What are we looking for?
Global equity funds that have outperformed peers despite fees.
The screen
The most liquid Canadian stocks are held in the S&P/TSX Composite Index of roughly 220 companies, a universe that this column’s readership is likely very familiar with. By contrast, the Morningstar Global Markets Index holds roughly 7,930 companies. For many investors, keeping an eye on a large universe of companies for both risks (of stocks that you hold) and opportunities (for stocks that you don’t hold) is not a task that should be underestimated, especially if you seek diversification across regions and sectors.
The good news is there’s no shortage of portfolio solutions available to Canadian investors in this arena. Among the universe of ETFs and DIY mutual funds (those that are offered through discount brokerages without a bundled advice cost), Morningstar’s database shows a whopping 160 unique offerings. Though access to a global portfolio will have some fees attached, this tradeoff may be worthwhile.
Case in point, I used Morningstar’s database to find funds that have managed to outperform their peers historically by a good margin on an after-fee basis. To do this, I largely relied on the Morningstar Rating for Funds (also known as the Morningstar Star Rating), which rates funds according to these metrics, on a risk-adjusted basis.
Our data show 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 with a track record of outperforming peers will continue to outperform in the future, as compared those that have historically underperformed peers. Only five-star rated global equity funds from Canadian-domiciled providers were considered in this search.
What we found
The ETFs and DIY funds that met the above requirements are listed in the accompanying table, which includes MERs (management expense ratios), historical performance, ratings, and a breakout of asset allocation. It’s worthwhile noting an abundance of actively managed funds on the list alongside the likes of iShares MSCI World Index ETF (XWD-TSX), which is passively managed.
Also displayed, but not used in the search, is Morningstar’s Medalist rating, which is our forward-looking opinion on a fund’s ability to produce excess returns (also known as alpha) after fees in the future, with those receiving Gold, Silver or Bronze preferable to those rated neutral or negative. The basis of the medalist rating is Morningstar’s qualitative assessment of the people (looking at things like experience and past performance history), the process (the effectiveness of the teams investment approach and risk management), and the parent company (a look at manufacturer’s stewardship qualities and resource management).
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