You’ll find our mutual-fund ratings (Aggressive, Conservative or Income) displayed next to every fund we recommend in our Canadian Wealth Advisor newsletter. They’re key to helping us find top-performing funds, including those that are suitable for income investing.
(To show you how our system works, we’d like to share one of the income investing fund buys we recently recommended in Canadian Wealth Advisor. Please read on for full details.)
Rating mutual funds is more complex than rating individual companies. When we judge a company’s investment quality, we take nine key factors into account.
These are: a record of profit; a record of dividends; an influential industry position; balance-sheet strength; geographical diversification; freedom from business cycles; freedom from excess regulation or insider abuse; ability to profit from lasting secular trends (such as global economic liberalization); and the ability to cash in on habitual customer behaviour.
Look beyond performance to find the top funds for income investing and capital gains
Mutual funds are a step removed from these factors. Before we award our fund ratings in Canadian Wealth Advisor, we assess a fund’s strengths and weaknesses in several key areas.
We start by looking at the quality of the fund’s holdings, based on our nine key factors. Then we look at the degree to which these are spread out across the five main economic sectors (Manufacturing & Industry, Resources, Consumer, Finance and Utilities).
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Funds that focus on narrow segments are more risky or aggressive than those that diversify, even if they focus on a conservative area, such as Utilities.
We then look at where the fund invests. Canada, the U.S., Japan and parts of Europe offer conservative opportunities and income investing possibilities. Many investments in other parts of the world involve extra risk. We also look at the fund’s trading frequency and use of derivatives or leverage; both of these cut quality and raise risk.
Most other fund-rating systems make the mistake of focusing too heavily on performance. The problem here is that low-quality funds can be great performers for long periods. But when the winning streak ends, horrendous losses can follow.
Our goal is to keep you out of these “time bomb” funds and help you focus on the high-quality funds that will likely lead to long-term investment success.
A top mutual fund buy for income investing
Here’s how our fund ratings work for one of our mutual-fund recommendations in Canadian Wealth Advisor:
Guardian Monthly High Income II Fund (CWA Rating: Income) (GGOF Guardian Group of Funds, Commerce Court West, Suite 4100, P.O. Box 201, Toronto, Ontario M5L 1E8. 1-800-668-5613; Web site: www.ggof.com. Available from brokers) is a good example of a fund we rate as Income.
Guardian Monthly High Income II continues to emphasize more stable real estate investment trusts (REITs) and high-quality, long-lived resource trusts that pay out a low percentage of cash flow as distributions. This should help the fund keep distributions high even after Ottawa’s tax changes in 2011.
Guardian Monthly High Income II pays a $0.06 monthly distribution, for a 6.8% yield. The fund has an MER of 2.30%.
The $574.3-million fund’s top holdings are Crescent Point Energy Trust, RioCan REIT, ARC Energy, Bonavista Energy Trust, Cominar REIT, IESI-BFC, Vermilion Energy Trust, CML Healthcare Income Fund, Canadian REIT and Enerplus Resources Fund.
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The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
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