What are we looking for?
Some of the best-performing commission-based mutual funds
The screen
In a Globe and Mail column this week, Rob Carrick posed the question of whether Canadians have “outgrown” mutual funds – an interesting comment given that in the United States, last year marked the first time that the issuance of ETFs outpaced that of mutual funds. In his article, he references the fact that there are indeed some strong-performing mutual funds in Canada, but their performance is hampered by high fees, which detract from what the investor receives.
This is a topic that Morningstar writes about quite frequently: High fees are the single consistent detractor from investor returns over time. In Canada, this is of particular relevance since many mutual funds are sold with a bundled fee for advice. In other words, the adviser or salesperson who sells you the mutual fund is paid a portion of the fee for providing you with advice and distribution. Morningstar dubs these as “commission-based” mutual funds, and they are commonly denoted with “series A” after the fund name. Mr. Carrick makes a good point in his article, and though it is difficult to find a higher-fee mutual fund that beats its peers over time, they do exist. Today, I search for these funds using Morningstar Direct by screening for funds that:
- Morningstar has denoted as ”commission-based” mutual funds, or those where the management expense ratio (MER) includes the cost of advice and distribution.
- Have a minimum required investment amount of $1,000 or less.
- Have received a Morningstar Rating for Funds (informally known as the “star” rating) of five stars. This rating is an objective look back at the risk-adjusted, after-fee performance of the fund, relative to its category peers. The rating considers the last 10 years of performance history, if available, and puts emphasis on the past three years. Our data shows that although the star ratings are backward-looking, funds that have received five stars as a group, outperform those that have received four stars, three stars, etc., in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future, as compared with those which have historically underperformed peers.
- Have received a Morningstar Medalist Rating of gold, silver or bronze, isolating funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision making).
- Are actively managed (i.e. do not follow an index).
Only commission-based mutual funds from Canadian-domiciled fund companies were considered in this search.
What we found
The funds that qualified in the screen are listed in the table accompanying this article, alongside their MERs, historical performance, ratings and a breakout of their asset-class exposure. The list is first sorted by the broad asset class exposure (equities, fixed income or allocation), then by the specific category to which each fund belongs. I note that the category is of particular importance in this list, given that Morningstar’s ratings are meant to compare funds against their category peers.
Given the effect of fee-bundling, which results in MERs that are higher than what one would find in a typical passive ETF, the fact that these funds have outperformed peers after fees is certainly worth highlighting. Investors who have larger dollar amounts to invest would be well served to understand whether there is a share class of the same fund with a lower fee available, or a fee-based version of the fund, where the cost of advice is decoupled from the sale of the mutual fund.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Ian Tam, CFA