As the deadline looms at the end of this month for registered retirement saving plan contributions, investors will see more companies boast about their award-winning mutual funds.
While there is an aura around award winners, and they can be a good source of ideas for further research, people should not jump into them with both feet, fund watchers warn.
Everyone’s investment needs differ, and there are no guarantees these funds can continue their winning ways, especially if they have had eye-popping returns in recent times.
U.S.-based fund research firm Lipper Inc., a unit of Thomson Reuters, on Thursday handed out its 2011 awards in Toronto, while the Canadian subsidiary of U.S.-based Morningstar Inc. doled out its honours last November.
“Winning an award is an accolade from the industry,” said Jeff Tjornejoj, head of Lipper Americas research. “There is a lot to consider when buying a fund. The fact that it won an award is a mark of distinction, but it doesn’t confer that it is the only choice out there.”
Investors or their financial advisers first need to map out an asset-allocation strategy that defines how much money to put in bonds versus stocks based on factors such as age and risk tolerance, and then figure what kinds of funds could help fit that bill, he said.
“Don’t buy funds in isolation,” he said. “An award winner may not be appropriate. Some like the faster ride you may get through a precious metals equity fund, but somebody who is conservative by nature would probably not appreciate that volatility.”
Fund awards are not alike. Lipper Awards, which are given for one-, three-, five- and 10-year performance, are determined by a computer-generated test for delivering strong performance with lower risk than their peers. The same manager may not have run the fund for the entire time.
Morningstar’s Canadian Investment Awards are chosen more subjectively. Industry analysts nominate the funds, and can evaluate them within any framework they choose. The awards are not year-specific, but the manager must have overseen the fund for at least three years.
Award winners can be a starting point for research, but “there are going to be some interesting funds that don’t ever get mentioned at any of the awards ceremonies,” said Dan Hallett, a fund analyst at HighView Financial Group, and one of the judges for the Morningstar awards.
“Not every fund that I nominate get to be finalists and winners. At the same time, there are going to be good funds that slip through those quantitative filters that Lipper applies to its awards.”
BMO Guardian Monthly Dividend Ltd. Classic was one fund he nominated in the Canadian dividend and income category, but it didn’t make it as a finalist. That fund charges a low fee of 1.4 per cent, and is run by Guardian Capital Corp., which “we have high regard for,” he said.
When choosing funds, “at the minimum, you want to make sure that the person or persons responsible for the track record are still in place,” Mr. Hallett said. There are no guarantees that the manager of an award-winning fund will stay with the firm for very long, or whether a successor can maintain the previous strong performance.
Sentry Select Diversified Total Return, which won a 2010 Lipper Award for three-year performance in the Canadian focused equity category, was managed by Andrew McCreath. However, he left Sentry Investments last August, and that fund is now run by former co-manager John Kim.
“We parted ways” because of a difference in investment philosophy, said Sandy McIntyre, chief executive officer of Sentry Investments, which won a 2011 Lipper Award for best equity fund family for the second year in a row. Mr. McCreath, who has been a regular market commentator on the financial news television channel BNN (Business News Network), agreed that was the case.
The musical chairs among fund managers continues even in the midst of the current RRSP season. Last week, Wendy Chua, who won a 2008 Lipper Award for three-year performance in running Mackenzie Universal Health Sciences Class, left Mackenzie Financial Corp.
