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Even for the conservative investor a well diversified portfolio includes at least some higher-risk growth stocks. Depending on your age, personal circumstances and market conditions, those nail-biter equities should hold a weighting of 5 to 10 per cent of your portfolio. Let's face it, income trusts and bonds alone won't provide decent returns for your retirement goals.
The key to high-risk investing is to limit risk, and one way to do that is to invest in aggressive growth mutual funds. Fund managers can dilute the risk of one stock by holding several stocks, along with a healthy amount of cash to smooth things out when the going gets rough. There are just over 300 aggressive growth funds with over $25,000 in assets available. The types of funds include hedge funds, emerging markets, precious metals, small cap and just about every equity class that could have a higher degree of risk. And the returns are just as diverse.
Of the funds considered Aggressive Growth by Globefund, the best one-year return is 120 per cent, and the worst over the same period lost 31.5 per cent. That warning mutual fund companies issue about past performance not necessarily indicating future performance rings especially true with aggressive growth funds, but past performance does give some insight when selecting a higher-risk growth fund.
As an example, the aggressive growth fund that returned 120 per cent over the past year is considered an alternative strategy or hedge fund. There's risk-o-plenty in the Dynamic Power Hedge Fund and the fund manager, Dynamic Mutual Funds, makes that clear to the interested investor. For starters a minimum initial investment of $100,000 is required. Minimum initial investments vary depending on securities regulations in each province and territory.
The investment approach laid out in the fund's, prospectus is top-down — which means the team led by manager Rohit Sehgal will rate an investment by first looking at the overall economy, then the sector, and then the investment. That helps explain why the fund's $52-million is invested primarily in materials and energy stocks in North America.
Adding to the risk is the fund's relative immaturity. The Dynamic Power Hedge Fund has only been active in its current form since October 2004 and has no performance track record beyond that. Like most hedge funds, the management fee is based on performance. Last year unit holders paid 6.37 per cent for their investment to more than double.
Not surprising, another aggressive growth fund to more than double in the past year is a precious metals fund managed by Sentry Select Capital. The $87-million Sentry Precious Metals Growth fund returned slightly over 100 per cent thanks to steadily rising gold bullion prices and a rally in gold stocks. Still, it was the management of Kevin McLean that propelled the fund above the 67 per cent return from the average precious metals fund and the 64 per cent gain for the benchmark Globe Precious Metals Peer Index.
Like most aggressive growth funds, consistent returns for the Sentry Precious Metals Growth fund are elusive — but impressive. Over the past five years the fund has grown annually by an average 32 per cent.
Investing in small cap stocks can be unsettling at the best of times but when management chooses to ramp up the risk…hang on. The Resolute Growth fund, managed by Tom O. Stanley, returned 91 per cent over the past year — crushing the group average gain of 26 per cent. The $140-million fund is packed to the brim with small cap energy stocks — a sector that has rallied along with precious metals. The objective of the fund is to produce "superior returns over the long term" and so far it has delivered, netting investors an average annual gain of 33 per cent over the past ten years.
Naturally, there's an ugly side to high-risk funds. The worst performing aggressive growth fund lost 31.5 per cent over the past year. The First Ontario LSIF fund is labour-sponsored fund loaded with red flags even without the advantage of hindsight. Many retail investors are familiar with labour-sponsored funds, which provide generous tax credits as an incentive to invest in high risk venture companies. Most of these companies are too small to trade publicly and few have much of a track record or coverage by analysts. Coincidentally the one year return for the BMO Nesbitt Burns Canadian Small Cap index is a mirror image to the First Ontario LSIF fund — it's up 31 per cent.
The average labour-sponsored fund, on the other hand, has not made a nickel over the past 10 years. To make matters worse, the generous tax rebates have been scaled back to the point where the Ontario government has cancelled its tax rebate contribution altogether. To make matter even worse, the management expense ratio charged by First Ontario Management is 6.14 per cent.
Mind you, returns for aggressive growth funds most likely would have reached higher highs and lower lows if they were independent aggressive growth stocks. Aggressive growth funds are for investors with a taste for risk, but not the stomach for too much risk.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.