Finding the Right Choice Among Canadian Mutual Funds

This past weekend was my turn to throw a party for a select group of our lifelong friends. We get together at least once a month for a “cup of conversation,” as my father used to say. The group is an eclectic collection of professions, interests, and hobbies. Basically, within the group, we can find answers to most questions a reasonable person could ask. We have a lawyer, two doctors, an accountant, a chief technology officer, a PhD in philosophy, two journalists, a painter, a housewife with a PhD in English Literature, a computer programmer, a musician, a teacher, and, well, me!

As the meat sizzled on the barbeque, the computer geek in our midst finally admitted that he had grown tired of how poorly his employer-sponsored RRSP was doing and wanted some direction in terms of which Canadian mutual funds would make sense for him.

My first gut reaction was to point him toward Canadian balanced equity funds. Their historic performance usually provided for the best return-to-risk ratio. It seems that fund managers typically put their best efforts in managing balanced funds, offering investors an opportunity to stay fully invested without losing a wink of sleep at night.

My next choice was small-cap funds. Lombardi Financial’s long- term focus has been on U.S. small-caps, which, while highly speculative, compensate for risks taken with surprisingly high returns most of the time. Notably, some of that volatility is best offset by the kind of diversification you can only find in pooled investments, such as small-cap funds.

My friend’s next question was about income-generating funds. In the current low-interest environment, income-generating funds could be appealing to very specific demographics, such as retirees; but not to my friend, whose earning power sufficiently covers his current income needs and then some. However, in the spirit of diversification, I told him he could look into a few bond and dividend funds that have had comparably stellar performances, considering interest rates have been holding steady at four percent to 4.5%.

On that note, investors who have bet their money on the U.S. fixed income funds have had a good ride in the past couple of years because of the surging Canadian dollar. This is due to having their coupon interest payments converted from the shaky greenback into our northern rising star. As many of you know, the Canadian dollar has recently closed at US$0.92, its four-year historic high. Unfortunately, the process would have been reversed had those same investors also put their hard-earned Canadian money into U.S. equities.

We then talked some more about global diversification; we talked about a few European and Far East funds; and we talked about asset diversification, mainly focusing on resource funds. By the end of it, all that talking made us excessively hungry. We followed the smell of food, honing in on that one, perfect cheeseburger my husband is famous for in our little circle. All in all, it was a good day.