What are we looking for?
Equity mutual funds that shone during the past two global market turndowns.
The screen
As we roll into fall, stock investors are likely in reasonably good spirit as both the Canada and U.S. central banks signal continued interest rate normalization. That said, the volatility in early August probably has a few on their toes given the sudden drop in equity markets. In remembrance of Black Monday (Oct.19, 1987, when the S&P 500 lost 20.4 per cent), today I use Morningstar Direct to look for equity mutual funds that best weathered the last two systemic market corrections (the Global Financial Crisis and the COVID-19 pandemic).
To do this, I first screened the universe of Canadian domiciled mutual funds with an inception date prior to Jan. 1, 2008, leaving me with roughly 650 unique funds. From here, I noted the maximum drawdown (the value lost from peak to trough during a market correction) during both systemic market corrections. I ranked both drawdown measures from best (least value lost) to worst (most value lost) and combined the ranks by applying a weight of 70 per cent to the global financial crisis, and a 30 per cent weight to the COVID 19 pandemic. Finally, to find funds that not only fared well but were able to outperform their peers, I screened for funds that received Morningstar Rating for Funds (or “star rating”) of 4 or 5 stars. As a reminder, the star ratings are an objective look back at risk-adjusted returns after fees against category peers, and use 10 years’ worth of history where available, placing emphasis on the most recent three years of performance. Only the oldest share class of each fund was considered in this search. Additionally, I excluded sector equity funds (for example, health care funds) which by their nature stick to a single economic sector rather than being diversified across the economy. Many health care funds did stick out in the screening process but perhaps due to their required exposure as opposed to the manager’s own skill, hence their exclusion.
What we found
The top 15 mutual funds that qualified in the screen are listed in the table accompanying this article, alongside their trailing performance, MERs, inception dates, star ratings, and performance during the last two major market corrections. The list is sorted by the combined rank mentioned above.
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 mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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