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Even conservative investors can enhance their portfolios with a dash of global stocks, a spoonful of alternative strategies or a pinch of high-yield bonds - albeit with some risk.
Think of such investments as relish: you only want a little bit. Your core holdings will comprise blue chip, dividend-paying Canadian and U.S. stocks and bonds, mutual funds or exchange traded funds. But a little something on the side adds zest.
For example, take the Friedberg Asset Allocation Fund, a mutual fund in which investors stand to benefit from the often brilliant but sometimes hair raising strategies of super-trader and hedge fund manager Al Friedberg. Unlike hedge funds, mutual funds cannot sell short, which arguably makes them less risky.
This multi-strategy fund is shooting for "significant" returns, its prospectus says. The manager, Friedberg Mercantile Group Ltd., invests in commodities, currencies, bonds and stocks anywhere in the world using derivatives such as futures and options.
The fund's main holdings as of Sept. 30, 2010, its most recent quarterly report, were gold, euros and euro-denominated bonds and U.S. Treasury inflated protected securities, or TIPS.
"It's an alternative to just holding bonds or stocks," says Michael Hart, vice-president and head bond trader.
"Two gigantic forces - inflation and deflation - are at war in the economy," Mr. Hart said. "It's difficult to tell which one is going to come out on top." Given its heavy weighting in TIPS and gold, the Friedberg fund is betting on inflation. "Gold has been a stellar investment," Mr. Hart adds. "We think the big move is still coming."
The big risk: "If we're wrong, we're going to lose money."
The main advantage of an alternative strategy fund is its low correlation to the stock market. Because of its diverse holdings, the Friedberg fund will not necessarily move in the same direction as broader financial markets. Instead, it could gain more or less than the stock market in good years but fall less - or perhaps actually rise - in bad ones.
Classified as speculative, the Friedberg Asset Allocation Fund has a $5,000 minimum, a management expense ratio of 2 per cent and a management fee of 1 per cent. The RRSP-eligible fund is up 12.05 per cent for the 12 months ended Jan. 31, 2010, and 16.9 per cent since inception in June, 2009. It is the only Friedberg fund still open to new investors.
If alternative strategies are a little too spicy for you, consider an award-winning global mutual fund to complement your North American blue chips - the Mawer World Investment Fund, which won the 2010 Lipper Award for the best international stock fund for the past three, five and 10 years.
"The fund would suit anybody looking for good long-term returns with reasonable risk," says Peter Lampert, an analyst with Mawer Investment Management.
Mawer's strategy is to position the portfolio to take advantage of global economic growth without paying the high prices typical of hot markets such as Asia, China and Brazil, Mr. Lampert said. Lately, the managers have been finding good opportunities in Europe and the U.K., one example being Unilever, the global consumer goods company that makes products ranging from Dove soap to Lipton tea.
"The stock was priced better than similar companies in emerging markets but it has access to rapidly growing consumer spending in those markets," Mr. Lampert noted. The Mawer managers look for high-quality companies with solid management teams and a clear competitive advantage.
"We take a long-term view, looking at how a company can create value for shareholders over the next five, 10 or even 20 years." One such example is an Australian law firm called Slater and Gordon, the only publicly traded law firm in the world.
"That's another advantage of investing internationally," he added. "Not only does it add diversification to your portfolio, but you can invest in unique opportunities that may not be available in Canada."
The Mawer World Investment Fund has earned its keep over the years, consistently beating its benchmark index. In 2010, the fund returned 8.40 per cent net of fees, compared with only 2.84 per cent for the MSCI EAFE Index. For three years it was down 2.83 per cent (the benchmark was down 6.34 per cent); and for 15 years, it was up 6.86 per cent (the benchmark was up 2.91 per cent).
Mind you, the advantage of geographic diversification is not what it used to be. In the financial panic of 2008, stock markets worldwide crumbled in unison even though many emerging-market economies escaped relatively unscathed. The ensuing stock rebound, while it came at different times to different markets, was equally universal.
The Mawer World Investment Fund has a relatively low MER of 1.51 per cent. Its current holdings are two-thirds in Europe, 13 per cent in Asia and 7 per cent in Australia. The big risk: a severe global economic recession.
Special to The Globe and Mail