Mutual funds for defense
At a time when markets are strong and returns have been generous for the past 3 years, why would anyone want to hear about investments for defense? Remember that everything goes in cycles and while I am not trying to predict doom and gloom, I think it is important for investors to not lose sight of reasons to include some defense in portfolios.
While no one can predict the future, here are some funds that can be added to a portfolio with a history of being more defensive in nature. I know that lists promoting top performing funds are much more exciting but investors must not forget the importance of risk management.
In this list I have tried to include defensive funds from different asset categories. These funds were selected based on their ability to manage risk over a long history (more than 5 years). We’ve looked at data that includes the risk level from the prospectus, the’ All Time Period Analysis’ from Morningstar to understand downside risk and we’ve also look at the most traditional measure of risk being the standard deviation of the fund.
- TD Real Return Bond Fund. When one thinks about defense, you can’t help but think about bonds. Two of my defensive picks are in the bond category. The first is the TD Real Return Bond fund. Real return bonds are unlike conventional bonds in that they drop when interest rates go up. Instead, they tend to do well in periods of rising inflation. The performance of this fund speaks for itself. Since inception dating back to Nov 1994, the fund has posted an impressive 9.1% compound return. More impressive though, it the track record of managing downside risk. The fund has lost money in only 4 out of 122 rolling 1 year periods The worst 1 year return it has ever had was -2.62%.
- Dynamic Income Fund. The Dynamic Income Fund has been in existence since Aug 1979. The fund is a more conventional bond fund in that it has mostly government bonds. The fund also currently has about 30% in corporate bonds. Over the last 5 years, the Dynamic Income Fund has not performed as well as the TD Real Return Bond Fund but it has an impeccable track record for managing risk. Since 1979, the fund has only lost money 3.5% of the time, which means it has made money 96.5% of the time. The worst 1-year return ever was -1.19%.
- Mackenzie Cundill Value. In the Global Equity category, Value funds tend to be more defensive in nature. Peter Cundill is one of the most well known value managers in history. This fund may be a great way to be contrarian and invest global with still some defense in mind. This fund is one of the few equity funds that can claim that it has never has a loss over any three or five year period in its 25 year history. Although equities have more risk than bonds, this fund has done a great job managing risk for the global equity category. Honorable mention goes to another fund from Mackenzie Financial, the Mackenzie Ivy Foreign Equity Fund.
- TD Monthly Income. Balanced funds are always a great way for investors to get the benefits of equity returns with the defense of bonds. The TD monthly income fund is one of the most defensive balanced funds in this category. According to the prospectus this is a low risk fund and more importantly, its history is impeccable given the fund has never lost money over any 1, 3 or 5 year trailing basis.
- Horizons Mondiale Hedge Fund. Although hedge funds have been under the microscope lately, this hedge fund is still one to consider if you want an asset that has low correlation to markets. According to the prospectus, this fund is considered a high-risk fund but its history shows a very different story on all measures of risk given that it has never lost more than 4.85% investing in equities over any 12-month period in its history.
- Canadian Equity Funds – Canada is a popular place for Canadians to invest. In our research, three Canadian Equity Funds make the list for conservative defensive funds. Mackenzie Financial has two great defensive funds in the Mackenzie Ivy Canadian and the Mackenzie Cundill Canadian Security. In addition, the CI Harbour Fund has an impressive history of managing risk, especially downside risk.
- TD Dividend Income Fund – yet another TD mutual fund makes the list. The TD Dividend Income Fund has been around since October 1994. This fund has never lost more than 5.4% over any 12-month period in its history. In fact, this fund has made money 92% of the time and only lost money 8% of the time.
As much as we have used the past to provide this list, keep in mind that past performance is no indication of future performance and there are no guarantees when it comes to mutual funds. All these funds have shown that they have done a great job managing risk in the past but there are no guarantees for the future. When picking any investment, make sure you incorporate some risk analysis especially if you consider yourself a conservative investor.
Diversification is key to success when investing in mutual funds. You should be exposed to both high yielding AAA+ Corporate bonds, equities diversified across different sectors & also have dividends. I always discarded dividends but since learned the advantages of cash flow investing. Here they are:
* Dividends add up over time – In fact over the last 25 years, the S&P 500 Index has gained 914%. If you add re-invested dividends, it soars to 2000%
* Dividends are tax-efficient – Interest gained from a Guaranteed Investment Certificate (GIC) at your local bank is taxed at your income tax bracket, which can be as high as 35%. Qualified dividends however are taxed at lower long term capital gains rates, which is 15% for most investors.
* Dividends grow overtime unlike GICs – Most companies that pay dividends are committed to growing their payouts over time as business improves, cash flow efficiency increases & to retain shareholder interest in their stock. As an example, consider McDonalds Corporation (NYSE: MCD). In the last 10 years, McDonald’s shares have risen by 192.50% and the company has increased its annual dividend from 22.5 cents a share to a whopping $2.32 per share. This represents a tenfold increase in dividend along with the 193% capital growth. Whereas if you purchase US treasuries, you might get 3.2% interest for a 10 year bond with no growth in the interest rate i.e. the 3.2% interest will never increase because it is fixed.