What are we looking for?
Canadian equity mutual funds available through discount brokerages that have outperformed peers on a risk-adjusted basis.
The screen
A tumultuous year for Canadian equities marked with a global pandemic and sharp decline in oil prices will likely leave this Canada Day as one not soon forgotten by investors. As a category, Canadian equity funds (mutual funds and exchange-traded funds that hold 90 per cent in Canadian-domiciled large-cap stocks) have been particularly hard hit this year showing a year-to-date average performance of minus 11.8 per cent, a full 3.6 percentage points worse than the S&P/TSX Composite Total Return Index. That said, oil prices have rebounded sharply off lows, as has the index. For optimistic investors who believe the worst is behind us, I use Morningstar Direct to seek funds within the Canadian equity category that have performed well relative to peers over the medium- to long term and are available through discount brokerage channels.
To find these funds, I look to the Morningstar Rating Overall (also known as the Star Rating), which is a backward-looking assessment of risk-adjusted fund returns after fees relative to their peers. The Morningstar Rating Overall considers performance over three, five and 10 years with greater emphasis on the near term. Although the rating looks retroactively, it serves as a great starting point for more research. Our data also show that as a group, funds that earn five stars tend to outperform those that are assigned four stars, three stars etc. after receiving the five-star rating. Today’s screen only considers four-star and five-star funds.
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
The investments that meet the requirement are listed in the accompanying table along with their trailing performance, ratings and fees. For reference, the category average and index performance are also shown. Note that the management expense ratios listed here do not include the cost of continuing advice, as these funds are sold primarily through channels where no advice is given. Experienced investors who do not require such advice will benefit from the lower MERs. Also note that two of the funds listed here are passive index investments, both of which are among those that outperformed the category after fees on a year-to-date basis.
As each of the funds on our list represents Canadian equities only, investors are reminded that a well-rounded portfolio with ample asset class and geographical diversification are effective ways to reduce risk in the portfolio.
This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing in any of the products listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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