Canadian News Service
Just about anything that could happen in the investment world did happen in 2011, amidst bouts of major turbulence.
How rocky will 2012 be? Possibly just as turbulent.
"About the only thing I can predict with confidence for 2012 is unpredictability," says Gordon Pape, an author and the publisher and editor of a number of investment newsletters.
"There are so many uncertainties playing out on the world stage that it is impossible to know how the year will unfold. In these circumstances, the best advice I can give is to be cautious. Prudence should trump greed, at least until such time as we have a clearer idea of how the European debt crisis will play out and whether we are headed into another recession."
Pape and Dave Paterson, editor of the Mutual Funds/ETFs Update newsletter, were each asked by Canadian News Service for their top two Canadian mutual fund picks for 2012.

PAPE'S PICKS
Pape selected two income funds as his top two Canadian picks for 2012:
Fidelity Monthly Income Fund and the RBC Equity Income Fund.
"The Fidelity fund offers a well-balanced portfolio, which is just the sort of thing we need in turbulent times," said Pape. "It is a consistently strong performer, beating its peers over all time periods by a substantial margin and earning a five-star rating from Morningstar."
During a year when many funds struggled to break even, it posted a gain of 6.5 per cent in the 12 months ending Nov. 30, 2011, among the best in its category. And, said Pape, "for the three years to that date, the fund showed an average annual compound rate of return of 14.2 per cent, nearly doubling the category (Canadian neutral balanced funds) average. That's a very fine result for a conservative portfolio such as this."
"This does not mean, however, that the fund is immune from market downturns," said Pape.
"It dropped 21.5 per cent in the year ending Feb. 28, 2009. But most equity and balanced funds did worse during that period. Fidelity rates the risk as below average on its volatility meter."
This is a "huge" fund in all ways, stressed Pape. "It has accumulated more than $4 billion in assets since it was launched in November 2003 (all series). The portfolio holds a breath-taking 1,659 positions, 272 of which are equities and the rest bonds. Stocks make up about 43 per cent of the fund, with about the same weighting in bonds, and 11.4 per cent in cash, so the portfolio is quite defensive in nature. Foreign content is about 30 per cent."
Cash flow, however, is thin, if you are looking for regular income.
"Monthly payments vary but were less than $0.02 a unit for most of 2011," said Pape.
"The managers use a value approach to stock selection and the management expense ratio (MER) for the B units is a reasonable 2.09 per cent. There are 44 different types of units for this fund so check out the Fidelity website for the appropriate code."
His other Canadian pick, RBC Canadian Equity Income Fund, "has done amazingly well in very tough market conditions."
"Manager Jennifer McClelland has skilfully transformed a former income trust fund into a high-yield equity fund that has outperformed just about everyone else in the Canadian Dividend and Income Equity category. The A units of the fund recorded a 12-month gain of 14.09 per cent as of the end of November 2011, while the group average was minus .40 per cent."
"Over the past three years through November," said Pape, "the fund has generated an average annual compound rate of return of 29.68 per cent, nearly tripling the average return in this category which should be good enough to please even the most demanding investor."
The portfolio, which has just over 100 positions, is a mix of blue-chip stocks such as Brookfield Asset Management and CIBC, REITs, former income trusts, and various resource companies, explains Pape. About one-third of the assets are in the financial sector with 23.3 per cent in energy, 14.6 per cent in industrials, and 10.4 per cent in materials. The investments are heavily concentrated in Canada, with only a smattering of foreign securities.
"This RBC fund," said Pape, "offers good cash flow, with current distributions running at $0.09 a unit per month. Based on a recent NAV of $23, that projects to a yield of 4.7 per cent over the next year."

PATERSON'S TOP TWO
Dave Paterson, editor of the Mutual Funds/ETFs Update newsletter, picked two Canadian mutual funds that he believes are good choices for volatile times: the Fidelity Canadian Large Cap Fund and the IA Clarington Canadian Conservative Equity Fund.
The Fidelity fund has performed well both "on an absolute and risk adjusted basis, and both before and after a recent manager change," said Paterson. "This Canadian focused equity fund is now managed by Daniel Dupont, who took the fund over in April of 2011 after the departure of Brandon Snow."
"After the manager change, the fund gained 5.2 per cent through November, while the S&P/TSX Composite Total Return Index lost 11.2 per cent."
"The costs of this fund, particularly in the front-end Series B units, are reasonable for a Canadian equity fund," said Paterson. "The MER is 2.28 per cent, which is below the category median of 2.49 per cent."
"In our opinion, the portfolio's large cap focus, combined with the manager's active approach, make this a good fund for volatile times."
Paterson`s other Canadian pick, the IA Clarington Canadian ConservativeEquity Fund, is a "good conservative fund for volatile markets."
"Its 12-month return through November was a gain of 4.23 per cent, in a year when many funds lost money. Through the first 11 months of 2011, it was ranked 23rd out of the 213 Canadian Dividend and Income Funds."
The fund has been managed by George Frazer and his team at Leon Frazer & Associates Investment Counsel for decades. The team looks for companies with a demonstrated history of growing dividends paid to investors over time, based on the belief that "dividend increases drive growth in both income and capital and offer capital protection in volatile markets," said Paterson.
"There is definite evidence that this process works. During the period between July 2008 and February 2009, the S&P/TSX Composite Total Return Index plunged by more than 57 per cent, while this fund was down 32 per cent."
The fund`s overall volatility is significantly below that of the S&P/TSX Composite Index, he adds.
"If there is a drawback to a fund such as this," said Paterson, "it is that it will lag in up markets. This is a good choice for volatile markets."