What do bigger cars in India, toys in Canada and companies in the cloud have in common? They're all trends that have helped to fuel the best performing mutual funds in Canada over the past 15 years, according to Globefund.com.
In first place: Excel India Fund
This fund takes the top spot among the mutual funds accessible to most investors, with an average annual return of 15 per cent after the 3.3-per-cent annual management expense ratio (MER). The fund is managed by Mumbai-based Aditya Birla Sun Life Asset Management.
Portfolio manager Atul Penkar describes his investment style as growth at a reasonable price. "Our investment approach is to identify and invest in businesses that have sustainable competitive advantages, which are run by strong management," he says.
In addition to outperforming the volatile Indian equity market, vigilant risk management is essential to keep returns steady, Mr. Penkar says. "It is a process which helps us achieve alpha [returns] on a consistent basis and at the same time manage risk in the portfolio."
About one-third of the fund is invested in the financial sector, including large holdings in India's largest private sector bank, HDFC Bank Ltd., and ICICI Bank, which trades publicly on the New York Stock Exchange. "Both these banks have been growing at a rapid pace compared to the market. What is more important is the asset quality is incredible," he says.
The largest holding in Excel India is Maruti Suzuki India Ltd., which has nearly half of the vehicle market share in India. Mr. Penkar says much of the company's rapid growth can be attributed to its ability to get ahead of the shift from smaller cars to mid-size and entry level SUVs.
"Consistently, Maruti Suzuki has been growing between 15 and 20 per cent for many years. Because of the scale of operations they have, they have been increasing their margins," he says.
With a population of more than 1.3 billion and the median age at 27 years, India has evolved into a rapidly growing consumer society.
"Two-thirds of the economy is consumption driven, so what gets produced in India gets consumed in India," says Mr. Penkar. The nation's GDP growth has been around 7 to 8 per cent consistently, he says. "We believe that the Indian economy will continue to grow between 7 and 8 per cent for the next 10 to 15 years."
In second place: Dynamic Small Business Fund
Closer to home, the second-best 15-year mutual fund performer is the Dynamic Small Business Fund, with an average annual return of 14.4 per cent after the 2.48-per-cent MER. The portfolio is managed by a team at 1832 Asset Management LP that searches for smaller, undervalued companies.
"It is an area where you can do stock picking. There is a lot of value in active management, doing analysis that is not being done by the street and gleaning insight that isn't otherwise widely known," says co-manager Tom Dicker.
Mr. Dicker attributes the fund's success to a decision in 2002 to broaden its mandate, "from being primarily a Canadian fund to owning some U.S. stocks as well, and from being primarily small cap to some small- and mid-caps stocks."
One key holding that has graduated to a large-cap company is a waste-management service called Waste Connections Inc., which merged with Progressive Waste Solutions Ltd. in 2016 and now has a market capitalization of $23.5-billion. "It's now a TSX 60 company. It's still high quality and a company we understand well. We still think there's upside," says Mr. Dicker.
Like the Indian equity market, small caps can be volatile, making risk management essential to long-term returns. "We don't go down as much in bad times, so we don't have to go up as much in good times," he says.
The Dynamic Small Business portfolio differs from most Canadian small-cap funds because it holds a small weighting in resource-related stocks. Its top sector holding is consumer discretionary.
"The consumer sector has really diversified. There are a lot of unique companies, not like energy, where a lot of the companies are similar," he says.
Canadian toy company Spin Master Corp. is one of the top holdings in the portfolio. Shares in Spin Master have risen 188 per cent in the past five years.
In third place: TD Entertainment & Communications Fund
Holdings in the third-best 15-year performer are more common. The TD Entertainment & Communications Fund returned an annual average of 13.8 per cent over the past 15 years. The fund, which has an MER of 2.82 per cent, holds about 60 telecom, media, Internet, cable and transmission-tower companies, including T-Mobile US Inc., Comcast Corp. and American Tower Corp.
The fund is managed by T. Rowe Price in Baltimore, Md. Portfolio manager Paul Greene says the key to its long-term success is the ability to spot trends in technology before they happen and find undervalued companies with solid management.
"If we think we understand or have some important insight on why a company or business model is going to be more durable than the market understands, that's really important to get," he says.
Mr. Greene has a two-pronged strategy that mixes riskier growth companies with more stable, defensive firms. The first prong holds innovative, disruptive, high-growth Internet companies, such as Amazon.com Inc. and Facebook Inc.
The second prong is made up of companies he calls "enablers" that support the disruptors, "businesses that are more mature, more stable and predictable. They tend to be more defensive but have business models that enable the first group."
One example of an enabler is Equinix Inc., a data-centre provider for cloud companies. Equinix shares have nearly tripled since the start of 2014.
But finding disruptors before the market does requires dogged research. "We spend a considerable amount of time researching and talking to early-stage private companies just to inform ourselves what's going on in the space," he says.
"You can't sit around and wait for a company to become public and do their IPO [initial public offering] road show to learn about them before you factor them into your analysis. You have to be aware of this stuff much earlier."