Investing 101

Some things in life just go great together

Some things in life are good on their own, but work even better together. Peanut butter and jam. Movies and popcorn. Simon and Garfunkel. Mackenzie Cundill Value Fund and Mackenzie Ivy Foreign Equity Fund fall into this category as well. Individually they are good, solid funds, but when combined they are remarkable.

The following article looks at how these two funds perform together, and the benefits of investing globally.

Three good reasons to invest globally

With its fiscal strength, strong banks and plentiful natural resources, Canada’s economic prospects appear strong. So why invest outside of Canada?

1. Many other regions are undervalued in comparison to their historical averages and are thus ripe for growth. Holding a globally diversified portfolio ensures you’ll reap the benefits of growth wherever it may happen.

2. The top performing countries change from year to year. In fact, over the past 10 years, Canada (represented by the S&P/TSX Total Return Index) has been the top performing country only once – in 2005. (Source: Datastream).

3. Studies have consistently shown that investing in a mix of Canadian and international stocks produces better potential returns over the long term, with less risk, than investing in Canada alone.

The above chart shows the 10-year risk/reward of the funds compiled by the independent fund-rating agency Morningstar in its Morningstar Global Equity Index to July 30, 2010. The Cundill Value/Ivy Foreign Equity fund pairing in the top left-hand quadrant (dark blue) was the top global performer. The fund pair recorded lower volatility than any other single fund, and the second highest return, beaten only by Cundill Value Fund itself.

Why not invest in a global ETF?

The chart above also answers the question, “Why not invest in a global ETF?”, those exchange-traded funds that mimic a market index. Comparing the return of the fund pair with that of the MSCI World Index ($CDN), the leading benchmark for global markets, the fund pair posted a positive return of 3.4% over the period, while the MSCI World Index ($CDN) lost 3.1%.

In other words, the fund pairing outperformed the index by 6.5%. Active management obviously worked. Indeed, global markets are particularly well-suited to active management. Economies around the world can be complex and develop at different paces. It takes a knowledgeable portfolio manager to choose the best places to invest and the stocks with the best prospects in those places.

Why does this combination work so well?

While some investment funds are highly correlated – their returns tend to move up and down together – the returns of Cundill Value Fund and Ivy Foreign Equity Fund don’t closely track one another. This means it is possible for Cundill Value Fund to be making money while Ivy Foreign Equity Fund isn’t, and vice versa.

As well, both Cundill Value and Ivy Foreign Equity hold concentrated portfolios, and their holdings do not overlap. Cundill portfolios generally hold 30 to 35 stocks, and Ivy Foreign Equity Fund is similarly concentrated: over the past number of years the number has ranged from 20 to 25.

On July 30, 2010, the pair held a total of 57 stocks – fewer holdings than many single funds, so there is no worry about being over diversified. Each fund holds a group of well-researched, individually selected stocks, giving investors a portfolio where the managers have strong conviction in each and every holding.

The proof is in the performance