By Ray Turchansky
Victoria Times Colonist
Saturday, January 3, 2004

Last week was a solid week for the mutual fund industry in Canada, with strong reports of sales and performance coming on the heals of some assurance that industry problems in the United States aren't likely occurring here.

The Investment Funds Institute of Canada reported net sales of $513 million for November, the second consecutive month of positive sales and the highest monthly level this year. It even tops the $485.1 million in February sales during RRSP season.

By comparison, in November of 2002, there were net redemptions of $579.8 million.

At the same time, a report by the fund rating service Morningstar indicated 75 per cent of Canadian mutual funds made money in November, and 78 per cent of individual funds have made gains thus far this year.

Precious metals once again led the fund categories, up 11 per cent during the month, 51.9 per cent year-to-date and 94 per cent in the past 12 months.

But David O'Leary, an analyst with Morningstar Canada, warned: "Investors should be cautioned to recall the popularity of technology funds during 1999. Remember that, over any short-term period of time, a fund focusing on a subset of the market -- whether emphasizing sector, geography, asset class or capitalization -- will outperform fully diversified funds."

The second-best performing class during November was natural resources, up 3.5 per cent, followed by Canadian income trusts, with a 2.9 per cent one-month return.

The worst performing sectors were Asia (Excluding Japan) and Asia-Pacific Rim, both losing 3.3 per cent.

The results came out just days after IFIC president Tom Hockin addressed reporters on the matters of late trading and market timing, which have scandalized the mutual fund industry in the U.S.

Late trading is processing a trade after a close of business, usually 1 p.m. Pacific time. Market timing is when stocks are flipped quickly within a fund, benefiting a few investors who get in and out, while driving up trading costs for all.

Hockin said there are "profound, systemic" differences in the way such issues are handled in the Canada and the U.S.

In the U.S., an order is received when it is placed with a broker or dealer. In Canada, the order is not deemed to be placed until it is processed by the fund company itself.

IFIC vice-president John Murray says that 90 per cent of all fund orders in Canada go through the six major chartered banks, Investors Group, or FundServ, an independent firm that handles orders. And all use a time-stamping technique that prevents late trading.

While market timing is not illegal, Hockin said: "Firms that have identified suspicious short-term trading activity have already moved to implement discretionary short-term trading fees."

Bill Procter, senior vice-president at Mackenzie Financial Corporation, admitted that negative headlines about the industry in the U.S. have caused investor concerns in our country. "But in Canada we're a little more conservative.

"At Mackenzie we have eight lawyers on staff, it's been well policed. In years past we had one or two planners who traded more than we'd like to see, so we put in limits. I don't think it's going to be an issue in Canada. Hopefully we have the policies in place."

Adrian Mastracci, of KCM Wealth Management in Vancouver, suggests investors can protect themselves with the following due diligence:

Make sure the fund's investment objective matches your personal objective.

Keep tabs on whether a fund's investment objectives change.

Become familiar with the mutual fund prospectus. It contains a wealth of information, such as the fees and costs area.

When selecting traditional funds, look for those that have low turnover of individual securities and consider the impact of management expense ratios on investor returns.

Be vigilant of mutual funds that replace their managers, sometimes suddenly.

Be aware of major and/or sudden shifts in performance, both up and down.

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.