♦ RBC GOES GREEN. The news that RBC is about to jump onto the socially responsible investing (SRI) bandwagon is a major development for those who advocate taking a “green” approach to money management.

RBC, whose funds are distributed through Royal Bank and its affiliated companies, is the largest stand-alone fund group in the country with assets under management of about $78 billion. It has tremendous marketing clout and the addition of three new SRI funds to its line-up will go a long way towards bringing “green” investing into the mainstream.

However, the new funds, which are still in the preliminary prospectus stage, will have to deliver from a performance perspective. Many of the existing SRI funds available in this country have produced sub-par results, which have held back their acceptance among investors. Until now, Canadians have indicated that they are willing to think green when it comes to money as long as they aren’t financially penalized for doing so.

The numbers are getting better, however. Last year, industry-leader Ethical Funds had three first-quartile performers: Ethical American Multi-Strategy Fund, Ethical Global Equity Fund, and the flagship Equity Growth Fund. The Mackenzie Universal Sustainable Opportunities Class, which we wrote about in the April issue, was also a first-quartile performer in 2006 and shows above-average numbers over one, two, and three-year time frames.

For fixed-income investors, the Phillips, Hager & North Community Values Bond Fund is far and away the best choice. It has been a first-quartile performer every single year since its inception in late 2002.

♦ ASSESSING RISK. Globefund.com has added a valuable new feature to its fund analysis pages. Now you can see at a glance a fund’s volatility rating over the past three years, visually displayed in a “volatility meter”. Even more useful, in my opinion, are the best and worst 12-month performance periods over the fund’s entire lifetime.

This is especially helpful in determining how much risk you are taking on when you decide to purchase a specific fund. For example, the worst 12 months ever experienced by the Chou RRSP Fund was a loss of 15.7% way back in 1990. By comparison, the Acuity Canadian Equity Fund posted a one-year loss of 35.4% over the period to September 2001, while Altamira Equity dropped 39.5% during that same period. Check out the numbers on the funds that are of interest to you.

♦ HIGHER INTEREST RATES. High-interest savings accounts are offering even better returns these days. Altamira recently announced that it has increased the rate on its Canadian dollar Cash Performer Account to 3.85% (from 3.75%) while the US dollar version is paying 4.75%.

Some time ago, we recommended switching to Altamira Cash Performer from the Altamira T-Bill Fund because the high interest account is currently offering a superior return. We continue to show Altamira T-Bill Fund in our Ideal Portfolios (see article elsewhere in this issue) because of ease of tracking. However, readers who follow those portfolios may wish to substitute Cash Performer instead.

♦ SAXON WORLD GROWTH UNDERPERFORMS. I’m concerned about the recent weak results of Saxon World Growth Fund, which is on our Recommended List. The fund lost more than 5% in the three months to the end of April, much worse than the average for the Global Equity category. Part of the loss may be due to the recent sharp rise of the Canadian dollar since 46% of the fund’s assets are invested in the United States. However, I am putting the fund on watch and changing the rating to Hold for the time being. Don’t bail out yet, but don’t add to your positions either.

♦ NEW SPROTT FUND. Any time the Sprott organization launches a new fund, it’s worth paying attention. Eric Sprott and his team take an unconventional approach to securities selection, but you can’t argue with success and on the whole their funds have been great performers. We added the Sprott Canadian Equity Fund to our Recommended List on Jan. 2, when its NAV was $38.32. It’s now at $42.42, for a gain of 9.7% in just five months.

The new entry, launched on April 25, is the Sprott Global Equity Fund. It will invest in mid to large-cap companies (minimum capitalization of US$1 billion) from around the world with a goal of long-term growth. If it follows the pattern of the other Sprott funds, expect a heavy emphasis on energy, gold, and base metals stocks at the outset. Volatility will likely be high so this is not a fund for risk-averse investors. – Gordon Pape

DOLLAR DILEMMA

With the loonie hitting thirty-year highs almost daily, what can fund investors do to protect profits?

Every day it seems we see the same headline in the newspapers: “Loonie hits new thirty-year high”. Our once anaemic dollar has soared through US93c and the way things are going it seems like nothing is going to stop it, at least for a while.

On Thursday, Statistics Canada reported that our economy grew at an annualized rate of 3.7% in the first quarter, a much faster pace than most economists had expected. Two days earlier, the Bank of Canada had signalled that it may start to raise interest rates again to combat inflation. Together, the two developments pushed our dollar up by more than a cent against the US greenback.

It’s a far cry from last winter, when a temporary slump in oil prices and a weak fourth quarter dragged down the loonie from the US90c range that it touched in the summer of 2006 to about US85c. At that point, the general consensus was that our dollar would probably continue to drift down, eventually stabilizing around the US82c level. However, the opposite has occurred. Since Jan. 1, the loonie has gained almost US8c, rising from US85.81c to US93.44 as of Thursday afternoon. That’s an advance of almost 9% in just five months. It all goes to show just how unpredictable short-term currency movements can be.

The loonie has risen from US63c at the start of 2002 to the US93c range today.
Source: Bank of Canada.

The loonie’s rise has important implications for fund investors, particularly at a time when global diversification is being emphasized by most financial advisors. Unfortunately, in many cases stock market gains are being offset by currency losses, especially in terms of US equities. For example, during the period from 2003 to 2006, US stock markets were very strong but most US equity funds scored meagre gains because of the surge in the value of the loonie. We’re seeing a repeat of this phenomenon in 2007. From Jan. 1 to May 30, the Dow Jones Industrial Average was ahead 9.4% for the year while the S&P 500 was up 7.9%. However, very few US equity funds have been able to match those numbers in Canadian dollar terms.

As a result, many Canadian investors are reluctant to use proper international diversification strategies because they are afraid of being whipsawed by currency movements. Those concerns are justified in the light of recent experience but the answer is not to put all your eggs in the resource-heavy and potentially volatile Canadian market. Rather, the solution is to reduce the currency risk in your fund portfolio.

Admittedly, this isn’t easy. The problem is complicated by the fact that since the removal of the 30% foreign content restriction for registered plans, many so-called “Canadian” equity funds have been boosting their global content. A survey published in The Globe and Mail on Thursday identified several supposedly Canadian stock funds that hold more than 40% of their assets in foreign stocks. The Signature Select Canadian Fund from CI, which has an excellent record, reported that as of April 30 only 46.5% of its assets were actually invested in Canada!

So how do you deal with the currency situation? The first step is to decide whether it really is an important issue for you. John Montalbano, president of the Vancouver investment firm of Phillips, Hager & North, maintains that over the long term (5-7 years), currency movements are “a wash” – everything eventually evens out. But for people with shorter time horizons, which include groups like retirees, it’s a different matter. In those situations, currencies become more of a risk than a diversification tool.

Investors who take a shorter-term view must decide on an appropriate strategy and stick with it. Give careful thought to how much currency diversification you want in your portfolio and then choose appropriate funds to implement your plan.

There are three ways to achieve that. The first is to choose some US and offshore equity funds that routinely employ currency hedging as part of their strategy. One example is the RBC O’Shaughnessy US Value Fund, which is on our Recommended List. Hedging is part of the reason why this fund’s performance record is miles ahead of the average for the US Equity category. To the end of April, the O’Shaughnessy fund showed a three-year average annual compound rate of return of 12.3% compared to the category average of 4.1%.

A second approach is to select an index fund that invests in Canadian-dollar denominated options and futures based on foreign stock exchanges. The Altamira Precision U.S. RSP Index Fund provides an example of this type of fund. It tracks the S&P 500 Index through a mix of derivatives and showed a three-year average annual compound rate of return of 10.5% to the end of April. If you prefer exchange-traded funds (ETFs), Barclays Global Investors offers two foreign funds that are fully-hedged back into Canadian dollars. They are the iShares CDN MSCI EAFE Index Fund (TSX: XIN) and the iShares CDN S&P 500 Index Fund (TSX: XSP).

Finally, you can choose one of the new currency-neutral funds that many companies are now offering. Phillips, Hager & North, for example, launched two such funds last year. The PH&N Currency-Hedged Overseas Equity Fund is available as an alternative to the regular Overseas Equity Fund, while the PH&N Currency-Hedged US Equity Fund can be used by investors who don’t want the American dollar exposure of the regular PH&N US Equity Fund. Six-month results to the end of April show that people who chose the Currency-Hedged US Fund would have been better off by about one percentage point. However, the non-hedged Overseas Equity Fund outperformed its hedged counterpart by about two and a half percentage points.

Therein lies the dilemma for fund investors: to hedge or not to hedge? There is no ideal answer but PH&N’s John Montalbano suggests that a broad guideline is to hedge about one-half of your total equity exposure. Of course, personal circumstances will play an important part in your decision; Canadians who winter in the Sun Belt may want more US dollar exposure in their portfolios than those who spend the entire year at home.

Do not, under any circumstances, try to outguess the currency markets by switching back and forth between hedged and unhedged funds depending on where you think the loonie is going. It’s increasingly tempting to try such a tactic because of the advent of currency-neutral mutual funds, but it’s a dangerous game. Even the experts can’t predict short-term currency movements so why should you expect to do any better?

Also, contrary to popular belief, it makes no difference whether you buy US or Canadian dollar units of a fund. Except in the case of money market funds, everything evens out because all units are priced on the basis of the portfolio’s underlying value.

The Bottom Line: Currency fluctuations are a fact of life that fund investors must contend with. Decide on a strategy that meets your needs and stick to it.

PROFITS ALL AROUND

Our semi-annual review of the Ideal Portfolios
shows that every fund on our list except one made money.

It was a good six months for readers who track the MFU Ideal Portfolios. All of them made money as did every individual fund with the exception of Altamira Bond, which was down a fractional 0.2% in the half-year period ending April 30.

The reason for Altamira Bond’s weak performance is simple: the Canadian economy rebounded from its 2006 year-end slump much more quickly than most people expected and this week the Bank of Canada warned that growing inflation fears make a renewal of interest rate increases likely.

Altamira Bond focuses on the long end of the bond market. Long bonds are highly sensitive to interest rate movements, so they have excellent capital gains potential when rates are falling but are vulnerable at times when central banks are tightening.

When we added Altamira Bond to the Ideal Portfolios last year, it was with the expectation that the economic slowdown would be more severe and prolonged than it actually was. At the time, it appeared more likely that the Bank of Canada would be cutting interest rates in 2007 in order to stimulate the economy. That no longer appears to be the most likely scenario.

Given these circumstances, we are recommending a shift out of Altamira Bond in all the Ideal Portfolios at this time. There should be no costs involved in doing this since it is a no-load fund. We expect to return to Altamira Bond in the future when economic conditions are more favourable for outperformance, but for the time being there are better choices available.

All our other funds performed about as expected over the period. The standout was the Mackenzie Universal Canadian Resource Fund, which is represented in the Ideal Aggressive Portfolio. It advanced slightly more than 14% over the six months thanks to renewed strength in the energy sector and continued strong performance from mining companies. (Energy and materials together make up almost 60% of the portfolio.)

Altamira Global Small Company Fund, RBC O’Shaughnessy Canadian Equity Fund, and AIM Canadian Premier Fund, which was added to the Aggressive Portfolio in December, all generated returns in the 11%-12% range. Other double-digits gainers were CIBC Monthly Income Fund, Synergy Canadian Corporate Class, and Fidelity Canadian Disciplined Equity Fund.

Despite the good performance of the RBC O’Shaughnessy Canadian Equity Fund, we are dropping it from the Ideal Portfolios because it has been closed to new investors. This is a policy that we adopted at the time these portfolios were launched, back at the beginning of 1997. Since new readers are coming on board all the time, we only include funds that are currently available for purchase and which have an initial minimum investment requirement of not more than $1,000.

In deciding which of the Ideal Portfolios is right for you, ask yourself one basic question: how much risk am I prepared to live with? The Ideal Safety Portfolio has produced the lowest returns over the years but it rarely loses money in any six-month period because of the conservative nature of the funds it holds. Therefore, it’s the best choice for those who put preservation of capital ahead of all other priorities.

The Balanced Portfolio is the best choice for most people. It offers the potential for higher return than the Safety Portfolio (and this has proven to be the case over the years) combined with a modest degree of risk that is unlikely to result in serious losses even during periods of stock market weakness.

The Ideal Aggressive Portfolio is designed for investors who are willing to take more chances with their money. Over the long term, it is by far the best performer of the three but there have been times, such as during the 2000-2002 bear market, when the portfolio valuation took a big dip.

Now let’s take a look at how each of the portfolios performed during the six months to April 30 and our recommended changes. The portfolios were launched on Jan. 1, 1997 with an initial value of $10,000 each.

Value at last review (Oct. 31/06)	$16,691.99
Current valuation (Apr. 30/07)	$17,286.81
Change since last review (6 mo.)	+ $ 594.82
% change since last review	+ 3.56%
% change since inception (10.33 yrs)	+ 72.87%

Comments: This portfolio is heavily weighted to bonds and cash (55% of total assets). Bonds were generally weak during the period under review, with only the GGOF High Yield Bond Fund managing better than a 2% gain (it was up 3.6%). The balanced and equity funds in this portfolio all take a conservative approach, with the best performances coming from the Mackenzie Cundill Global Balanced Fund and the RBC O’Shaughnessy US Value Fund, each of which gained 7.7%. Overall, the Safety Portfolio was ahead 3.56% for the period.

Changes: As mentioned, we will drop Altamira Bond from the mix. We will redistribute its 10% weighting equally between the HSBC Mortgage Fund and the CIBC Canadian Short Term Bond Index Fund, both of which offer minimal risk during a period of potentially rising interest rates.

We also suggest switching out of CI Canadian Investment Fund, which has been underperforming since the departure of Kim Shannon last fall. To avoid DSC fees, stay within the CI group by moving over to Signature Select Canadian Fund, which has a fine record and is conservatively managed by Eric Bushell.

Altamira T-Bill Fund	10%
HSBC Mortgage Fund	10%
CIBC Canadian Short Term Bond Index Fund	10%
TD Canadian Bond Fund	20%
GGOF Canadian High-Yield Bond Fund	5%
BMO Monthly Income Fund	10%
Mackenzie Cundill Global Balanced Fund	5%
Harbour Growth & Income Fund	10%
Signature Select Canadian Fund	10%
RBC O’Shaughnessy US Value Fund	10%

Value at last review (Oct. 31/06)	$18,718.80
Current valuation (Apr. 30/07)	$19,940.86
Change since last review (6 mo.)	+ $1,222.06
% change since last review	+6.53%
% change since inception (10.33 yrs)	+ 99.41%

Comments: The asset allocation in this portfolio is approximately 60% equities and 40% bonds/cash. The performance over the latest six months was about what we’d expect from that mix, with an advance of 6.53% which was provided almost entirely by the equity component. There were no stand-out funds here on either the positive or negative side. This is an example of a dull-as-dishwater portfolio with just one virtue: it keeps on producing decent returns with modest risk.

Changes: We are dropping two funds from the portfolio for reasons mentioned earlier: Altamira Bond and RBC O’Shaughnessy Canadian Equity. The 10% Altamira Bond weighting will be divided between Altamira T-Bill Fund and HSBC Mortgage Fund. We’ll replace O’Shaughnessy Canadian Equity with the new RBC O’Shaughnessy All-Canadian Equity Fund, which was launched in January as we are very comfortable with the style of manager James P. O’Shaughnessy.

Altamira T-Bill Fund	10%
HSBC Mortgage Fund	10%
TD Canadian Bond Fund	10%
Northwest Specialty High-Yield Bond Fund	5%
CIBC Monthly Income Fund	10%
RBC O’Shaughnessy All-Canadian Equity Fund	10%
Synergy Canadian Corporate Class	10%
Fidelity Canadian Growth Company Fund	5%
Trimark US Small Companies Class	5%
RBC O’Shaughnessy US Value Fund	10%
Mackenzie Cundill Value Fund	10%
Fidelity NorthStar Fund B	5%

IDEAL AGGRESSIVE PORTFOLIO REVIEW

Value at last review (Oct. 31/06)	$24,595.26
Current valuation (Apr. 30/07)	$26,933.29
Change since last review (6 mo.)	+$2,338.03
% change since last review	+9.51%
% change since inception (10.33 yrs)	+169.33%

Comments: The Aggressive Portfolio, which invests mainly in equity funds, was firing on all cylinders, with a six-month gain of 9.51%. Except for the small 5% position in Altamira Bond, every fund in the mix contributed with the lowest gain being the 7.7% profit scored by both RBC O’Shaughnessy US Value and Mackenzie Cundill Value. That’s the kind of consistency we like to see.

Changes: The 5% Altamira Bond weighting should be moved to Altamira T-Bill Fund for now. As with the Balanced Portfolio, the new RBC O’Shaughnessy All-Canadian fund will replace the old one that has now been capped.

REVISED IDEAL AGGRESSIVE PORTFOLIO

Altamira T-Bill Fund	5%
CIBC Monthly Income Fund	10%
RBC O’Shaughnessy All-Canadian Equity Fund	10%
Synergy Canadian Corporate Class	10%
Fidelity Canadian Disciplined Equity Fund	10%
AIM Canadian Premier Fund	5%
Fidelity Canadian Growth Company Fund	5%
Trimark US Small Companies Class	5%
RBC O’Shaughnessy US Value Fund	15%
Mackenzie Cundill Value Fund	10%
Altamira Global Small Company Fund	10%
Mackenzie Universal Canadian Resource Fund	5%

The Bottom Line: All the Ideal Portfolios are acting pretty much as anticipated. Except for the fine-tuning mentioned, there is no need for major changes at this time.

PH&N FUNDS MORE ACCESSIBLE

New units will reduce minimum investment requirements while encouraging advisors to recommend the funds to clients.

Phillips, Hager & North is one of the most respected boutique investment houses in Canada. For more than 40 years, this Vancouver-based company has offered a selection of high-quality, low-cost funds, several of which have been among the perennial leaders in their categories.

At present, we have four PH&N funds on the Mutual Funds Update Recommended List: Bond, Short-Term Bond and Mortgage, High Yield Bond, and Dividend Income. The latter was first picked way back in April 1996 and has a 10-year average annual compound rate of return of 15.4%, placing it number one in its category over that period according to The Fund Library.

A comparison of the PH&N Dividend Fund and the S&P/TSX Composite Index over the past decade.
Source: Globefund.com

Many people have told us that they would like to include some PH&N funds in their portfolios but have been deterred by the high cost of entry. You must have at least $25,000 to open an account with the company and even though this is a family total and can be spread over several funds, investors are often unwilling to make that large an initial commitment.

Moreover, few financial advisors encourage their clients to look at PH&N funds for one simple reason: they receive no compensation for money invested with the company. PH&N is among the few mutual fund houses that do not pay “trailer fees” to advisors. These are annual payments to cover the cost of advice and services and are based on the total fund assets with a company in investors’ accounts. A typical trailer fee for an equity fund is 1% while for a fixed-income fund it may be 0.5%.

PH&N management has decided it’s time to change the dynamic and open the company’s funds to a wider range of investors. Beginning July 2, the company will offer new B-series which will provide a modest trailer fee for advisors (about half that paid by other companies) and carry a minimum initial investment requirement of $5,000.

Investors will foot the bill by paying the cost of the trailer fees in the form of higher management expense ratios (MERs). But the cost of the B units will still be well below the industry average.

For example, the MER of the existing A units of the PH&N Bond Fund in 2006 was 0.59%. The new B units are expected to have an MER of 0.84%, a difference of 25 basis points. In the case of the PH&N Dividend Income Fund, the MER will go up by 50 basis points, from 1.14% to 1.64%. In all cases, the additional amount will go to the advisor as a trailer fee; PH&N gets none of the extra money.

This of course means that the B units will generate a lower return than the existing A units, to the extent of the MER differential. However, to keep matters in perspective, it’s important to note that the B-unit MERs will still be well below the average for similar funds of the same type. For example, the company estimates that the B units of the PH&N Balanced Fund will have an MER of 1.38%. The average for the category is almost double that, at 2.67%.

The cheapest way to buy PH&N funds will continue to be to invest $25,000 and open an account with the company. This will enable you to buy the A units, with the lower MERs. (All units, including the new B series, are no-load.) But if you don’t have that kind of money available, or you prefer to work through your own financial advisor, the new B units will be a good alternative.

In other news from PH&N, it appears that the company has finally solved one of its long-standing problems. For years, I’ve been critical of the weak performance of their foreign equity funds. Several fixes have been attempted, none of which were successful until now.

In mid-2004, the company chose Jennifer Witterick of Toronto-based Sky Investment Counsel to take charge of its faltering PH&N Overseas Equity Fund. The fund had recently experienced two terrible years, having lost 18.5% in 2001 and 19.4% in 2002. Witterick, who uses a value style for choosing international stocks (most PH&N funds employ a GARP approach) took a while to get things turned around. But in 2006, the fund was a first-quartile performer with a gain of 27.4% in what hopefully was a break-out year. Over the latest six months, to April 30, the fund has advanced 16.2%, about four percentage points better than the category average.

Unfortunately, the company’s two US equity funds, PH&N US Equity and PH&N US Growth, continue to struggle despite a managerial change there as well, with Carl Lytollis assuming portfolio responsibility. We’ll need to see improvement there before we can once again say that PH&N offers one-stop shopping for fund investors.

The Bottom Line: As of July, PH&N funds will be more easily accessible for investors, albeit at a somewhat higher cost. The company’s fixed-income and Canadian equity funds remain its core strength, with the Overseas Fund coming on strong.

Q – Would you please comment on TD’s new Global Dividend Fund in the near future? – Martin O.

A – This fund was launched last September with a mandate to invest in dividend-paying equities from around the world. The focus is on large-cap stocks which are selected using both value and growth criteria. The fund pays quarterly income distributions but so far they have been unimpressive with the latest payment being 3.34c a unit in March.

Investors immediately gravitated to the concept. The fund already has over $500 million in assets and it is not yet a year old. I’m sure the folks at TD are thrilled with this but so far I see nothing to support this investor exuberance. Granted, the fund has a six-month return of 9% to the end of April. But that’s below the 9.9% average for the Global Equity category and more recent results are also sub-par. My advice is to sit tight for now and see if performance picks up. There are lots of good global funds out there so you might as well go with a winner. – G.P.

Q – A recent article by Morningstar’s Brian O'Neill questions the sustainability of monthly distributions of the BMO Monthly Income Fund. I currently own this fund and am thinking of increasing my holdings but this article causes me to pause.

I know you have been a fan of this fund for some time now and you had mentioned it in one of your articles as recently as March. What are your thoughts about the continuance of monthly distributions by this fund? – Tony R.

A – One of the first things I look for when assessing a fund’s ability to sustain distributions is total return compared to cash yield. If the yield exceeds the total return, it means the portfolio is not generating enough profit to cover the payments. This doesn’t automatically translate into a distribution cut, but it’s a good tip-off to potential problems.

In 2005, this fund posted a total return of 11.3% and paid out 7.4% in cash flow. That’s a comfortable margin in my view. But in 2006, the respective numbers were 8.5% and 7.1%, which leaves little margin for error. So far this year, total return is exceeding the distributions – you can determine that simply by looking at a fund’s monthly net asset value (NAV) on websites like Globefund. As long as that pattern continues, the distribution will probably remain at 6c a unit, although of course there are no guarantees.

This is the most conservatively managed of the bank monthly income funds. As of the end of March, just over 50% of the portfolio was in Canadian equities with 48% in bonds. The bond position has been a drag on returns for the past few months and that is likely to continue over the summer. If the stock market slows down, the fund is going to have troubled producing the returns needed to sustain the payments without dipping into capital. This is why some commentators suggest a distribution cut may be in the works.

Of course, there is no reason a fund such as this can’t live off its own fat for a while, continuing the 6c payments even at the expense of a declining NAV. But that can’t go on forever – we’ve previously seen the consequences of such policies in other funds.

Having said all this, I should point out that the amount of the distribution should not be the only reason to choose this fund. Some investors will be attracted to its low-risk portfolio, which should preserve capital more effectively than such rivals as CIBC Monthly Income Fund and RBC Monthly Income Fund in the event stocks go south. In such circumstances, a distribution cut might be seen as a fair trade-off for asset protection.

On balance, I still like this fund I continue to rate it as a buy for conservative investors. – G.P.

Q – One of your recommendations is Diversified Preferred Share Trust (TSX: DPS.UN) for a safe dividend income investment. I thought I made a good deal by buying some units at about $24. As you are aware, it is continuously dropping. Should I get rid of my units and is there a good reason for the drastic change in value, for an investment that you would expect to be more "stable"? – Andre L.

A – This closed-end fund had about 10% of its portfolio in BCE preferred shares as of the end of March. BCE and Bell preferreds and bonds were hit by price drops when the big ratings agencies put them on credit watch as a result of speculation that the company could be taken over in a leveraged buy-out. Commenting on this in the May issue of our companion newsletter, The Income Investor, contributing editor Tom Slee wrote:

“BCE preferred shareholders and bondholders who can live with some uncertainty, should think about maintaining their positions. As a matter of fact, I think that some BCE preferreds are even a buy right now.”

The same can be said about DPS.UN. At Thursday’s closing price of $21.73, the fund has a projected one-year cash yield of 5.5%. It is a buy at these levels. – G.P.

ACKER FINLEY CANADA FOCUS FUND $$
This fund seeks to identify the most undervalued funds among the top 100 companies in the S&P/TSX Composite Index. The portfolio typically holds 20-30 positions including such names as Teck Cominco, Alcan, and CNR. The management team will take large positions in about 10 stocks that they have identified as being especially cheap. Examples include Teck and Alcan which each represented more than 7% of the portfolio entering 2007. About half the total assets are used in this way with the other 50% equally distributed among stocks that meet the company’s sophisticated investment criteria. You might expect all these calculations to produce outstanding results but that has not been the case thus far. The three-year average annual compound rate of return to April 30 was slightly above average at 18.1% but the latest one-year advance of 4.8% was far below the category norm. In short, this is an okay fund, but nothing exciting.

ACKER FINLEY SELECT US VALUE 50 FUND $$
When you look at this fund's performance record, you may be puzzled by what you see. Over the three years to April 30, the average annual return was 14.2%, more than three times better than average for the US Equity category. But the latest one-year gain was below average, at 7.5%. The reason? This fund is 100% currency hedged. That means it did not take a big hit while the loonie was rising against the US dollar in the 2003-06 period and investors benefited. In the early part of this year, the hedging policy worked against the fund as the Canadian dollar weakened. But in the past couple of months, hedging paid off big-time as the loonie surged past US93c. Clearly, hedging can be a two-edged sword. The managers seek out undervalued large-cap stocks, aiming to hold 40 to 50 positions in the portfolio (hence the "50" in the name). However, the weightings are not evenly distributed. The fund has several stocks with a position of 6%+ of total assets, including Home Depot, Carnival Corp. (the cruise line), ConocoPhillips, and Pfizer. Other positions are very small, some less than 1%. In short, the managers make fairly large bets on a few stocks and then round out the portfolio from there. We see nothing to suggest that their stock-picking technique is any better than that of several other US funds. The currency hedging has helped to boost past returns but that advantage now appears to be over. You must be an accredited investor or have $150,000 to get into this fund. You can do better elsewhere for less money.

All rights reserved. Reproduction in whole or in part without written permission is prohibited. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers and distributors of Mutual Funds Update assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. Contributors to the MFU and/or their companies or members of their families may hold and trade positions in securities mentioned in this newsletter. No compensation for recommending particular securities or financial advisors is solicited or accepted.

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In this issue:

What's New

DOLLAR DILEMMA

With the loonie hitting thirty-year highs almost daily, what can fund investors do to protect profits?

PROFITS ALL AROUND

10%

10%

10%

10%

10%

10%

IDEAL AGGRESSIVE PORTFOLIO REVIEW

REVISED IDEAL AGGRESSIVE PORTFOLIO

5%

10%

10%

PH&N FUNDS MORE ACCESSIBLE