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What are we looking for?

Large-cap Canadian equity funds with a value-style focus.

The Screen

Inflation saw its largest increase since 1983 in June when it reached 8.4 per cent. This can present a challenging environment for investors, but offers unique opportunities for those with a value-style investment approach. Value-style investors, such as Warren Buffett, pick stocks that are undervalued by the market with the expectation that those stocks will outperform when the market recognizes their true value. These stocks can also be considered discounted, and just like any other sale, they can get snatched up quickly so investors tend to see profits earlier than they would by investing in growth-oriented companies.

As Canada is traditionally known as a fruitful hunting ground for value stocks, I used Morningstar Direct to screen for Canadian equity mutual funds and ETFs that have higher exposure to value stocks than the Canadian market (as represented by the S&P/TSX Index). To find these investment funds, I screened Morningstar’s database, which consists of roughly 225 unique Canadian equity funds, on the following metrics:

  • Value-style equity exposure greater than the S&P/TSX Composite Index, based on most recently available holdings data
  • A Morningstar Rating (aka “star rating”) of four stars or better. 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. Though the measure is backward-looking, Morningstar’s research shows that over time and on aggregate, five-star funds continue to outperform four-star funds, which in turn beat three-star funds etc., after receiving the rating.

What we found

Large-cap Canadian equity funds with a value-style focus

NameMER(%)Morningstar Rating OverallEquity Style Value % (Net)Total Return 6 Month (%) Total Return 1 Yr (%)Total Return Annlzd 3 Yr (%)Total Return Annlzd 5 Yr (%)Total Return Annlzd 10 Yr (%)Annual Ret 2021 CADAnnual Ret 2016 CAD
Scotia Wealth Cdn Value Pool F1.21455.70-3.538.1512.239.298.6630.7126.17
iShares Canadian Fundamental ETF Comm0.72454.98-2.9811.4911.979.108.8834.7329.76
Invesco FTSE RAFI Canadian ETF0.51454.63-2.8811.7212.259.369.1735.0329.99
BMO MSCI Canada Value ETF0.40452.65-2.1712.4410.9732.36
TD Canadian Large Cap Equity D1.38445.43-1.798.989.048.0026.04
iShares S&P/TSX 60 ETF0.18445.24-5.940.419.939.159.1027.9021.14
RBC Quant Canadian Equity Leaders ETF0.44444.86-4.780.849.278.2225.4423.03
RBC QUBE Low Vol Canadian Eqty Fund F0.77444.47-2.193.618.798.1524.5215.51
Mackenzie Canadian Large Cap Equity ETF0.04444.34-5.550.419.0425.71
PH&N Conservative Equity Income Sr F0.78543.95-0.629.7511.5230.26
Vanguard FTSE Canada ETF0.06442.91-5.781.2010.189.319.0128.5420.42
S&P/TSX Composite TR41.69-5.29-0.209.508.628.5925.0921.08

Source: Morningstar CPMS

The Canadian market is naturally tilted toward value-style stocks given the prominence of financial and energy companies in the index, which are sectors known for their value-style characteristics. There were fewer qualifying funds than had been expected, potentially owing to managers’ desire to maintain diversified portfolios from a sector perspective. Furthermore, seven of the 11 investment funds that met the screen’s criteria are ETF products, which means investors would incur much lower fees.

Historical analysis of these investment funds also indicates most have had success in the most recent market environments when value-style investing has been in favour. We have also seen new entrants since 2016, one of which, the BMI MSCI Canada Value ETF, was among the top performers of the group in 2021.

Note that the management expense ratios (MERs) listed here are reflective of the oldest share class. In the table, f-class (aka fee-based share classes) shares exclude the cost of advice and are held in fee-based accounts where the adviser charges separately for advice.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.

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