What are we looking for?
Value or growth? ETF and mutual fund winners with opposing style biases.
The screen
When it comes to fundamental investment styles, investors are often presented with two opposing ideas: the concept of value – buying securities that are underpriced, based on the fair value of a stock; and the concept of growth – buying companies that are quickly increasing earnings or that appear to have potential new income streams. Today, we look for examples of investment funds that showcase either of these styles that have outperformed their category peers. To start the search, I screened the 1,800 or so Canadian-domiciled ETFs and DIY mutual funds (those that are sold via discount brokerages and come without a bundled advice fee) for the following metrics:
- A four- or five-star Morningstar Rating for Funds (also known as the “star” rating), indicating that the fund has historically outperformed respective category peers after fees, on a risk-adjusted basis. Our data show that although the star ratings are based on past performance, 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 that have historically underperformed peers.
- A Morningstar Medalist Rating of gold, silver or bronze, which identifies 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).
Given that the fund investment style is largely applicable to equity funds, I limited the search for funds that invest primarily in U.S. equities, an efficient market where new information is quickly reflected in a stock’s price. I then turned my attention to Morningstar’s Factor Profile – a holdings-based analysis that allows investors to understand exposures to investing style (value/growth), yield, momentum, quality, volatility, liquidity and size. Here, I homed in on the style factor, which is a standardized score from 0 to 100 that indicates the funds’ value or growth tilt. (Lower scores indicate a greater growth tilt.) Experienced investors will quickly recognize this analysis as an extension of the renowned Morningstar Style Box introduced in 1992 to help investors quickly understand an investment’s characteristics.
What we found
The screen resulted in a list of 48 funds, of which I’ve displayed the 10 funds with the heaviest tilt to growth (listed first) and the 10 funds with the heaviest tilt to value (listed last). Alongside the style score are fund MERs, categories, trailing returns and ratings. Where available, each fund’s maximum drawdown during the 2008 global financial crisis and the 2020 COVID-19 sell-off are also displayed, to illustrate the resiliency of each investment during times of strife.
Finally, I note here the abundant appearance of passive and strategic beta ETFs, both of which are offered with lower management fees than actively managed funds.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA