What are we looking for?
Equity funds that protected on the downside during the 2008-09 financial crisis and recovered faster than the index.
The screen
After the triple hit to the Canadian economy (COVID-19 worries, a surprise interest rate cut and an oil price plunge), so far this year the S&P/TSX Composite has erased more than half the gains it made in 2019. Although Morningstar’s view is that the economic impact of the novel coronavirus will have a marginal impact on world GDP over the long term, this doesn’t mean that investors aren’t feeling the full pain of today’s equity markets.
Taking a lesson from history, this week I look for Canadian equity managers who were able to outperform the index during the 2008-09 financial crisis. The search may interest investors who might consider paying for active management during today’s volatile times. The key measure that outlines this trait is known as maximum drawdown, or the value lost from peak to valley during a market correction. A related measure is known as the recovery period, or the number of months it took for the fund to recover its peak value from prior to the correction. To this end, I screened Morningstar’s database of equity managers across these dimensions:
- A maximum drawdown better than the S&P/TSX Composite Index or S&P/TSX SmallCap Index on a total return basis, and a recovery period in line with or less than the indexes;
- An inception date prior to Jan. 1, 2007;
- The Morningstar Quantitative Rating, or “medalist” rating of bronze, silver or gold. As a reminder, the medalist ratings are 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).
Only the oldest share class of each fund in our database was considered.
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 advisers, 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
Only seven funds made the cut. The relevant information on the funds from the screen are listed in the table, inclusive of their after-fee total returns, management expense ratios and inception dates. Also included are the maximum drawdown and recovery period metrics for both the S&P/TSX Composite and SmallCap indexes.
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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