What are we looking for?
Outperformers during an uncertain interest-rate regime.
The screen
As inflation data rolls in, the markets continue to speculate on whether the Bank of Canada might once again consider raising rates. For reference, the bank rate dropped from 2 per cent in February, 2020, down to 0.5 per cent by April of the same year. Over the following 42-month period, the bank rate increased to 5.25 per cent. This was a particularly challenging time for investors as asset classes (particularly equities) did not behave as history would have dictated. For example, during periods of rising interest rates, investors might have expected financial firms such as banks to do well given their expanded margins.
However, since the Bank of Canada started raising rates in March, 2022, performance of Canadian financial stocks has dwindled. Today, we look at this time range for active fund managers that have outperformed their peers on an after-fee basis despite the rising rate environment. To start with, I screened for funds that have received:
- A four-star 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 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 fewer stars 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 or silver, 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).
I then calculated the performance of the funds and their respective category averages between March, 2020, and August, 2023, and have displayed the top 20, ranked by their respective peer-group outperformance over this period. Only fee-based and DIY share classes of Canadian-domiciled mutual funds and ETFs were considered in the screen (noting that these investments’ fees do not include a bundled advice cost).
Thirteen balanced funds to reduce home-country bias
What we found
The screen resulted in the list of funds in the table accompanying this article. The table includes fund categories, MERs, trailing returns and ratings. I note importantly here that investors should first consider the category to which each of these funds belong to – not only because it is the basis for this screen, but also to understand whether it makes sense to own in your portfolio. A conservative investor closing in on retirement, for example, will not likely be a good fit for a small-cap equity fund. Although passive/index funds were excluded from the screen given the topic, I note that a number of well-rated NASDAQ 100 ETFs would have also outperformed the broader U.S. equity category over this time period.
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 listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA