What are we looking for?
Risk-efficient funds that can round out your portfolio.
The screen
Although Monday’s market bounce and Tuesday’s emergency Fed rate cut may offer investors some comfort, the market volatility exemplified over the past week may encourage some investors to rethink their long-term asset allocations in favour of a more defensive asset mix. To find some steady-eddy suggestions, I screened Morningstar’s database on two dimensions:
- A risk-adjusted return metric known as the Sortino ratio. The ratio measures a fund’s return over a specified time period against the downside risk that it takes on. Similar to the Sharpe ratio, the numerator of this ratio is an investment’s total return. The denominator is the standard deviation of returns (a measure of volatility) – but in negative periods only. The context here is that investors don’t necessarily put as much emphasis on volatility in up markets. Investments with higher Sortino ratios can be viewed as more risk efficient than those with lower Sortino ratios.
- The Morningstar Quantitative Rating, or “medalist” rating – a forward-looking assessment of a fund’s prospective ability to outperform similar funds after fees, based on five factors: people (the quality of management team), process (the effectiveness and consistency of the investment process), parent (organizational structure and talent retention), performance and price (fees). Ratings include gold, silver, bronze, neutral and negative.
To qualify, a fund must have a Sortino ratio that is higher than that of the category average over the trailing one-, three-, five-, 10- and 15-year periods and must have a medalist rating of bronze, silver or gold.
More about Morningstar
Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.
What we found
Although the entire database of 24,000 funds across multiple asset classes was screened on the same criteria, only four funds met my requirements. Not by coincidence, all four funds are Canadian fixed income funds. The relevant information on the funds from the screen are listed in the table, inclusive of their trailing returns, Sortino ratios, management expense ratios and inception dates. Note that Canadian fixed income funds must contain at least 90 per cent bond issues that are denominated in Canadian dollars with less than 30 per cent from foreign issuers. For reference, I’ve also included return and risk statistics for the category average.
This column does not constitute financial advice. It is always recommended to speak to a financial adviser or investment professional before investing.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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