The Globe and Mail

A few mutual funds - really, really, few, actually - have done such a good job over the years that they deserve a lifetime achievement award.

So let's hand some out, starting with TD Canadian Equity. This $3-billion giant of a fund has delivered index-beating returns over the past 15 years as a whole, and its more recent returns continue the pattern of outperformance.

Beating a benchmark stock or bond index over a year is a nice thing for a mutual fund and its unitholders, but it signifies nothing because mere luck can be involved. Only in beating the index consistently does a fund exhibit a higher level of managerial skill. That's how you win one of the Portfolio Strategy column's lifetime achievement awards - by regularly beating the index.

Index beaters are such rare animals that many in the investing community would say it's pointless to seek them out. They argue that it's better to buy the returns of a particular stock index through an exchange-traded fund (ETF) than it is to depend on a mutual fund manager to try to beat the index.

These index investors have a good point. As you'll see, mutual funds that surpass their index on an annualized basis over the past 15 years form a small minority. But they do exist, and it's worth giving them their due.

The indexing enthusiast would interject at this point that just because a fund beat the index over the past decade and a half doesn't mean investors can count on it to do so in the future. Again, too true. Past history is not the most reliable indicator of future returns.

For that reason, there's more to the lifetime achievement awards than beating the index over the past 15 years. Winners must also be index-beaters over the past three- or five-year periods, an indication that they they're not coasting on past success. At the same time, we don't want funds where great short-term results have helped buff up less-than-stellar long-term numbers.

As well, award winners must be managed in such a way as to provide a decent level of assurance that the great returns of the past can be carried into the future. The way to address this is to focus on funds offered by companies that avoid the star manager approach and instead focus on teamwork and a corporate investing philosophy that transcends any one individual. There's evidence of this with TD Canadian Equity. Managers John Smolinski and John Margach have been around since 2001 and 2004, respectively, but the fund's index-beating ways go back 15 years.

The process of handing out a lifetime achievement award in the Canadian equity category started with a Globefund.com search for all funds that beat the 11.9-per-cent average annual return from the S&P/TSX total-return index (includes dividends) over the 15 years to Aug. 31. Seven funds made it through, but two were immediately dumped because they're not widely available to investors. That left a short list of five funds - IA Clarington Canadian Conservative Equity, Mawer Canadian Equity, PH&N Canadian Equity, Saxon Stock and TD Canadian Equity.

Making the short list is big. Globefund shows there are 32 Canadian equity funds with a history of 15 years or more, which means that close to 80 per cent of funds in the category couldn't beat the index.

To pare down the short list, the medium-term results of the five funds were evaluated to see how they compared with the index return of 20.3 per cent annually for the past three years and 18 per cent for the past five years. TD Canadian Equity beat the index over both periods, while none of the short-listed funds turned the trick over either time frame.

Let's keep some perspective here. Returns that beat the index over 15 years speak much louder than those that trail the index over a few years. Still, the rules of the lifetime achievement awards are such that more recent numbers must be considered.

In the global equity category, just five of 18 funds with a 15-year history were index beaters, or 27.8 per cent. The competition in this small group for a lifetime achievement award in the global equity category was so fierce that we have two winners, Mackenzie Cundill Value and The Trimark Fund SC (a version sold with an upfront commission that advisers and dealers will waive). A third fund, Dynamic Global Value, was only excluded because its long-term numbers seem to be largely a product of its recent success.

Both Cundill Value and the Trimark Fund have the performance numbers, but just as importantly they come from organizations with specific investing philosophies that transcend the individual managers who happen to be working on these funds at the moment.

The Cundill people are strict value investors who seek to buy quality companies when their shares are down in price, while Trimark sees itself as investing not so much in stocks as taking an ownership position in quality companies. The Trimark Fund has seen several manager changes in recent years, but has remained solid.

The lifetime achievement award in the international equity category goes to Mawer World Investment, a product of a low-profile but highly proficient fund family out of Calgary called Mawer Investment Management. This fund beat the Morgan Stanley Europe Australasia Far East Index in Canadian dollars not just over the past 15 years, but in each time frame measured by Globefund.com.

An obvious advantage that Mawer Investment Management has over the runner-up in the international equity category, Templeton International Stock, is its low management expense ratio of 1.42 per cent. The Templeton's MER is a very high 2.9 per cent.

Categories where no lifetime achievement awards were earned include U.S. equity, where only two funds out of 26 beat the S&P 500 index in Canadian-dollar terms over the past 15 years. Investors Large Cap Value was one of the two, but its more recent results have trailed the index. The other is CI American Small Companies, an index-beater over the long and medium terms. What prevents this fund from receiving a lifetime achievement award is the fact that it's run by an outside manager who has only been on the job five years.

The story in the Canadian fixed-income category is that not a single fund beat the 7.5-per-cent average annual return of the Scotia Capital universe bond index and the two funds that came closest, PH&N Bond and TD Canadian Bond, also trailed the index over the past three- and five-year periods.

The message here for investors is that they might just as well get their Canadian bond exposure through something that tracks the Scotia bond index. There are a few bond index funds that do this, but the best option is the iShares CDN Bond Index Fund (XBB-TSX), an exchange-traded fund.

ETFs are sturdy portfolio building blocks unto themselves, but they also pair up well with the sort of index-beating funds mentioned here. It's quite possible for a fund to beat the index on an average annual basis over the long term and yet struggle a bit over shorter periods. If you own an ETF tracking the S&P/TSX composite index and an index-beating Canadian equity fund, you have the best of both worlds. (For more on mixing ETFs and funds or individual stocks, go to the columnists area of ReportonBusiness.com and look under my name for the Portfolio Strategy column of Sept. 15.)

Lifetime achievers

The following is a list of mutual funds that have earned a Portfolio Strategy Lifetime Achievement Award for beating their benchmark stock indexes over both the long and short term.

*compound average annual returns.

SOURCE: GLOBEFUND

CORRECTION

The co-manager of the TD Canadian Equity Fund is Scott Margach. Incorrect information was published Saturday.