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Rocky mountain high

Investors in US funds may have been tempted to cut their losses and run recently but those funds which can diversify into Canada have fared well.

The £278m Martin Currie North American fund has nearly 15 per cent exposure to Canada compared with an 8 per cent position in the MSCI North America index. It has risen by 3.28 per cent over one year and 12.25 per cent over three years.

Invesco Perpetual US aggressive, with just 3.3 per cent exposure, is down by 11.28 per cent over one year and 21.67 per cent over three years while the Investment Management Association’s US sector has fallen by 4.46 per cent over one year and is up by 7.44 per cent over three years to April 19, according to Morningstar (bid to bid, net income reinvested).

An International Monetary Fund report in March says: “Reflecting prudent policies and favourable conditions, Canadian real GDP has grown faster than in other G7 countries, inflation has been low and stable and fiscal balances have been in surplus.” It predicts GDP growth of 2 per cent this year compared with 1.6 and 0.5 per cent for the UK and US.

Two of the biggest Canadian holdings in the Martin Currie fund are Canadian Fording Coal and agricultural fertil-iser firm Potash Corporation, each accounting for around 3 per cent of the fund. It also holds Canada Pacific Railways and Gildan Activewear.

Co-manager TomWalker says: “We select stocks based on four criteria – quality, value, growth and change. Potash is meeting these, especially quality and positive change, brought about by a global trend as more countries move from rice to grain and need fertiliser to improve productivity, causing it to see incredible earnings revisions.”

The $2.2trn Toronto Stock Exchange, the seventhbiggest in the world, saw 338 initial public offerings in 2007 compared with 209 in the US. Forty-nine listings last year were international companies and 31 of the listings were in the mining, oil and gas sectors.

Canada’s biggest strength is its abundance of natural resources. It has responded to the commodity price boom by reallocating resources smoothly, with big transfers of capital and labour from the manufacturing-based central provinces to the Albertan oil sands, Sudbury nickel belt or Arctic gas lines.

JP Morgan natural resources fund manager Ian Henderson holds European companies such as Royal Dutch, which is a big player in the oil sands business, but also has 33.9 per cent direct exposure to Canadian quoted companies.

Henderson says: “I have investments in Canadian gold, copper and zinc through shares in acquisitive mining company Teck Cominco, not to mention coking coal, steaming coal, diamonds, oil and rich seams of uranium. Canada has everything except platinum.”

Then there are vast swathes of land. Property specialist Landcorp International is offering access to Canadian land development for as little as £8,875 a quarter acre, with an estimated 150 per cent return on investment, while diversified global property funds are increasing their exposure to the Canadian property market.

There are possible downsides. Bank of Canada recently warned that tighter US financial conditions could dampen Canadian growth. The US is Canada’s biggest single trade partner and if the Democrats’ sabre-rattling over the North American Free Trade Agreement results in rising protectionism, this could hurt Canadian exports.

Yet the credit crunch has hit consumers lightly compared with the US and UK. The Canadian dollar was trading at 1.012 against the US dollar at the end of April, having rebounded from an all-time low of 61.79 cents in 2002 and has been trading at 1.997 against the pound.

Walker says: “Canada is resource-rich with interesting companies, positive tax cuts, a strong currency and no housing boom and bust. Things are on a level footing.”

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