From our Canadian Bureau:      Page 2 CIBC and Barclays Roll Out New Index Products

Let's face it, Canadian investors are star-chasers. In 1993, most Latin American and emerging markets funds returned 60% to 100%, spurring huge sales in these funds during 1994 - just in time for the Mexican Peso crisis. When the gold frenzy was prominent in the first half of 1996, investors poured billions into precious metals and resource funds during the subsequent eight months, only to find resources slump for two and a half years (with gold still languishing). There are many more examples, but the point is clear - Canadian investors have terrible timing and they typically underperform the very funds in which they are invested.

While having more diverse and cost-effective investment alternatives is a positive for all investors, specialty indexes may allow Canadians to do themselves more harm than good. Let's look at the iFin fund for instance. It's filled with Canada's largest banks, finance firms, insurers, investment management companies, and other financials. So how can Canadians have such bad timing in a relatively stable sector? Consider the AIC Advantage fund - a Canadian fund launched in 1987 with a focus on the financial services industry (and wealth management in particular). It enjoyed such tremendous success during the 1990s that AIC decided to cap its original fund in the fall of 1996 and launch its sister - AIC Advantage II. That should have been the sign for Canadians to ignore their instincts.

In September of 1999, Advantage II celebrated its third anniversary and boasted a 12.50% compound annualized return. The problem is that the fund itself outperformed its investors by about 12.50% per year. That's right, investors in the AIC Advantage II fund had, in aggregate, an annualized compound return of 0.00% per year during the fund's first three years in existence. Though updated numbers are slightly better, they're still discouraging (16.10% for the fund vs. 6.96% for investors, annualized from inception to 08/31/2000). So even relatively stable, high yielding sectors like financials have been poorly timed. Examining the average Canadian investor's experience in the areas of gold and energy stocks would show ever more startling results of poor timing and underperformance. The more diversified the portfolio, the less impact the timing of transactions will have on investors' bottom lines. The challenge with all of the new sector offerings (plus those available in the US such as sector SPDRs) will be to keep prudent balance in your portfolios.

While I'm not overly enthused about the MERs on CIBC's index products, they do provide access to areas not previously available to Canadian index investors, and they offer a MER rebate that brings the cost down to 0.30% annually if your aggregate index fund holdings are at least $150,000. (This MER rebate is taxable according to Canada's tax laws if received in respect of taxable holdings.) The best deal for indexers remains ETFs and other similar products with razor-thin fees of 0.18% and a structure that promotes liquidity. While I'm not a fan of indexing everything, the dirt-cheap fees and growing product choice are positives for all investors and will continue to force the Canadian fund industry to lower its steep MERs - which average about 2.40% for Canadian stock funds and 2.50% for US and foreign stock funds.

Dan Hallett, B.Comm., CFP is Senior Investment Analyst with Sterling Mutuals Inc. Sterling Mutuals Inc. (http://www.sterlingmutuals.com) is registered as a Canadian mutual fund dealer in Ontario, British Columbia and Manitoba.

10/02/2000

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