Canadian Unit Income Trust Mutual Fund - DOC

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Canadian Unit Income Trust Mutual Fund - DOC Powered By Docstoc
					     John Shelson
     Robert Lake

       Finance 321
  Prof. Diana Sandberg

 Mutual Fund Evaluation

   December 5th, 2007
Vanguard Growth and Income (VQNPX)*
        Vanguard’s Growth and Income Fund Investor’s Shares (VQNPX) is a large cap equity

income fund with moderate risk exposure in diversified industries and sectors. The fund has been

managed by John S. Cone of Franklin Portfolio Associates, LLC since 1999. Franklin Portfolio

Associates had advised Vanguard Growth and Income Fund Investor Shares since 1986. This

fund has been fairly more volatile than its income blend rating would suggest by experiencing

double-digit growth and loss in seven of the last ten years. In 1997, the best year for the fund, it

returned 33.48%, while its worst year was experienced in 2002 with a return of -22.87 %.

        This large cap growth fund is currently benchmarked against the S&P 500, an index that

shares many of the same risk/return qualities including common holdings within the fund. For

the past three years, the fund has had an average return of 12.69%, while the S&P had an average

return of 13.14%. Over the past five years, VQNPX just narrowly missed beating the index. The

fund had an average return of 15.00% while the S&P returned 15.45%. As stated before, the fund

contains many of the larger companies listed in the S&P500. This would account for the

similarity of the 3-year and 5-year return averages. Returns, in fact, have been within 1

percentage point of the index for four of the past five years. The ten largest holdings for this fund

are in order from largest to smallest:

                General Electric Co.
                ExxonMobil Corp.
                Apple Inc.
                Citigroup Inc.
                American International Group Inc.
                Johnson & Johnson
                The Proctor & Gamble Co.
                QUALCOMM Inc.
                International Business Machines Corp.
                Lockheed Martin Corp.

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page     1
        As seen from above, the fund is diversified in its industry and sector allocation. Roughly

10-15% for each of consumer discretionary, consumer staples, energy, financials, health care,

industrials, and information technology.

Table 1-1

                                             Equity Holdings
                                       2%   4%          10%
                                  3%                                               Consumer Discretionary

                                                                                   Consumer Staples
                       16%                                                         Energy


                                                                                   Health Care

                      12%                                                          Information T echnology


                                                                                   T elecommunications

                                  13%                         17%

        The current Morningstar Financial rating for this fund is 3-stars. The 3-year Sharpe ratio

is .94 while the 5 year is 1.08 suggesting a slight downward trend, although management has not

changed during this time. It is likely the risk has been reduced due to a slight reallocation of

holdings within the fund such as an increase in energy and a decrease in financials.

        This fund, like all others, is subject to a number of expenses. First, an expense ratio of

0.32% is required. This is well below the average large blend fund average of 1.12%. Second, a

$20 annual account service fee is required per fund. Funds with balances of over $10,000.00 are

exempt while investors with accounts with balances greater than $100,000.00 are exempt from

this fee. This fee varies slightly in dollar amount between non-retirement accounts to SIMPLE

IRAs to (403)(b)(7) plans.

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page           2
        We chose this fund because we feel it returns consistently with the S&P 500. We very

much enjoy how it is structured to mirror or even beat the S&P500. Also, with a beta of roughly

1.0 and good diversification into sectors we prefer, we feel this fund is hedged against the

volatility of the U.S. economy of today. Several well branded and consistent dividend issuing

companies are listed in the top ten holdings. We like General Electric, Johnson & Johnson, as

well as Lockheed Martin. However, the fund’s large exposure to financials, including Citigroup,

is something of major concern.

Amana Growth Fund (AMAGX)*
        The second fund our group chose to evaluate is the from the fund family of Amana

Mutual Funds Trust. The Amana Growth Fund trades with the symbol AMAGX and uses an all

equity investment style consisting of large market capitalization with a focus in high growth. We

chose this fund because it is very unique and invests only according to Islamic principles, as well

has shown tremendous growth over the past 10 years. The Morningstar rating is also five stars

for the past three and five year period. The investment strategy this fund utilizes poses an extra

challenge to the already difficult task of composing a portfolio due to the nature in which the

fund avoids investment in businesses such as liquor, wine, casinos, pornography, insurance,

gambling, pork processing, and interest-based financial institutions, including banks (Yahoo,

AMAGX 2007). However, with the current sub-prime mortgage debacle, credit-crunch, and

financial turmoil, the avoidance of banks has actually left the fund somewhat unexposed to the

risk in defaulting mortgages. We feel this is one of the most appealing aspects as a young

investor in today’s economy. This fund is also attractive and has growth potential because it

complies with Islamic principles, which makes it appealing relative to emerging markets such as

the United Arab Emirates. Recently, the government of Abu Dhabi injected $7.5 billion of

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page   3
liquidity into Citigroup for a 4.9% stake in one of the largest American financial institutions

(Altman, 2007). This fund would appeal to young investors due to the low minimum investment

of $250 as well as the high growth rate. Young investors would also have a substantial time

period to recoup any losses, shall they occur. The top ten holdings of AMAGX are listed below,

which compose 19.71% of total assets.

                Apple Inc
                Potash Corp of Saskatchewan
                China Mobile Limited
                Anglo-American plc
                Rio Tinto plc
                Manitowoc
                Canadian Pacific Railway Ltd
                Humana Inc
                Trimble Navigation
                International Business Machines

        Nicholas Kaiser, CFA is the lead manager of this fund and has been actively managing its

assets worth $634.3 million since the fund’s inception in 1994. Mr. Kaiser managed the fund’s

best performing year in 1999 which returned an impressive 99.88%. However, in 2002, the

Amana Growth Fund’s return was -25.17%. These returns show that the fund does have

moderate risk exposure and the returns are volatile from year to year. The negative growth rate

is not inconsistent with the market at that time. However, as an investor in this fund, one would

have suffered a substantial loss. AMAGX has had significantly higher returns then its Russell

2000 benchmark in the 1, 3, 5, and 10 year return. The three year return is almost 8% higher

than its index and the five year return is 9% higher than the Russell 2000. The net asset value

(NAV) as of December 4th, 2008 was $23.24 with a YTD return of 18%. Using the sharpe ratio,

which measures the excess return gained for every unit of risk, to gauge Mr. Kaiser’s ability to

manage excess return and risk, yields a 3 year sharpe ratio of 1.59 and a 5 year sharpe ratio of

1.69. Using this ratio to compare other funds and managers, Mr. Kaiser is above average. The

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page   4
Fidelity Contra Fund (FCNTX), which also has a 3 and 5 year five-star Morningstar rating and

similar investment strategy, has a 3 and 5 year sharpe ratio of 1.57 and 1.59.

        As stated above, the Amana Growth Fund avoids the banking and financial industry due

to its incompatibility with Islamic principles. Instead, AMAGX invests heavily in the medical

industry and computer hardware industry. Stocks compose 86.75% of the AMAGX portfolio

supplemented with 13.25% cash investments. The Amana Growth Fund also carries expenses in

the form of 12b-1 fees at a rate of .25%. There are no front-end load or back end-load fees. The

total expense ratio is 1.35%.        Please see the graph below for complete breakdown of industry


Table 2-1

 Fidelity Value (FDVLX)*
        The Fidelity Value (FDVLX) fund is a low-risk conservative mutual fund that invests in

holdings that management believes is undervalued in the market. This fund is a mid-cap value

fund and has been managed by Richard B. Fentin since 1996. Over the past five years, this fund

has experienced very positive net gains with a whopping return of 16.56%. The fund’s worst

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page   5
year came in 2002 with a return of -9.25 %. Offsetting this negative return is the fund’s best year

in 2003 with a 34.43% return. FDVLX has had a 3-year average return and 5-year average

returns of 12.1% and 16.56% respectively. The 3-year exceeds the Russell 2000 of 11.93%, the

funds benchmark, but the 5-year falls slightly short of 17.62%. The top ten holdings of the

Fidelity Value Fund compose 10.9% of total assets and are listed below:

                National-Oilwell Varco Inc
                Owens Illionios Inc
                Xerox Corp
                AT&T Inc
                Fluor Corp
                Avon Products Inc
                Agilent Technologies Inc
                Smith International Inc
                Eastman Kodak Co
                FMC Technologies Inc

        FDLVX is four-star rated fund according to Morningstar and invests in diversified

industries ranging from software and utility companies to financial institutions. The majority of

the portfolio, 99.23%, is composed of stock. There is very little exposure to cash, bonds, and

other instruments This fund has a heavy emphasis in financials (about 13.68%), which contrasts

the AMANA fund evaluated above and exposes FDLVX to a high risk relative to the sub-prime

mortgage and current financial crises. Many funds in the mid-capvalue category invest in

financials and the exposure seems to be relatively consistent. However, Mr. Fentin’s ability to

manage excess return with regard to risk exposure has yielded a three and five year sharpe ratio

of 1.27 and 1.46. As the sharpe ratio suggests, the five year ratio is somewhat higher as this fund

is designed to be held for the long term, which is consistent with the five year higher return of

16.56% compared to the three year. The performance of this fund is consistent with the market

and other funds with similar investment strategies. Using the sharpe ratio to gauge the

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page   6
performance of Mr. Fentin, he neither siginificantly outperforms the market or falls behind, but

seems to be consistent with his approach and sector allocation.

Table 3-1
                                              Industry Allocation



                           8                                                                     Series1







                                               l m es
















                                       su oft

                                     co ina
















        We chose this fund due to the past performance. Richard B. Fentin has proven his ability

to handle risk and maximizing return. The fact that the fund has performed so well in the

extremely volatile past ten years was enough to convince us that this fund was a good choice. Of

course, we also like the allocation. We also enjoy the low fees this fund has to offer. The total

expense ratio of .66% is well below the industry average of 1.37%. Owning this fund appears to

be significantly cheaper than owning similar mid cap funds. This is a recurring theme for

Fidelity, which may be why this fund is attractive to young or beginner investors. Energy,

technology, and communications have been strong points for the U.S. economy and the future

predicts that this trend will continue.

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page         7

Vanguard. “Vanguard Growth and Income Fund Investor Shares (VQNPX).” 2007. The Vanguard Group, Inc.

Saturna. “Amana Mutual Funds Trust.” 2006 Saturna Capital Corporation

Fidelity. “Fidelity Value Fund (FDVLX).” 1998-2007 FMR LLC.

Yahoo. “Vanguard Growth and Income (VQNPX).” 2007. Yahoo!

Yahoo. “Amana Trust Growth (AMAGX).” 2007. Yahoo!
Please refer to fact sheet.pdf

Yahoo. “Fidelity Value (FDVLX)”. 2007 Yahoo!

Altman, Joseph. “Citi Sells Stake to Abu Dhabi Fund”. Yahoo. 3 December 2007.

*Please note that all statistics used are borrowed from Yahoo! Finance as cited on the source page   8
ited on the source page   8

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