Ranga Chand's Investment Insights: Staying Focused and Building Portfolio. Momentum in Bull and Bear Markets

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1 Ranga Chand's Investment Insights: Staying Focused and Building Portfolio Momentum in Bull and Bear Markets Summer 2005 TM

2 Page 1, Ranga Chand's Investment Insights Foreward BMO InvestorLine is pleased to bring you this special report from internationally recognized economist and mutual fund analyst Ranga Chand. In this special report, Ranga Chand provides insights on how to stay on course with your investments, ride out fluctuating markets, and shares how he successfully employed his strategies in the seven Heavy Hitter * Model Portfolios developed for BMO InvestorLine. Ranga Chand has three key lessons for long-term success that investors can apply to their own investment strategies: 1) Diversify your investment portfolio; 2) Don't try to time the market; and 3) Focus on your long-term financial plan. Read on to find out how these lessons were applied in practice and how they can help you achieve your investing goals.

3 Diversification A Long-Term Strategy During turbulent times when all one reads and hears about are market declines, record high consumer debt loads, and predictions of global market meltdowns, it is difficult to remain calm. The urge to act and sell out during market downturns, thereby abandoning one's long-term plans, can be overwhelming. But, as many investors have discovered to their chagrin, the cost of panic selling can be very high and can cause lasting damage. Given that no one has a crystal ball to see into the future and that you can't make short-term fixes for long-term problems, what should an investor do? The answer lies in an often overlooked but fundamental investment strategy: asset allocation. In other words, diversify your portfolio so that you don't have all your eggs in one basket. While diversification will not eliminate bear markets, it is the key to maximizing portfolio returns while minimizing portfolio risk. The Benefits of Asset Allocation Choosing an appropriate mutual fund portfolio based on your investment objectives, risk tolerance and time horizon is the single best way of tackling the unpredictability of financial markets. Successfully combining solid mutual funds with proven track records from the major asset categories helps reduce risk due to the low correlation between the different asset classes. The best course of action for investors is to take a long-term view of their investment strategy and construct a well-diversified portfolio that will perform well under all market conditions. Asset allocation, dividing your money among a variety of domestic and international investments, is perhaps the most important rule you can follow as an investor. The reason for diversifying is quite simple: if you spread your money among stocks, bonds, and cash, at home and abroad, the performance of your portfolio should be less volatile. Losses from some investments may be offset by gains in others, exposing you to less risk than if you put all your money in one type of investment, such as stocks or bonds. Moreover, it also improves your chances of having investments in a market that suddenly takes off. Asset allocation also gives investors an edge because each asset class generally follows a different cycle and each one reacts differently to changes in the economy and stock market movements. In addition, foreign markets are not always in sync with those of North America and may be rising while we are in a decline. While the benefits of diversification make theoretical and intuitive sense, how does the strategy actually play out in practice? To test the effectiveness of asset allocation during the different phases of a market cycle, and by way of illustration, the performance of each of the seven - 1 -

4 Heavy Hitter Model Portfolios developed exclusively for BMO InvestorLine was analyzed. Heavy Hitter * Model Portfolios In 2003, seven Heavy Hitter Model Portfolios were designed and constructed exclusively for BMO Performance of the Heavy Hitter Model Portfolios During the Bear Market Table One shows the performance of each of the seven Heavy Hitter Model Portfolios during the bear market. Despite the severity of this bear market, all seven Heavy Hitter Model Portfolios posted positive returns. Investment returns ranged from a low of 4.6% for the Aggressive Growth Portfolio (100% equities) to a high of 16.9% for the Income Portfolio (80% fixed income/20% equities). In dollar terms, a hypothetical investment of $10,000 at the start of the bear market in August 2000 would have grown to $10,460 for the Aggressive Growth Portfolio, and to $11,690 for the Income Portfolio at the bottom of the bear market. InvestorLine. In developing the portfolios, a comprehensive analysis of parameters including returns, volatility and correlation of key domestic and foreign markets was carried out. Then, quantitative modelling techniques were used to determine the optimal mix between the major asset categories that maximized returns at different risk levels. Moreover, for maximum diversification, only one fund per fund company was included in each portfolio. Each of the Heavy Hitter Model Portfolios provides investors with effective diversification by distributing one's investment assets among different fund categories to achieve both a variety of distinct risk/reward goals and a reduction in overall risk. The underlying Heavy Hitter funds for the Heavy Hitter Model Portfolios include the following fund categories: Canadian Equity, Global Equity, Canadian Small-Cap, Income Trust, Canadian Bond, Canadian Short-Bond, and Canadian Mortgage. All the underlying funds chosen have a strong performance history, superior risk/reward ratios, a minimum 5- year track record and below-average management In contrast, with no diversification, a $10,000 investment in the S&P/TSX Composite Index would have been worth $5,490 at the bottom of the bear market. Similarly, a $10,000 investment in the S&P 500 and the MSCI World Index at the start of the bear market in August 2000 would have dropped to $5,790 and $5,970, respectively, by the time the stock market slump ended 25 months later. Clearly a different mix of underlying mutual funds in each of the Heavy Hitter fees within their respective categories. The portfolios range from the low-volatility Capital Preservation Portfolio, which consists of only fixed income mutual funds, to the Aggressive Growth Portfolio, which is made up of only equity funds, both domestic and foreign. For more information about Heavy Hitter Model Portfolios and the underlying Heavy Hitter Select Funds, visit the Mutual Funds Centre at bmoinvestorline.com

5 Model Portfolios would produce different results. However, while there are no guarantees that the outcome will be positive in all cases, the above analysis clearly demonstrates the benefits of diversification that are unmistakably apparent during bear markets. Following an asset allocation strategy through an appropriate portfolio of mutual funds is one of the best techniques for investors to adopt if they wish to achieve their financial goals. It provides a rational and well-defined plan that investors can adhere to even when they are faced with unpredictable markets. Table One Performance of Heavy Hitter Model Portfolios During the Bear Market Cumulative Return* Portfolio Capital Preservation Income Balanced Income, Limited Growth Balanced Income & Growth Growth & Income Growth Aggressive Growth 15.1% 16.9% 12.3% 11.0% 8.0% 8.9% 4.6% Benchmarks S&P/TSX Composite -45.1% S&P 500 ($C) -42.1% MSCI World ($C) -40.3% * from August 31, 2000 to September 30, 2002 Performance of the Heavy Hitter Model Portfolios During the Bull Market Table Two shows the cumulative performance of the seven Heavy Hitter Model Portfolios during the subsequent bull market. From September 2002 to May 2005, all seven Heavy Hitter Model Portfolios have posted gains during the 32 months of the market upswing. Moreover, as expected, the Heavy Hitter Model Portfolios with a heavier equity weighting have also delivered the highest returns. Investment returns have ranged from a low of 13.0% for the Capital Preservation Portfolio (100% fixed income) to a high of 50.8% for the Aggressive Growth Portfolio (100% equities). In dollar Table Two Performance of Heavy Hitter Model Portfolios During the Bull Market Cumulative Return* Portfolio Capital Preservation Income Balanced Income, Limited Growth Balanced Income & Growth Growth & Income Growth Aggressive Growth 13.0% 25.6% 32.2% 35.7% 38.7% 43.3% 50.8% Benchmarks S&P/TSX Composite 55.5% S&P 500 ($C) 15.3% MSCI World ($C) 29.3% * from September 30, 2002 to May 31, 2005 terms, a hypothetical investment of $10,000 at the start of the bull market would have grown to $11,300 for the Capital Preservation Portfolio, and to $15,080 for the Aggressive Growth Portfolio. With Canadian equity markets significantly outperforming other major markets during the current bull market, a $10,000 investment in the S&P/TSX Composite Index in September 2002 would have increased by 55.5% and be worth $15,550 at the end of May Similarly, a $10,000 investment in the S&P 500 Index and the MSCI World Index at the start of the bull market would - 3 -

6 have increased to $11,530 and $12,930, respectively, by May Performance of the Heavy Hitter Model Portfolios During the Bull/Bear Market Cycle of Despite fluctuating market environments from August 2000 to May 2005, a 57-month period that covers both the bull and bear market phases of this market cycle, all seven Heavy Hitter Model Portfolios have delivered positive returns (see Table Three). During this period, the annualized returns of the Heavy Hitter Model Portfolios have ranged from a low of 5.7% for the Capital Preservation Portfolio to a high of 10.2% for the Growth Portfolio. An initial investment of $10,000 at the start of this cycle would have increased to $13,000 for the Capital Preservation Portfolio and to $15,870 for the Growth Portfolio. Table Three Performance of Heavy Hitter Model Portfolios Over the Market Cycle Annualized Return* Portfolio Capital Preservation Income Balanced Income, Limited Growth Balanced Income & Growth Growth & Income Growth Aggressive Growth Benchmarks S&P/TSX Composite S&P 500 ($C) MSCI World ($C) * from August 31, 2000 to May 31, % 8.4% 8.7% 9.4% 9.2% 10.2% 10.1% -3.3% -8.2% -5.3% In stark contrast, over the same 57-month time period, and despite the strong run-up in share prices during the bull market phase of this cycle, the major stock market indices have not recouped all their losses and remain in negative territory. Over the complete market cycle, the S&P/TSX Composite Index has posted an average annual loss of -3.3%. In dollar terms, an initial investment of $10,000 in August 2000 would have been worth $8,541 by May International equity indices have fared no better with the S&P 500 and the MSCI World Index posting an average annual loss of -8.2% and -5.3%, respectively, during the market cycle. Lessons Learned Diversify your investment portfolio. Investing in all asset classes stocks, bonds and cash equivalents reduces risk and, over the long term, increases the potential for higher returns. Proper asset allocation (how much you invest in each asset category) is crucial to achieving your financial goals with peace of mind. While every portfolio will hold a poor performer from time to time, it's the overall return of all your investments within your portfolio that's important. Over the long haul, holding a diversified portfolio that meets your investment time horizon, risk tolerance, and goals is an excellent strategy for most investors

7 Don't try to time the market. None of us can see into the future. If we could, we would all be wealthy. One thing we do know for certain is that markets will continue to go up and down and not necessarily in that order. Trying to time the market can be a recipe for disaster and can result in lasting damage to one's investment goals. Remember, a good asset allocation strategy works in both bull and bear markets and, while it can't eliminate the latter, it can minimize its effects. Focus on your long-term financial plan. A well-defined plan is your roadmap to achieving your financial goals. Focusing on it, regardless of short-term market fluctuations, is the key to your long-term success. As illustrated by the performance of the Heavy Hitter Model Portfolios, diversifying your portfolio, staying calm and making rational decisions that focus on your long-term plan can help you get closer to reaching your investing goals - whatever the markets are doing. For more information about Heavy Hitter Model Portfolios and the underlying Heavy Hitter Select Funds, visit the Mutual Fund Centre at bmoinvestorline.com. BMO InvestorLine is a member of BMO Financial Group. As ranked by The Globe and Mail, 2002, 2003, 2004 & Feb. 5, 2005, by Gómez Canada Q1, Q & Q2, Q and by Watchfire GómezPro, Q Registered trade-marks of Bank of Montreal, used under licence. Trade-marks of Bank of Montreal, used under licence. BMO InvestorLine Inc. is a wholly owned subsidiary of Bank of Montreal. Member CIPF. *Heavy Hitter is a registered trade mark of Chand Carmichael & Company Limited. Copyright 2005 Chand Carmichael & Company Limited - 5 -

8 About the Author Ranga Chand is recognized both domestically and internationally as one of Canada's leading economists and mutual fund analysts. Professionally, he held senior positions with Canada's Department of Finance, then served as a director of the Conference Board of Canada before joining a major stock brokerage firm. He has also taught economics at the University of Waterloo, published extensively in the field of economics, and represented Canada at numerous economic forums, including the OECD in Paris, the United Nations, and the World Institute of Economics in Germany. A media personality with a huge following, his popular television show, Talking Mutual Funds with Ranga Chand, aired weekly on Canada's Report on Business Television (ROBTV) from 2000 to 2003 and reached over 4.3 million viewers nationwide. Much in demand by organizations, industries, and associations throughout North America, Ranga is well known for his down-to-earth, clear and informative presentations on the subjects of the global economy and investing. He is the author of a number of best-selling books including: Ranga Chand's Top 50 Mutual Funds Ranga Chand's Getting Started with Mutual Funds Best of the Best Mutual Funds, Featuring America's top 50 Heavy Hitter funds Is Your Retirement at Risk? Winning Strategies for a Financially Secure Future. Highly respected in the investment community, Ranga Chand is founder and President of the research and consulting firm Chand Carmichael & Company Limited located in Oakville, Ontario

9 DISCLAIMER: The foregoing information and opinions are for general information use only. Chand Carmichael & Company Limited does not guarantee their accuracy or completeness, nor does Chand Carmichael & Company Limited assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchases or sales of any security or as personalized investment advice. Mutual fund securities are not guaranteed, their values change frequently, and past performance may not be repeated. This report was prepared as a general source of information. It is not intended to provide legal, investment, accounting or tax advice, and should not be relied upon in that regard. If legal or investment advice, or other professional assistance is needed, the service of a competent professional should be obtained. The information contained in this report is based on sources believed to be reliable, but its accuracy cannot be guaranteed. The views expressed and information provided is attributable solely to the author. BMO InvestorLine is not liable for any special, indirect, incidental or consequential damages, (including, without limitation, lost revenues, lost profits or loss of prospective economic advantage resulting from the use of the information or for omissions or inaccuracies in the information) even if advised of the possibility of such damagers, or for any claim by another party. No part of this publication may be reproduced or redistributed in any form without prior written consent of both BMO InvestorLine Inc. and Chand Carmichael & Company Limited