What are we looking for?
Canadian-domiciled actively managed mutual funds exhibiting value.
The screen
Since the global financial crisis more than 10 years ago, it can be clearly shown that value investing has underperformed growth. But like many things within financial markets, there are exceptions. Today, we seek to find some exceptions by looking for Canadian-domiciled funds that have:
- A portfolio exhibiting value characteristics, as defined by the Morningstar Style Box, which measures a portfolio’s fundamental characteristics relative to others within the domicile (in this case, Canada). Here we seek funds that are classified as large-cap, mid-cap or small-cap value.
- 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 each fund was considered, and sector-specific equity funds (for example, financial services or energy funds) were excluded.
What we found
The funds that meet the above requirements are listed in the accompanying table alongside their ratings, style-box classification, management expense ratios, inception dates and trailing performance. Also displayed, but not used in the screen, are the Style Consistency and Style Dispersion classifications. The former describes the degree to which the manager’s style has shifted within the Style Box over the trailing 36 months (higher is indicative of a more consistent portfolio style), while the latter describes the “spread” or the consistency of value metrics among the stocks in the portfolio at a specific point in time (in this case, the latest portfolio values). It can be seen here that several funds exhibit a “high” dispersion, meaning that the individual value metrics for the equity positions vary substantively. However, when aggregated at the portfolio level, all funds on the list meet requirements to be classified as value-oriented based on the Style Box methodology.
Because only the oldest share class of funds were considered here, investors are urged to conduct further research to understand whether a different share class of the same fund is available to you at a similar or lower MER.
This article does not constitute financial advice. It is always recommended to speak with a financial adviser or investment professional before purchasing any of the products listed here.
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.
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