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What are we looking for?

Some of the best-performing commission-based mutual funds

The screen

In a Globe and Mail column this week, Rob Carrick posed the question of whether Canadians have “outgrown” mutual funds – an interesting comment given that in the United States, last year marked the first time that the issuance of ETFs outpaced that of mutual funds. In his article, he references the fact that there are indeed some strong-performing mutual funds in Canada, but their performance is hampered by high fees, which detract from what the investor receives.

This is a topic that Morningstar writes about quite frequently: High fees are the single consistent detractor from investor returns over time. In Canada, this is of particular relevance since many mutual funds are sold with a bundled fee for advice. In other words, the adviser or salesperson who sells you the mutual fund is paid a portion of the fee for providing you with advice and distribution. Morningstar dubs these as “commission-based” mutual funds, and they are commonly denoted with “series A” after the fund name. Mr. Carrick makes a good point in his article, and though it is difficult to find a higher-fee mutual fund that beats its peers over time, they do exist. Today, I search for these funds using Morningstar Direct by screening for funds that:

  • Morningstar has denoted as ”commission-based” mutual funds, or those where the management expense ratio (MER) includes the cost of advice and distribution.
  • Have a minimum required investment amount of $1,000 or less.
  • Have received a Morningstar Rating for Funds (informally known as the “star” rating) of five stars. This rating is an objective look back at the risk-adjusted, after-fee performance of the fund, relative to its category peers. The rating considers the last 10 years of performance history, if available, and puts emphasis on the past three years. Our data shows that although the star ratings are backward-looking, funds that have received five stars as a group, outperform those that have received four stars, three stars, etc., in periods after receiving the rating. In other words, it’s more likely that a fund manager with a track record of outperforming peers will continue to outperform in the future, as compared with those which have historically underperformed peers.
  • Have received a Morningstar Medalist Rating of gold, silver or bronze, isolating funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision making).
  • Are actively managed (i.e. do not follow an index).

Only commission-based mutual funds from Canadian-domiciled fund companies were considered in this search.

What we found

High performing mutual funds with commissions

NameMER (%)Asset ClassMorningstar CategoryMorningstar Rating OverallMorningstar Medalist RatingInception DateTotal Ret 1 Yr (%)Total Ret Ann 3 Yr (%)Total Ret Ann 5 Yr (%)Total Ret Ann 10 Yr (%)Total Ret Ann 15 Yr (%)Canadian Equity (%)U.S. Equity (%)Int'l Equity (%)Fixed Income (%)Cash (%)Other (%)
Dynamic U.S. Balanced Class Ser A2.18AllocationGlobal Equity Balanced5 StarsBronze3/30/201124.426.4611.428.660.0072.690.0025.942.30-0.93
Dynamic Premium Balanced Private Pl Cl A2.16AllocationTactical Balanced5 StarsBronze10/30/201817.686.739.016.5451.393.180.1637.850.89
Fidelity Tactical High Income Sr A2.32AllocationTactical Balanced5 StarsBronze5/28/20147.693.848.182.2826.462.0960.420.168.60
Manulife Tactical Income Adv2.42AllocationTactical Balanced5 StarsBronze7/6/200710.865.648.005.245.5016.0329.6414.6131.566.591.57
Fidelity AsiaStar Series B2.24EquityAsia Pacific Equity5 StarsBronze5/4/20065.00-4.546.516.907.440.000.0099.680.000.320.00
Fidelity Canadian Opportunities Cl A2.50EquityCanadian Equity5 StarsBronze11/8/200413.839.6915.5410.1112.3785.889.250.580.073.690.54
Manulife Canadian Equity Class Adv2.10EquityCanadian Equity5 StarsBronze5/26/20119.2910.3911.6990.516.012.870.000.420.20
Fidelity Greater Canada Sr A2.49EquityCanadian Focused Equity5 StarsBronze1/7/200819.748.8019.5712.8813.0150.8240.684.
Brandes Canadian Equity2.33EquityCanadian Focused Small/Mid Cap Equity5 StarsBronze7/2/200211.9612.289.547.7412.6165.8714.4015.910.001.052.77
Global Iman2.79EquityGlobal Equity5 StarsSilver3/6/200925.917.1113.9711.560.0082.9717.
GQG Partners Global Quality Equity A2.20EquityGlobal Equity5 StarsSilver9/30/202018.3110.400.0061.0834.060.004.860.00
RBC International Equity Cur Neutral A2.13EquityInternational Equity5 StarsSilver4/28/201410.484.279.760.002.9792.530.044.460.00
Fidelity North American Equity Cl B2.22EquityNorth American Equity5 StarsBronze10/28/201520.057.6614.0729.5169.480.
RBC Life Science & Technology Fund A2.05EquityUS Equity5 StarsSilver7/31/199540.1110.0417.1515.7616.560.4996.820.560.002.130.00
RBC U.S. Mid-Cap Growth Equity Fund A2.04EquityUS Small/Mid Cap Equity5 StarsGold3/31/199217.885.0411.6011.1911.791.4996.380.290.001.850.00
Lysander-Canso Corporate Value Bond A1.47Fixed IncomeGlobal Corporate Fixed Income5 StarsBronze12/23/20116.443.647.245.390.570.000.0095.320.573.54
PIMCO Low Duration Mly Inc (Cnd) Sr A1.35Fixed IncomeGlobal Fixed Income5 StarsBronze2/8/20194.340.740.000.020.05120.63-20.700.00
Fidelity American High Yield Sr A1.86Fixed IncomeHigh Yield Fixed Income5 StarsBronze2/7/19947.293.883.785.297.390.003.310.3685.205.026.11
Lysander-Fulcra Corporate Sec Fd A1.57Fixed IncomeHigh Yield Fixed Income5 StarsSilver12/30/20167.965.125.020.590.860.0068.2318.8811.43

Source: Morningstar Direct | Data as of Jan. 9, 2024

The funds that qualified in the screen are listed in the table accompanying this article, alongside their MERs, historical performance, ratings and a breakout of their asset-class exposure. The list is first sorted by the broad asset class exposure (equities, fixed income or allocation), then by the specific category to which each fund belongs. I note that the category is of particular importance in this list, given that Morningstar’s ratings are meant to compare funds against their category peers.

Given the effect of fee-bundling, which results in MERs that are higher than what one would find in a typical passive ETF, the fact that these funds have outperformed peers after fees is certainly worth highlighting. Investors who have larger dollar amounts to invest would be well served to understand whether there is a share class of the same fund with a lower fee available, or a fee-based version of the fund, where the cost of advice is decoupled from the sale of the mutual fund.

This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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