The world has gone through many market-moving events over the past 15 years, from the 2008 global financial crisis to the current COVID-19 pandemic. Through it all, a select group of mutual funds has thrived by hunkering down and simply buying into the right stocks.
Technology-related mutual funds top the list. Since the infamous dot-com boom of the 1990s and bust of 2000, no sector has produced more underappreciated stocks than technology as landlines gave way to smartphones.
“For us just being focused on core company fundamentals has been the key to success over a very long period of time,” says Alan Tu, vice president of New York-based T. Rowe Price Group Inc. and portfolio manager of TD Science and Technology Fund, Canada’s top-performing mutual fund over the past 15 years. Since 2005, the fund has posted an average annual return of 17 per cent, handily outperforming the 14-per-cent average annual return from major technology benchmark indexes.
Mr. Tu attributes the fund’s strong returns to a bottom-up, value investment style that focuses on a company’s quarterly financial statements and selects stocks based on their individual merits.
“If we follow our north star and stick to our investment framework, we really don’t pay that much attention to the benchmark,” he says.
The fund’s deviation from other technology funds is evident in its top holdings. Noticeably absent is heavyweight Apple Inc. (AAPL-Q). In its place are Singapore-based electronic gaming and multimedia company Sea Lt. (SE-N), Amazon.com Inc. (AMZN-Q), business software producer Slack Technologies (WORK-N), Ottawa-based e-commerce platform Shopify Inc. (SHOP-T), and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM-N).
One of the fund’s best years just passed with the onset of the pandemic in 2020, when socially distanced consumers turned to e-commerce and cloud computing in droves.
“What we’ve seen with the pandemic is that time has been accelerated,” he says. “These are mega-trends that still have a significant runway.”
Most mutual funds fail to outperform their benchmarks once annual fees, also known as management expense ratios (MERs) are subtracted from returns. The MER on TD Science and Technology Fund is an above-average 2.83 per cent, something Reid Baker, vice president of analytics and data with Toronto-based Fundata Canada Inc., says proves good management is sometimes worth paying for.
“To have a higher fee like that and still be able to put up a 17-per-cent return over the past 15 years is pretty impressive,” he says. “Cases are few and far between where you are better off with an actively managed fund charging a high fee but this is clearly one of those cases.”
According to Fundata the two other technology funds that beat their benchmarks over the past 15 years are Signature Global Technology Corporate Class (15.5 per cent) and TD Entertainment and Global Communications Fund (15.2 per cent).
A better argument for the merits of active management is found a bit further down the list of the top-performing mutual funds over the past 15 years. While the S&P/TSX Small Cap Index posted a slight decline over that period, two Canadian small-cap funds registered average annual returns in the double digits.
Investors in Mawer New Canada Fund have enjoyed an 11.7 per cent average gain on their investments each year while paying a below-average 1.3 per cent MER.
The biggest sector holdings in the bottom-up, value fund are smaller Canadian industrial, information technology and real estate companies.
Specific top holdings include software provider Enghouse Systems Ltd. (ENGH-T), vehicle collision repair chain Boyd Group Services Inc. (BYD-T), packaging manufacturer Richards Packaging Income Fund (RPI.UN-T) and lumber producer Stella Jones Inc. (SJ-T).
Calgary-based Mawer Investment Management Ltd. has closed the fund to new investors. The reason, the firm states on its website, is “to ensure that the size of the fund does not hinder the fund’s strategy as large inflows of capital may exceed the available investment opportunities to the detriment of the performance of the fund.”
Investors who currently in the fund are permitted to purchase more units, though.
“To be able to show up on this list and outperform so many other funds in the Canadian small-cap space is really impressive,” Mr. Baker says.
National Bank Investments Inc.’s NBI Quebec Growth Fund also recorded an 11.7-per-cent, 15-year average annual return despite a higher MER of 2.52 per cent. Roughly one-third of the Quebec-based small-cap holdings are industrials.
Top holdings include janitorial service provider GDI Integrated Facility Services Inc. (GDI-T), transportation consulting provider WSP Global Inc. (WSP-T), air cargo hauler Cargojet Inc. (CJT-T), and Richelieu Hardware Ltd. (RCH-T).
The fund also holds a significant stake in convenience store chain Alimentation Couche-Tard Inc. (ATD.B-T), which recently made a US$2-billion bid for France-based grocer Carrefour SA.
Mr. Baker says NBI Quebec Growth Fund deserves kudos for being able to pull off strong and consistent returns with such a small pool to select stocks compared with funds that literally have the world from which to draw on.
“It’s focused on companies out of Quebec, so they are generally small-cap companies. They have a limited universe to play with but they are clearly making quality picks,” he says.
Whether it’s Canadian small-cap or large-cap global technology, Mr. Baker says skilled management is the common thread for most mutual funds that beat their indexes.
“It really comes down to good stock picking,” he says.