What are we looking for?
Funds that struggled in 2022, but have rebounded so far in 2023.
The screen
No investor likes to see the value of their investments decline, but the reality is that funds underperform from time to time. Although this can happen for a variety of reasons, including some that may warrant eliminating a fund from your portfolio, that is not always the case. Generally speaking, a structural change such as a modification to the fund’s investment philosophy or process, or a meaningful loss outside of what would be expected for the fund (say, a growth fund underperforming when growth-style investing is doing well) could be reason to reconsider holding it. That said, when a fund’s underperformance is expected as a result of its objectives and the market environment, investors can be rewarded for sticking with it.
Calendar year 2022 was challenging. Morningstar’s Global Gross Index (which measures the performance of a basket of stocks around the world) and Morningstar’s Global Core Bond Gross Index (an index that measures the performance of global investment grade bonds around the world), both declined by more than 11 per cent in Canadian dollar terms, which signalled a tough investment period for most asset classes, and therefore most funds. I used Morningstar Direct to screen more than 4,300 mutual funds and exchange-traded funds to highlight some good funds to hold over the long term that had weak results in 2022, but have recovered so far in 2023. The criteria included:
A Morningstar Medalist Rating of gold, silver or bronze, indicating a forward-looking view of the fund’s ability to outperform its peer group and/or a relevant benchmark on a risk-adjusted basis over a full market cycle.
A Morningstar Rating of four or five stars. The star rating is an objective look back at a fund’s after-fee, risk-adjusted returns relative to the category to which the fund belongs.
What we found
The screen’s results represent funds across a variety of asset classes, regions and styles. Interestingly, we also found a mix of index-tracking ETFs and actively-managed mutual funds fit our criteria. Growth-style funds, particularly those with a technology focus (such as ETFs that track Nasdaq and growth-style equity funds) are prominent in the list. This is expected, because technology stocks were among the worst-performing in the market last year, but are top performers this year.
Note that the management expense ratios (MERs) for mutual funds listed here are for the F-class versions. These exclude the cost of advice and are held in fee-based accounts in which an adviser charges separately for advice. Some funds may also be offered on order-execution-only platforms.
Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.
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