Our favourite funds to hold for the long term

These funds can help young investors reach their retirement goals.

Shehryar Khan, CFA 29 January, 2016 | 6:00PM
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Note: This article is part of Morningstar's January 2016 Five keys to retirement investing special report.

Young investors should approach planning for their retirement the same way they would for a long road trip. Anyone who has driven a vast distance knows that choosing the vehicle that will get you where you need to go is a critical decision. A convertible may be the sexy choice, but chances are it isn't as practical as an SUV.

Over the course of their life, investors will face the financial equivalent of the many detours, rain and snow storms, dead-ends and traffic jams that they would on the road. Therefore their choice of vehicle needs to not only be strong enough to get them to their destination, but also sturdy enough to withstand the numerous obstacles (and there will be many) that will be faced along the way.

Given that younger investors usually have a long time horizon, investing in funds that will provide long-term appreciation makes sense, but there are other considerations to make. For someone who prefers that someone else takes the wheel, allowing them to enjoy the scenery, a balanced fund might make sense. For those who prefer to be the ones doing the steering, building a best-of-breed portfolio can have its benefits, but will also require vigilance.

Cost is also a significant factor; younger investors who are starting out by investing small amounts can consider the efficiency of their choice so that their costs don't eat into the spending they plan to do when they reach their destination. As such, it's worth examining whether they would be well-served by using low-cost ETFs as their vehicle of choice.

Additionally, a portfolio should be diversified and its success should not rest with one single region -- therefore investing globally makes sense. Also, a longer-time horizon allows for an investor (if they are willing) to take on slightly more volatility, so some small- and mid-cap exposure might also be of benefit.

Now that we know what we're looking for, here are some funds and ETFs worth considering as the core of your portfolio for the long-term that will, in our opinion, be your best bet to get to your destination.

Canadian Equity

Beutel Goodman Canadian Equity 
For those who prefer to build their own portfolio, this strategy fits the bill as a core holding for your domestic exposure. Led by Morningstar's 2013 Domestic Equity Managers of the Year, this fund demonstrates the virtues of a disciplined process. Veteran managers Mark Thomson, Pat Palozzi and James Black look for companies with strong free cash flows and only buy in when they trade at a 30% discount to their fair values. When their holdings reach fair value, they automatically sell a third of their position, limiting the risk of holding more expensive stocks. The team then gets a fresh set of eyes to reassess the stock; if the company's value hasn't increased, they'll sell the position outright. This process has led to outstanding protection on the downside. Combined with solid performance in up markets, the fund has delivered outstanding long-term results. As a bonus, this fund invests a small piece of its portfolio in Beutel Goodman Small Cap. For pure large-cap exposure, Beutel recently launched Beutel Goodman Canadian Intrinsic.

Foreign Equity

Mawer Global Equity 
As mentioned previously, a longer-term time horizon makes it sensible to consider a global option for the equity portion of the portfolio. Managers Paul Moroz and Jim Hall, like their Mawer counterparts, target highly profitable firms with strong competitive advantages and reasonable valuations. Their all-cap approach and willingness to ignore the benchmark has led to tremendous success. Many rivals share similar approaches, but the team's disciplined execution and focus on the long term has resulted in a track record that is among the top in the category. The managers prioritize quality over price and have continued to emphasize the former as valuations have climbed in recent years. Their defensively positioned portfolio will likely weather a down market better than the peer group, though its relatively expensive portfolio could make it harder for the fund to replicate its eye-catching success of recent years. Investors who use the services of an advisor can consider Manulife Global Equity, which is run in an identical fashion.

iShares MSCI World (XWD)
With a management-expense ratio (MER) of just 0.46%, this ETF allows younger investors a very affordable way to start off investing in the global economy. Stocks are not weighted by how well they're expected to do but rather by their market capitalization, or how big the stock is. Low costs aside, the biggest benefit of choosing an ETF is that you'll never have to worry about trailing the market, making it easy to take a hands-off approach.

Investors who are contributing on a monthly basis or at other regular intervals should ensure their brokers are not charging them with commissions every time they add to their ETF investment, as in that case the lower price of the ETF would be more than offset by trading costs.

RBC Emerging Markets Equity 
While they're in the headlines these days for their struggling economies due to headwinds in the commodity world, emerging market countries are, in many cases, still growing at a faster pace than larger, more developed economies. For a long-term investor, a reasonable allocation to the countries that could provide a meaningful chunk of the future growth of the world might be prudent. Manager Philippe Langham and the team that manages RBC Emerging Markets Equity aim to achieve strong returns by identifying secular themes or structural changes that are expected to benefit businesses operating in the emerging markets. Their approach means the fund should do better when emerging markets lag, as they did in 2011, but will struggle to keep up in racier markets where lower quality stocks tend to outperform. For investors who prefer ETFs, iShares All Country World ex-Canada (XAW) allows for both global and emerging market exposure in one low-cost product.

Fixed Income

Templeton Global Bond 
This isn't your typical bond fund, but investors who have the stomach to survive the speedbumps have been rewarded in the long-run. Manager Michael Hasenstab, who along with co-manager Sonal Desai picked up Morningstar's Fixed-Income Manager of the Year Award in 2013, aim to identify value among currencies, sovereign credits and interest rates in countries with healthy or improving fundamentals that they think the market underappreciates. The team attempts to find those opportunities early on and then watch as their theses unfold over several years. The fund isn't for the faint of heart, as Hasenstab has also shown a willingness to buy what the rest of the market shuns: In early 2014, he added to the fund's single-digit stake in dollar-denominated Ukrainian bonds, a move that hurt throughout that year but paid off during the first nine months of 2015. A recent price cut makes it also more reasonably priced than in the past.


Mawer Balanced
This fund offers those who prefer to let the experts do the driving a one-stop solution to their investing needs. The fund offers exposure to all the major asset classes, and its low costs also argue in its favour. Lead manager Greg Peterson is primarily responsible for managing this fund's asset mix. Shifts tend not to be extravagant, as the fund doesn't steer too far away from its base mix of 40% fixed income and 60% equities. Additionally, the fund offers geographic diversification benefits, giving unitholders exposure to global markets.

Rather than buying individual stocks and bonds, Peterson buys units of other Mawer funds. The managers of Mawer Canadian Equity, Mawer International Equity and Mawer Global Small Cap, all rated Gold by Morningstar analysts, have built enviable records on their respective funds. Peterson also holds Mawer New Canada (Silver), Mawer U.S. Equity (Bronze) and Mawer Canadian Bond and Mawer Global Bond, both of which are currently not rated by Morningstar.

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About Author

Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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