What are we looking for?
Canadian equity funds that have blown past peers and are poised to do well in the future.
The screen
Here’s a sobering stat: Today there are more exchange-traded funds (about 1,367) from Canadian fund companies than there are liquid Canadian stocks (about 232, as defined by the constituents of the S&P/TSX Composite Index as of last month’s close). As stock investors know, investing domestically is no easy feat given our resource-heavy cyclical market, not to mention the sheer volume of choice. Moreover, newer investors with smaller amounts to invest might lack the scale required to build a well-diversified portfolio of individual Canadian companies. With this in mind, today I seek to help with this conundrum by screening Morningstar’s database of ETFs and DIY mutual funds (those that are sold through discount brokerages without a bundled advice fee) across three peer groups that invest exclusively in Canadian equities that have:
- A four- or five-star Morningstar Rating for funds, 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 backwards-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.
- 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).
Three fund categories were considered here, including Canadian equity, Canadian dividend and income, and Canadian small/mid-cap categories as defined by the Canadian Investment Funds Standards Committee.
What we found
The funds that met the above requirements are listed in the accompanying table, which includes MERs, categories, Morningstar Ratings, trailing returns and inception dates. It’s important to note that both ratings from Morningstar are measured relative to category peers and hence consideration of the category should be taken before looking at the ratings. The list is sorted first by the medalist rating, followed by the star rating, then the three-year annualized returns. Also included in the table is whether the fund is actively managed, passively managed or what Morningstar calls strategic beta (a rules-based approach that straddles the line between active and passive, giving investors consistent exposure to an investment factor such as value/growth/dividends/quality etc.).
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA