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Dale Jackson

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The gift of global domination

Dale Jackson

 

It may sound greedy but the best gift this holiday is simply… the world. And although it may be the season for sharing, this gift doesn’t need to be shared with a portfolio manager.

It’s a global equity index fund. A global equity fund includes a worldwide smorgasbord of stocks from New York to Singapore. The fact that it’s also an index fund means it is passively managed. You don’t need to pay a portfolio manager - just an administration fee.

Unfortunately, choice is limited when it comes to purchasing a global equity index fund on the Canadian market. All three are linked to the benchmark Morgan Stanley Capital International Index. The MSCI World Index includes stocks from 23 developed markets in Europe, Asia, North America, Australia and New Zealand.

It’s been a pretty good year for the MSCI World Index. In Canadian dollars it has returned nearly 16 per cent from November first of this year to November first of 2005 - not bad compared with the S&P 500 Composite Total Return, which advanced only 10.7 per cent over the same period.

The TSX Total Return Index managed to outperform both Indexes during the year, jumping 21.7 per cent thanks to its strong representation from the energy and financial services sector. The MSCI World Index, however, has an investment advantage over the TSX because it is more diversified across several sectors and countries. A downturn in oil or bank stocks would spell disaster for the TSX while the World Index could better absorb the shock through advances in other sectors such as science and technology or manufacturing.

It hasn’t been all sunshine and roses for the MSCI World Index. Over the past five years it has produced an average annual return of only 3.5 per cent compared with 14.5 per cent for the TSX and 0.1 per cent for the S&P 500. Going back 20 years the MSCI World Index has returned an average 8.5 per cent annually versus 9.8 per cent for the TSX and 10.4 per cent for the S&P 500.

When comparing the three global equity index funds you find they’re not all created equal. The Mercure Global Equity Index MSW fund, administered by Optimum Placements Inc. is only available in Quebec. It’s also a segregated fund, which means it’s actually a life insurance policy wrapped in a mutual fund. Investors can take advantage of any gains the fund produces while being insured for either all, or a majority, of the principle investment (depending on the policy).

There’s a catch for having your investment insured though. The management expense ratio is 2.6 per cent - about the same as an actively managed fund. That means 2.6 per cent of your original investment and capital gains go to the administrators. It also has an optional back-end load depending on if investors want to pay the fee when they buy or sell.

Those fees take a pretty good chunk out of the fund’s returns. The Mercure Global Equity Index fund lagged the MSCI World Index by over three per cent. It also underperformed the average actively managed fund by nearly 2 per cent.

The second global equity index fund, Foresters Global Index, is also a segregated fund with an MER of 2.48 per cent. It’s not available to investors in Quebec or New Brunswick and has a back end load - meaning the fee is paid when the fund is sold. Over the past year the Foresters Global Index fund has outperformed the average actively managed fund by nearly half a per cent but lagged the MSCI World Index by over a full per cent.

The global equity index fund that you really should consider for your stocking is the TD Managed Index Maximum Equity Growth Portfolio I fund. It lives up to the index fund low-fee creed with a 1.69 per cent MER and no front or back end load.

When it comes to returns the TD global index fund actually beat the MSCI World Index over the past year by one-third of a per cent. Since it was first launched in 1998 it has consistently over performed the benchmark and the average global equity fund.

The fund has three holdings - all TD Asset Management Inc. index funds. About 40 per cent of the fund is invested in the TD U.S. Index fund, which tracks the S&P 500 total return index - big U.S. blue-chips like General Electric Co. and Citigroup Inc. A third of the fund is invested in the TD International Index fund, which holds big international equity stocks such as Toyota Motor Corporation of Japan. The final quarter of the fund’s assets are invested in the TD Canadian Index fund - big Canadian stocks such as Royal Bank of Canada and Manulife Financial Corporation.

Each global equity index fund has its own distinct features to suit specific investor needs. Consult your financial advisor before making a purchase.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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