What are we looking for?
Canadian small- and mid-cap funds where managers have outperformed their peers.
Looking across the 60 categories of Canadian-domiciled mutual funds and exchange-traded funds on a year-to-date basis, I noted that once again the Canadian Small/Mid Cap Equity category has shone through (after plummeting, on average, 28 per cent during the pandemic sell-off last March). This year, funds and ETFs in the category (which must have 90 per cent of their holdings in Canadian-domiciled companies) have produced an average of 12.9 per cent on a total return basis, while the Morningstar Canada Small Cap index produced 11.1 per cent. Experienced readers know that small-cap companies are often more volatile, rife with liquidity concerns, and often have a lack of analyst coverage. Hence, for investors, this particular category is one where hiring a professional manager may be worth considering to help manage some of these risks. For some ideas in this space, I use Morningstar Direct to screen for mutual funds and ETFs in the category that have:
- A Morningstar Rating (informally known as the “star rating”) of four stars or better. Recall that Morningstar’s star rating is a look back at historical risk-adjusted returns after fees, relative to peers. The star ratings are not forward-looking, but our data show that over the past decade, five-star funds domiciled in Canada were less than half as likely to be liquidated or merged than one-star funds. The star rating is a great starting point for further research.
- A Morningstar Quantitative Rating of gold, silver or bronze. This is Morningstar’s forward-looking assessment of a fund’s ability to outperform in the future. In the years that the rating has been in existence we’ve found that as a group, medalist-rated funds have outperformed neutral or negatively rated funds, after receiving their ratings.
Only the oldest share class of funds in the category were considered.
What we found
The funds that met the above requirements are listed in the table alongside their inception dates, trailing returns and management expense ratios. (Note that although both ETFs and mutual funds were included in the screen, no ETFs passed both screen requirements.) I’ve also noted the distribution channel of the funds shown. Do-it-yourself funds are available through discount brokerages and are a no-frills option that do not include advice. Commission-based share classes are typically made available through advisers, and have the cost of advice baked into the fee. Fee-based share classes are available to you if you have a fee-based account with an adviser, who will typically charge for advice separately from the stated MER. Regardless of the fee type, investors are always encouraged to have a good understanding of how they are being charged before entering into any type of investment.
This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.
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.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.