Canada Funds Drill and Dig Their Way to Riches

Before the big Wall Street sell-off began dragging Canadian equity markets down, too, the wild bull rampaging down Toronto's Bay Street was actually ahead by a nose of the one in New York.

With their northern economy strengthening, Canadian investors sank near-record amounts of cash into mutual funds last year.

And their faith was rewarded.

Markets roared ahead, the Toronto Stock Exchange 300 index recording a 27.4 percent rate of return compared with 23.3 percent for the S&P 500 index, when adjusted into Canadian dollars.

New York's selling spree has pulled the TSE down as well - from 5 percent on the plus side a month ago to just even on the year.

Still, improved corporate performance along with a stronger economic and fiscal picture nationwide has some American investors looking for a way to invest up North.

Canada has always had an abundance of natural resource stocks in oil, mining, paper, and wood products.

It always has been the land of the eternal gold rush - witness the rush away from Bre-X gold stock since its big Indonesian gold find turned bust - the latest disaster to befall a Canadian junior mining company.

But for every Bre-X there is a Voisey's Bay in Labrador, quite possibly the biggest nickel find in the world.

Intrepid American investors could, of course, simply call a broker to purchase individual Canadian stocks registered in the US.

But most investors look to mutual funds as their stock market vehicle.

There are about 1,000 Canadian-based mutual funds. But since they are not registered with the Securities and Exchange Commission (SEC), it is illegal under federal law for US residents to purchase the funds or for the funds to make public offerings in the US.

The few exceptions include: Private offerings of Canadian mutual funds may be made up to a limit of 100 US investors. Another exception expected to be adopted into law soon would allow professional investors with $5 million or more to invest in a fund if they chose, an SEC spokesman says.

But for most American investors, Canada-based funds are out. That leaves a small but intriguing universe of three US-based funds that, according to Morningstar, invest all or most of their assets in Canada:

Fidelity Canada

Managed by the Boston-based mutual fund giant, Fidelity Canada is the largest US-based Canada fund. Like other Canada funds, it tends to have a large weighting in energy, mining, and other natural-resource stocks. That means returns can be bumpy - down 12 percent in 1994, for example.

Perhaps reflecting a rising interest in Canada, the fund's assets jumped from $129 million last year to $154 million this year.

Total returns have been solid of late: 9.2 percent for the past year, and 7.5 percent annually over three years. Most assets, 87 percent, are Canadian with the rest in the US.

It has a two-star (below average) rating for risk/return from Morningstar and is rated as having "above average" risk.

Ivy Canada

One of 19 funds in the US-based Ivy and Mackenzie family, Ivy Canada is managed in Toronto by the parent company, Mackenzie Financial Corp.

Like its peers, Ivy has posted volatile returns. And it charges a heavy load, or sales commission.

For the past year, total return was 1.7 percent. The fund has gained 2.1 percent annually over three years

This is a small fund with 98 percent of its $15.3 million in assets in Canada. It has three stars (average) from Morningstar and is rated a high risk fund.

"Our view is that Canada is reemerging on the world stage," says fund manager Frederick Sturm.

A dozen years ago, he says, "Canada was a high inflation, strike prone, foreign capital dependent, high deficit, country.... But we have, over the last six years, made significant improvements in the fabric of our country."

Federal and provincial governments brought down budget deficits. Companies improved productivity. Interest rates fell. All this reduced capital costs for Canadian companies. Now the country is poised for growth, he says.

The fund is diversifying outside the resource sector into other industries, he says, including banks, last year's hottest sector.

"Canada has become a good call on global growth," Mr. Sturm says.

Still, he concedes that currency fluctuations threaten returns if the US dollar gains strength and the Canadian dollar slips.

Fontaine Global Growth

Fontaine Global Growth has 72 percent of its $5.6 million in assets in Canada, most of the rest the US.

The no-load fund has returned 12.3 percent annually over the past three years. For the past year, returns were caught in a downdraft, falling 6.8 percent.

Most of its holdings are in mining or mining-related Canadian issues. It also has three stars from Morningstar and is rated high risk.

"We're interested in mining companies - Inco, for example - because we think they're going to do well as commodity prices appreciate," says Richard Fontaine, the fund's manager. Inco is part owner of the huge nickel deposits in Labrador's Voisey's Bay.

"We're trying to invest in companies with significant growth potential. These are mining companies we're talking about so, by definition, they are high-risk investments."