Along with your financial advisor, the Dynamic team of dedicated
investment managers and client service representatives are working together
to achieve the only financial goals that really matter... yours. We want
you to be comfortable with your overall financial plan and know how each
component is contributing to the long-term strategy you and your financial
advisor have mapped out.
Mutual Funds
Fund Prices
Fixed Income Investments
Bond Funds & Interest Rates
Risk & Return
Asset Allocation
Front-end & Deferred Sales
Charges
Management Fees
Diversification & Foreign
Investments
Fund Performance
Dollar-cost Averaging
A mutual fund is a pool of money that represents the savings of
many people who share the same investment objective. The money is invested
on their behalf by an accredited investment manager or team of managers.
The mutual fund holds a portfolio of investments that may include interest-bearing
securities (such as bonds, mortgages or Treasury bills) and common, preferred
or convertible shares of individual companies depending on the objectives
of the fund and the manager's investment strategy. With over 1,300 different
mutual funds available in the Canadian market alone, you'll need a financial
advisor who can help determine the type of fund that meets your investment
objectives and make a specific recommendation among the funds in that category.
Mutual funds have been designed to meet different investment objectives
such as preserving capital, generating income, achieving growth and maintaining
liquidity (ready access to capital). In some cases, income tax considerations
may make one mutual fund more attractive than another.
Mutual funds were developed to simplify investing. By making one investment in a single mutual fund you get many benefits that would be difficult to obtain on your own. A mutual fund gives you diversification that only a large investment portfolio can provide. This can be diversification by type of asset, by industry, by company or even by different countries. You also benefit from the investment experience and market expertise of professional investment managers. Most importantly, you have the advantage of investment liquidity because, with a mutual fund, you can cash in your units by redeeming them from the fund management company at any time.
When you make the decision to invest in a mutual fund, your investment advisor can't tell you the exact price or how many units you're buying. That's because each fund represents a portfolio made up of many different stocks, bonds and money market securities, and you are buying a portion of that larger portfolio represented by units of the fund. Instead of purchasing 200 shares or 100 bonds, you usually buy $1,000 or more worth of units in a mutual fund.
Because the market prices of investments change throughout the day, the mutual fund is priced according to a calculation of its portfolio value based on the prices of the investments it holds when the markets close at the end of each business day. The value of all the investments in the fund divided by the number of units outstanding is known as the Net Asset Value Per Share or NAVPS. When you read the newspaper, the NAVPS column on the mutual fund page will tell you the new price or value of a single unit in any mutual fund you own. Multiply that by the number of units you own and you'll have the value of your mutual fund holdings.
As an example, if you bought $1,000 of Dynamic Partners Fund on January 31, 1993, you would have purchased 166.67 units, at $6.00 per unit. The fund paid capital distributions of $.35 per unit on December 31, 1993 and $0.24 per unit on December 31, 1994. The distributions were automatically reinvested in additional units which increased your total number of units to 179.65. By October 31, 1995, the NAVPS of the fund had increased to $8.08. When you calculate the value of your investment at the end of May 1995, it has grown to $1,451.571. That's an increase of 45.2%. The one, three and five-year returns for Dynamic Partners Fund were 5.93%, 16.30%, and 15.87% respectively.
Fixed Income investments usually mean Treasury bills (T-bills) and bonds. They're called fixed income because the rate of interest is fixed for the life of the investment. As an investor, you're lending your money to the government or corporation that issues the bond. In return, you receive a specified or fixed stream of income payments plus the return of your capital upon maturity.
But fixed income doesn't always mean constant value. These securities are traded daily in the bond and money markets where prices fluctuate based upon changes in the current level of interest rates and other financial factors. So while the level of income received is fixed, your capital may be at risk if you have to sell your bonds before they mature.
When you want the benefits of fixed income investments, a mutual fund is often the simplest solution. You get investment flexibility, the diversification of a much larger portfolio and professional fund managers who understand and can anticipate market movements.
For example, Dynamic Money Market Fund invests only in Canada Treasury bills and other short-term government guaranteed securities. It provides investors with security of capital. It also offers a higher rate of return than bank savings accounts and excellent liquidity.
Despite large fluctuations in the level of interest rate movements, the Dynamic Income Fund has had positive returns every single calendar year since inception (1979), and the same fund manager for the past twelve years.
The best way to understand the relationship between bond prices and interest rates is to imagine a teeter-totter - when interest rates go up, bond prices go down.* Since the interest rate on a bond is fixed, its price will fluctuate based on any change in general interest rates. After interest rates have risen, bonds already trading in the market are worth less because they are paying a rate of income that is lower than you could obtain if you invested today. Similarly, when interest rates fall, bond prices rise, reflecting the fact that bonds already trading in the marketplace are considered more attractive because they pay a higher rate of interest than bonds being issued today.
Bond mutual funds invest primarily in fixed-income investments and cash. So when interest rates are changing, any bond mutual funds that you own are also likely to experience price fluctuations. Interest rate movements can be predicted by a variety of economic, financial or political factors. If interest rates fall substantially in a given week, you can expect the net asset value per share (NAVPS) of your mutual fund to rise. Similarly if rates rise suddenly, you can expect your fund to drop in value.
There are many avenues through which the managers of Dynamic's fixed-income funds work to both increase the returns from their funds and reduce the risk inherent in interest rate changes. They structure their bond portfolios to reflect anticipated movements in rates and actively trade the securities held in their funds to improve the overall return from the fund.
The Dynamic Income Fund, a bond fund with a unique focus, was designed to provide investors with relatively stable income at a level higher than bank savings rates or money market funds. By investing in longer-term government bonds as well as those of senior corporations with superior credit worthiness, the fund also offers investors the opportunity for growth of their capital in a falling interest rate environment.
* This relationship stems from the fact that a bond's value is determined by its total yield to maturity - that is, its interest income plus capital gains or minus capital losses. As well, all bonds issued by the same borrower having the same term to maturity should be of equal value.
Many people want their hard earned capital to grow faster than the returns available through bank savings accounts, GICs and Canada Savings Bonds. In investing, that usually means a trade-off. Whereas some savings vehicles guarantee the safety of your capital, the trade-off is a lower rate of return and virtually no protection against inflation. In order to obtain the higher returns that generate faster growth, you sometimes have to take more risk with your capital. And higher risk usually implies the stock market or equity investments.
Equity means you own a share in the ownership of a company. As an owner, you participate in the company's successes and failures, which are quickly reflected in the price of the stock. Economic news and industry developments can also make the price of your shares go up or down as can management changes and the overall trend in the markets.
While there are no guarantees with equity investments, over the long term, stocks have historically outperformed all other asset classes. Because of the higher returns over the long term, equities are regarded as a better hedge against inflation than other asset types.
Relying on the experience of professional investment managers and the performance of an equity mutual fund can increase your potential for successful equity investing.
For instance, the one year return for Dynamic Canadian Growth Fund for the period ended October 31, 1995 was -6.15%. However, in the previous 12 months, the fund was up 1.021%. In the 12 months before that it gained 119.34%. The best way to judge a fund is to look at its long-term performance compared to other investment choices. A trust company GIC purchased five years ago would provide no risk to your capital and guarantee a 11% annual rate of return. Dynamic Canadian Growth Fund's annual compounded rate of return over three years was 27.64%. Its five-year rate was 22.57%; however, mutual funds are not guaranteed.
Having all your eggs in one basket is rarely a good idea. In investing, it can be downright risky. That's why diversification is important for investment performance. But before diversifying with investments in different industries or companies, there is a more fundamental decision to be made. How much of your portfolio should be allocated to each class of assets - equities, fixed income and cash?
Asset allocation is such a critical factor that many professional managers believe as much as 80% of a portfolio's performance (supported by several statistical studies) depends on it. Put another way, it's usually better to own the wrong security in the right asset category than to own the right investment in the wrong class of asset. For instance, if you have 75% of your portfolio in cash and fixed-income investments during a period when interest rates are low, most equities will be outperforming the fixed-income sector. Even if you manage to identify a stock that demonstrates outstanding growth, its performance will be offset by the lower performance in the other three quarters of your portfolio.
Dynamic Partners Fund has achieved top-ranked performance through a strategy of successful asset allocation. The Partners Fund is our most popular fund and possibly the easiest single investment decision you can make. By purchasing one fund, you get to participate in a portfolio that includes cash, bonds and stocks and is actively managed by professionals who monitor the asset mix regularly on your behalf.
Goodman & Company, Investment Counsel, the managers for the Dynamic Partners Fund, believe that a sensible approach to asset allocation provides a high degree of protection of capital while simultaneously offering the potential for growth. Dynamic Partners Fund will always have some investments in each of the major asset groups. This makes true pension-style management available to individuals.
FRONT-END AND DEFERRED SALES CHARGES
Your professional advisor plays a valuable role in helping you establish a financial plan and select the appropriate mutual funds to fulfill your investment objectives. When you buy a Dynamic mutual fund from your financial advisor, there are two options available to you, "front-end load" or "deferred sales charge."
If you chose the front-end load option, you pay a commission on the purchase date but no redemption fee when you sell the units. With the deferred sales (DSC) option, there is no charge at the time of your purchase. But when you come to sell your units, you may be charged a redemption fee. If you sell your Dynamic mutual funds during the first year you own the fund, the redemption fee is 6% of the value of the investment, and declines to 0% after six years.
So which is the better option? It all depends on how you and your advisor plan to invest. If you're buying an equity fund for long-term growth, chances are you'll stay in it for a number of years. In that case, DSC may be best since your future redemption fee will have declined to an amount below the percentage charged for a front-end load today. If, however, you think you might want to sell your mutual fund in less than a year, paying a front-end load today may be the least expensive option.
For instance, assume you bought $1,000 worth of Dynamic Partners Fund at a price of $6.00 a unit on a front-end load basis. The 5% sales commission you may have paid your financial advisor is taken out of the investment capital first and the remaining $950 would have purchased 158.33 units. Having paid the commission up front, you will pay no fee when you sell the units.
Investing the same amount on a DSC basis, Dynamic would have paid the advisor's commission and your $1,000 would have purchased 166.67 units of the fund. If you redeem your units in less than six years, however, you will pay aredemption fee.
When you make any purchase, you want to know the total cost of the item you're buying. With a mutual fund, you may pay an initial purchase cost or sales commission to your financial advisor. Different funds offer options that allow you to pay that commission in a variety of ways.
Once you understand the purchase options, you then need to consider what ongoing expenses are involved. All mutual funds have a management fee that's paid to a fund's investment managers for the work they do in selecting and monitoring the investments. Most mutual fund companies also charge certain investor expenses to the fund. The total of these expenses is called the "management expense ratio (MER)" for a fund. You could say these fees are "invisible" since they have already been subtracted before the performance returns on the fund are calculated and published in the newspaper.
At Dynamic Mutual Funds, Goodman & Company is paid a fee for managing the funds. Given their experience and record of performance, we think it's a nominal amount for all they do. A service fee is also paid by Dynamic to your financial advisor for continuing to advise and assist you after you've made the initial purchase decision. If you're happy with the fund's performance and your advisor's service, the total management expenses are usually a small price to pay for professional management, ongoing advice and the convenience of mutual fund investing.
DIVERSIFICATION AND FOREIGN INVESTMENTS
Diversification has always been one of the best ways to reduce risk in your investment portfolio. By holding different types of assets - bonds, equities and cash - you reduce the risk of being in the wrong asset at the wrong time. Diversification in different sectors, industries and companies lets you spread risk by participating in many different parts of the Canadian economy. Today investors have an even greater opportunity for diversification on a global scale thanks to international mutual funds.
Foreign markets may be at a different stage of the economic cycle than Canada, allowing portfolio managers to take advantage of timing differences. By choosing to invest in different countries around the world, investors can participate in emerging markets and industrializing nations which are growing more rapidly than developed economies.
Many mutual funds today offer you some participation in foreign countries and are fully eligible as RRSP investments. Other more specialized funds qualify for the 20% foreign content allowed under current RRSP legislation. Investors seeking higher returns usually take advantage of these options.
During 1994, many international equity funds outperformed Canadian equity funds. Past performance, however, is not always the best indicator of future results. For example, whenever a particular type of fund has experienced substantial growth, the funds in that group may actually be poised for future price declines rather than gains. These funds could be said to have more "downside risk" than "upside potential." At Dynamic Mutual Funds, we remain very positive on the outlook for Canadian equity funds through 1996 and suggest you discuss diversification and foreign content opportunities with your financial advisor.
With hundreds of different mutual funds available to Canadian investors, it's easy to be confused about which one to purchase. Your financial advisor can help guide you towards the type of fund most appropriate for your stage in life, investment objectives and comfort with risk. Knowing the type of fund narrows the field but can still leave you with 20 or 30 options. While past performance is not a guarantee of future growth, comparing the annual returns of different funds over time can help identify benchmarks of acceptable performance for various types of funds.
Depending on how long a particular fund has been in existence, you can often compare performance on a one, two, three, five and ten-year basis. However, since investment managers can move from fund to fund, you'll want to look at performance based on that manager's record. At Dynamic our core group of managers has been together for five years, with the senior investment strategists functioning as a team for over a decade. So when you purchase a Dynamic mutual fund, you're accessing experience and a seasoned team of professionals with an established record of performance.
Remember too that the fund that generated the highest performance numbers last year is not always the best option for this year's investment. A top-performing fund may have increased in value and purchasing it now could be buying late in the investment cycle. Your investment advisor should be able to tell you more about the fund managers and offer insight into performance. At Dynamic we make this information available to investment advisors on a regular basis.
Most people don't have the time to watch markets or the experience to know exactly the right time to invest. That's why they choose a mutual fund in the first place - for the convenience and the access to professional investment management. After they've consulted with an advisor to determine their objectives, established which type or types of fund will fulfill those objectives, selected the specific fund they want to purchase and chosen the form of commission that suits their investment time horizon, the only decision left is how to make the purchase. Some people invest $5,000 or $25,000 in a single fund because they have the knowledge and confidence to invest a lump sum all at once. That approach to investing suits their temperament and their expectations.
Others choose to purchase smaller amounts over time to make sure they don't invest it all on a day when the price may be unusually high. This form of investing is called dollar-cost averaging and ensures that you get maximum value for your investment dollar. With dollar-cost averaging, you make consistent purchases of the appropriate funds at regular intervals, usually monthly.
For example, imagine you want to invest $200 a month in a growth-oriented mutual fund that is currently selling for $10 a unit. In the first month your $200 buys 20 units. In the second month, the fund drops to $8.50 which means your $200 buys 23.53 units. In the third month the fund rises to $9.75 and you buy 20.51 units. At the end of three months, you've invested $600 and own 64.04 units which means you own them at an average cost of $9.37. Their market value is $624.39. If you had invested your entire $600 at the beginning you would only have purchased 60 units which, at $9.75 a unit, would only be worth $585. Even though the price of the fund has dropped, by dollar cost averaging, you've bought more units and generated a return that represents 16.27% on an annualized basis. That's the power of dollar-cost averaging.