Editor's Note: The winner of the overall best equity mutual funds was Sentry Investments. Due to a miscalculation, incorrect information appeared in a previous version of this story.
Rising stock markets helped lift many equity funds out of the red in 2010, but international stock funds remained in a funk amid Europe's debt woes.
Against this backdrop, on Thursday U.S.-based global fund data and analysis provider Lipper Inc. handed out awards to fund managers for the best three-year annualized returns with lower risk levels than their peers.
With the registered retirement savings plan season in full swing, "we want to make sure that we are presenting awards at a useful time," said Jeff Tjornejoj, head of Lipper Americas research at Thomson Reuters, though he cautioned that Lipper winners are not necessarily suitable for all investors.
Among the mutual funds that won the top honours over three years, there were areas that "definitely" did better than others, and some that may have disappointed, Mr. Tjornejoj said.
"Small-caps did well over the last three years. They outperformed their large-cap counterparts. Over three years, fixed-income was a better performer than equity, while precious metals had a fantastic one year and three years. If we look at one year, it is definitely a story about equities."
Last year was "a consolidation year" following a big market rebound in 2009 and the global stock market meltdown in 2008, he said. "We started to understand some of the stresses still reverberating in the global economy. Housing in the United States still seems unsettled. The debt concerns of Europe are now front and centre."
Emerging markets were continuing to draw in a lot of capital globally, but are now creating some new concerns, he said. "With all that flow of capital into emerging markets, it is very easy to overvalue securities there."
These are among the many challenges managers have faced over the past year when picking securities to outperform their benchmarks and peers. While Lipper highlights the three-year returns, it also gave awards for the one-, five- and 10-year periods to the end of Oct. 31, 2010. "Three years is a compromise," said Mr. Tjornejoj. "We usually see at least one market cycle within that period."
The awards are given in all categories defined by the Canadian Investment Funds Standards Committee, whose members come from domestic mutual fund database and research firms. There must be 10 funds available in a category before they are considered for a Lipper award.
Lipper measures volatility, an indicator of risk, through a proprietary methodology it calls "effective return." It was a measure first developed for foreign exchange traders to understand the volatility in their markets, Mr. Tjornejoj said. "We developed it into a model that works very well for mutual funds."
Lipper hands out numerous awards over many time periods because "not all investors are the same" - but even the one-year winner must have at least a three-year track record, he said. "We want to enable investors to choose the time horizons and categories that are most significant for them."
Among fixed-income funds over three years, Beutel Goodman Income was the winner in the Canadian fixed-income category with its annualized 8.2 per cent return. It also took the honour for five and 10 years. Manulife Strategic Income won in the global fixed-income group for three years with an annualized 14.1 per cent gain. It also won for the award for one year.
Mawer World Investment, which lost 3.8 per cent annually over three years, won the Lipper award for that period. It also took the honour for five and 10 years when it posted annualized returns of 4.1 and 2.4 per cent, respectively. David Ragan of Calgary-based Mawer Investment Management Ltd. took over as lead manager last year from Gerald Cooper-Key, who had been at the helm since inception.
Sentry Precious Metals Growth, which posted an average annual return of 21.6 per cent over three years, earned the award in the precious metals category, and has the best return of all categories for that period. It also won for one and five years.
Manager Kevin MacLean of Toronto-based Sentry Investments said he has been able to reduce risk or volatility in his fund because it is focused on smaller companies, which can add to existing reserves and resources, as opposed to large gold producers, whose stock returns depend on a rising gold price that can often fluctuate.
"When the gold price goes down, the senior shares go down and stay down until the gold price goes up again," Mr. MacLean said. "The shares of smaller companies can go down initially, but they will come back fast because they are creating wealth by finding it in the ground."
While the price of gold has been falling this year after last year's strong surge, he suggested the tumbling commodity price amid improving U.S. economic data is only temporary. "The U.S. recovery is almost driven by printing money," he said. "The United States has decided to devalue their currency rather than tighten their belts, so that is bullish for gold."
Most Lipper awards are given to actively managed funds, but some index funds can also be winners. For instance, the CIBC Nasdaq Index, which posted an annualized return of 0.2 per cent over three years, took the top honour in the U.S. equity category.
This index fund was helped by the fact that the technology-heavy Nasdaq 100 avoids financial companies, which had a "very volatile ride" during the last three years, Mr. Tjornejoj said. "So that group of stocks that it represents managed to put together good performance with some mitigation of risk, however unintended it was. It still had good numbers to back up its story."
It's worth recognizing that index funds can be solid performers, he said. "By excluding them, it in some ways gives a signal that active managers are not capable of competing with them."
The TD Japanese Index Investor series, which tracks the MSCI Japan Index, won a Lipper award in the Japanese equity category for three years, even with an annualized 8.1 per cent loss. It also won for one and five years.
Even though the Japanese equity market has lost money for many years, a contrarian investor could believe that Japan is poised for a turnaround and might want to consider a Lipper winner for that category, Mr. Tjornejoj said.
Lipper also gives out awards to fund companies or fund families for three-year performance. Phillips Hager & North, which is part of RBC Global Asset Management Inc., won awards in the bond and "overall" category for bond and balanced funds. The fund arm of National Bank of Canada won a Lipper award in the "mixed assets" or balanced fund category. The winner of the overall best equity mutual funds was Sentry Investments.
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