund is to provide significant long-term capital growth by investing primarily in a well-diversified portfolio of Canadian common stocks. The strategy used to achieve those objectives is to look for growth companies that have superior management; industry leadership; a high level of profitability compared to their competitors; a sound financial position; strong earnings growth; and a reasonable valuation.

In terms of nuts and bolts, this fund charges no loads, and has $724 million in assets under administration. The ten-year compound return is 6.3%, which is second-quartile.

There are tons of Canadian equity funds out there all competing to attract your money (more than 800 of them). But if you cut through all the noise, you’ll find the PH&N Canadian Equity Fund is one of the best.

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