In the Canadian equity category, the poor results of commodity-based stocks translated into weakness in other sectors, such as financials. Still, one person’s problem is often another’s opportunity: Lower oil prices and lower interest rates leave more spending money in consumer’s pockets, while the low Canadian dollar encourages exports. As a result, portfolio managers who concentrate on the consumer, technology or industrial (non-oil related) sectors have fared better and will continue to do so, at least for a good part of this year.
Such is the case with Fidelity Canadian Large Cap, a consistent top performer that regularly appears in my fund selections. The actively managed fund has responded to weakness in the energy and materials sectors by emphasizing investments in technology and industrials.
Likewise, Steadyhand Equity has gained from light exposure to resources and from a healthy allocation to U.S. equities, which continue to benefit from the U.S. dollar appreciation. The fund is fairly diversified and operates with a low cost structure and moderate portfolio turnover.
Canadian Equity Funds
Benchmark index: S&P/TSX Composite Index TR, Five-year return: 3.77%
In the U.S. equity category, do not be fooled by the very strong results achieved by some funds over the past year. The results can be attributed to the U.S. dollar appreciation, as the S&P 500 ended 2015 almost flat on a currency-neutral basis. This proves a point I made last year: that diversifying into U.S. equities is important for Canadian investors. For a number of years now, heavy equity market losses have been accompanied by depreciation of the Canadian dollar. I expect the Canadian dollar will remain weak until we see concrete signs of recovery in commodity prices.
As the name suggests, TD U.S. Quantitative Equity uses a data-driven methodology for fund selection, although its behaviour suggests a high degree of similarity with the S&P 500. Still, the combination of low cost and low turnover has helped the fund deliver superior returns for three consecutive years. There is also evidence of some added value from active management.
Both Mawer U.S. Equity and Brandes U.S. Equity operate with the same favourable combination of low cost and low turnover. However, the funds exhibit a high degree of similarity with the S&P 500, thus limiting their ability to beat the index.
U.S. Equity Funds
Benchmark index: S&P 500 TR Index (C$), Five-year return: 20.57%
The global equity category is always a mixed bag. American equities typically constitute about half of a fund’s portfolio, so U.S. influence is inevitable. Meanwhile, European equities remain undervalued by historical standards and pay high dividends. That the euro is now cheap adds to the category’s attraction. As for emerging markets, further turbulence is expected, but a careful fund manager should identify bright spots within countries and sectors that benefit from cheap commodity prices. For those reasons, I think global equities currently represent a viable option for adding diversification to your portfolio.
Mawer Global Equity continues to post superior returns with relentless consistency. That the fund experiences less volatility than its peers or the index reflects value added from active management. It also has a low cost structure and low portfolio turnover: The average holding period of a security can be as long as seven years.
Manulife Global Equity Class Advisor Series has posted superior results in each of the past four years. The portfolio’s recent focus has been on financials, technology and health-care stocks. Although the portfolio is similar to the index, there is evidence of value added from active management. The fund’s very low portfolio turnover represents a structural advantage.
Global Equity Funds
Benchmark index: Dow Jones Global TR Index (C$), Five-year return: 14.11%
In the balanced category, the Manulife Monthly High Income tops the list for the second year in a row with consistent above-average returns. The fund maintains a well-diversified portfolio which contributes to an acceptable down market performance. However, as I mentioned last year, do not misinterpret the generous cash distributions as investment income, given that a large part of that is made of capital gains or return of capital. Actual net income distributions (from interest and/or dividends) remain in the vicinity of 2%.
Another consistent performer from last year’s Honour Roll is Fidelity Monthly Income. Its superior recent results have come on the back of a strong showing by the bond component of its portfolio and exposure to dividend-paying equities. Net investment income distributions have recently averaged 2.5%.
Incidentally, I have personal reservations about balanced funds. On average, most balanced funds retain at least 30% to 40% (and sometimes more) of their portfolio in bonds. I feel that you are paying unnecessarily high fees on this component of your portfolio, and could achieve better results by sticking to a diversified portfolio of stocks and bonds. That said, finding an optimal allocation can be a daunting task for many investors who prefer to outsource the chore to their fund manager. If you do invest in a balanced fund, ensure that it that charges low fees and delivers at least some added value from active management. Fortunately, the Honour Roll’s methodology shortlists funds with those very characteristics.
Canadian Balanced Funds
Benchmark index: Fundata Canadian Balanced Index, Five-year return: 4.33%
The Canadian small cap category, characterized by heavy concentration on energy and natural resources, has been among the worst affected over the past year. Only a small group of funds have been able to avoid the carnage with limited losses, and they were the funds that carried the highest exposure to sectors like technology and telecommunications. Such is the case with Pender Small Cap Opportunities, which against all odds managed to end the year with significant gains (unfortunately, the fund is closed to new investments).
Likewise, National Bank Quebec Growth also managed to end the year in positive territory. Bear in mind: By mandate, this fund concentrates on firms that conduct a large portion of their business in Quebec. Given that the province has limited dependence on natural resources, the fund’s exposure to the sector is less than 20% of the portfolio. This is one of several funds in the category (like Mawer, HSBC, BMO Enterprise and Trimark Canadian Endeavour) that periodically feature on the Honour Roll, another tribute to their superior long-term performance record.
Canadian Small Cap Funds
Benchmark index: BMO Canadian Small Cap Index, Five-year return: -4.88%
How to use these tables
Overall ratings in each category go from one star (poor) to five stars (excellent). Any Honour Roll fund is a good buy, but some may be better for you than others. For instance, if you’re investing outside an RRSP, pay particular attention to “Tax Efficiency.” This measures how much of the return on a fund has been lost to taxes on distributions. (Funds that don’t distribute cash don’t lose anything and so are rated at 100%.) In general, the higher this number, the better for funds held in taxable accounts. All investors should consider risk as well. “Risk-Adjusted Return” shows how much return each fund has achieved in proportion to its risk—again, the higher, the better. If you want to play it safe, look for funds with a high “Consistency” rating (which shows the percentage of months in which a fund has performed better than its peers) and strong “Bear Market Performance” (the best funds get ‘A’s and so on, down to ‘E’s).
1 Tax efficiency estimates the percentage of total returns retained by investors, assuming a 46% tax rate for interest income, 25% for capital gains and 23% for dividends. Not applicable for RRSP investors
2 Based on five years’ historical return, before sales charges and commissions
4 Based on average monthly
loss during market corrections
5 Restricted/may not be sold in all provinces
6 Closed for new investors, check availability of other versions
Sources: Fundata Canada Inc. & FundScope Limited November 2015