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Three-year performance took the spotlight at the annual Lipper Fund Awards amid improving investor sentiment as worries about the euro-zone debt crisis and U.S. "fiscal cliff" have moved to the back burner.
Longer-term track records are a test of a fund manager's acumen, but investors should scrutinize the most recent three-year fund numbers more carefully. That's because it doesn't include the period when managers were forced to navigate through the 2008-2009 global financial crisis that devastated some portfolios, but does include the strong recovery for some stocks from their depressed lows.
"The fact that the financial crisis and bear market accompanying it is completely out of that three-year period is cause for caution," said Dan Hallett, a fund analyst and director of asset management at HighView Financial Group. "However, 2011 [dominated by events such as the euro-crisis] is included in that period, and that was a pretty rough year for a lot of fund managers."
U.S.-based fund research firm Lipper Inc., a unit of Thomson Reuters, handed out the awards in Toronto for top-performing funds over the three years ending last Oct. 31. The honour, which is given for funds that can generate strong returns with lower risk than their peers, is determined through the use of a computer-generated test. The award also goes to funds with five- and 10-year records, but no longer for one-year returns.
Today, the five-year record is more interesting because of the different environments through which active managers have been tested, Mr. Hallett said. "You have got the entire financial crisis, and for some markets, like Canada, there was a bit of a run-up before the peak in the middle of 2008. … You have got the strong recovery through most of 2009, and all of 2010. You have a pretty soft 2011 and a pretty good 2012."
Among the Lipper Award winners is RBC Canadian Equity Income in the Canadian dividend and income equity category. It won for three years with its annualized 16.9-per-cent return, but also for five years with its impressive annual gain of 13.4 per cent as well.
"The fund had minimal exposure to banks and insurance through the darkest period of the financial crisis, and timed adding our exposure back in 2009 quite well," recalled its lead manager, Jennifer McClelland of RBC Global Asset Management. Energy stocks focused on low-cost producers and emerging plays in the Bakken, Montney and Duvernay regions of Canada helped the fund, as well as holdings in players such as Keyera Corp. in the midstream energy sector, which is involved in the processing, storing and transporting of oil and gas.
Bissett Microcap fund, a three-year winner, generated an eye-popping annual 25.9-per-cent return over the period. But investors should not expect that kind of gain going forward. In addition to numerous takeovers of companies in the fund, the gains included a strong rebound in stocks beaten up during the financial crisis. The fund has returned 7.0 per cent annually over five years and 11.9 per cent over 10 years.
The 10-year returns are even more meaningful because they include the latest five years with its troubling times, and the previous five years of strong markets after the technology bubble burst in 2000, Mr. Hallett said. "When you think of 2003-2007, they are all really good years. …That is going to favour the more aggressive, risk-taking management. It is not going to favour the more risk-conscious type of manager."
In Canada, the Lipper Awards are based on categories defined by the Canadian Investment Funds Standards Committee (CIFSC), which was formed by Canada's major mutual fund database and research firms. Lipper will add new categories for awards each year if there are at least 10 funds in a group.
One new category this year was alternative strategies, but it applies only to mutual funds with regulatory approval to do limited short-selling. Hedge funds and pooled funds in this category are excluded. Some mutual funds fit into this category if their short sales – betting against a stock – exceed 2 per cent in any one security, or if such positions exceed 10 per cent of the total fund value. Exemplar Leaders Fund, a North American stock fund managed by Alex Ruus of Blumont Capital Corp., was the three-year winner in the category with its 14.2-per-cent annualized gain.
Lipper Awards are given for passive, as well as active, management. Two U.S. index funds that track the 100 non-financial companies in the Nasdaq Stock Market won for different periods. The TD NASDAQ Index fund (investor series) won a Lipper Award for three-year performance with an annualized 15.4-per-cent return, while the CIBC Nasdaq Index fund won for the five-year period with its annual return of nearly 4.1 per cent.
These awards, however, don't require the same manager to be on the fund for the entire period considered, or even most of the period. For example, the Cambridge High Income Fund, which is sold by CI Investments Inc., won a Lipper Award for five-year performance in the Canadian equity balanced category. Until December, however, that fund was named Lakeview Disciplined Leadership High Income, and was managed by Barometer Capital Management Inc.
CI, which acquired the fund in 2007, finally brought it in-house to be managed as part of its Cambridge fund family. It is now being run by CI's Robert Swanson, who, interestingly, won Lipper Awards in 2010 and 2011 when he was with Fidelity Investments Canada. "Time will tell if this change will have an impact on the fund's performance," said Jeff Tjornehoj, head of Lipper Americas research. "It's hard to predict if and when a manager will leave. We acknowledge that such changes may occur after we've assigned winners."
Lipper is one of only three firms that give awards to the Canadian mutual fund industry. The newest is Fundata Canada Inc., a distributor of investment fund data. For the second year in a row recently, it gave out its FundGrade A+ rating for one-year calender returns. These ratings focus on consistency in generating the best returns with lower risk.
The winning funds at the annual Morningstar Canadian Investment Awards and gala in late fall are chosen in a more subjective manner. Funds are nominated by industry analysts, including Mr. Hallett, who judge them using any framework they choose. The Morningstar awards are also given to pooled and hedge funds, as well as exchange-traded funds [ETFs]. Morningstar Canada acquired the award brand two years ago from a private company.
It goes without saying that any mutual fund that has the good fortune to be recognized by all three award providers would be worth considering.