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number cruncher

What are we looking for?

Canadian equity funds with low to no exposure to banks.

The screen

With Wednesday’s interest-rate hike from the Bank of Canada and the potential for a recession to emerge, investors have watched as skepticism and uncertainty affect their investment returns. Over the past five trading days, as of Tuesday’s close, the S&P/TSX Composite Index has declined more than 3.6 per cent. On Tuesday, the financial sector logged its worst day in more than two years. Canadian banks have typically been known for their resilience but recent underperformance and mixed earnings results may cause investors to second-guess their exposure to bank stocks.

For investors who are skeptical of the banks’ abilities to maintain their haven reputation during a potentially challenging time, running away from their home market may be considered the only solution. To provide alternative options, I used Morningstar Direct to screen more than 400 Canadian large-cap equity funds to find a selection that maintains a Canadian focus with little to no exposure to banks. The criteria used include:

  • Less than 10 per cent of the fund’s holdings are in Canadian banks (by comparison, banks currently make up about 20 per cent of the S&P/TSX Composite Index);
  • Funds are categorized by the Canadian Investment Funds Standards Committee (CIFSC) as either Canada equity, Canada focused equity or Canada dividend and income equity;
  • A Morningstar Rating Overall – or “star rating” – of four stars or better. The star rating is an objective look back at a fund’s after-fee, risk-adjusted returns relative to the category to which the fund belongs. Though the measure is backward-looking, Morningstar’s research shows that over time and on aggregate, five-star funds continue to outperform four-star funds, three-star funds etc., after receiving the rating.

What we found

Canadian equity funds with low to no exposure to banks

NameBank Hldgs. (%)Morning-star Rating OverallMER (%)3M Ttl. Rtn. (%)YTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)3Y Max. Drawdown (%)COVID Recession, Feb.-April 2020 (%)Financial Crisis (Oct. 2008-March 2009)
S&P/TSX Composite Total Return20.8N/AN/A-6.0-7.2-3.48.78.1-22.3-8.5-24.3
Exemplar Performance Series F0.041.99-4.8-5.8-4.610.79.2-14.9-2.8n/a
Fidelity Cdn. Growth Company Sr F0.051.11-7.2-12.6-9.410.711.9-18.1-1.4-23.7
Fidelity Special Situations Series F0.051.11-7.8-12.8-13.512.112.4-20.9-2.3-19.1
Fidelity Dividend Plus Series F1.050.95-3.1-2.52.08.38.0-11.7-4.1-20.5
Manulife Dividend Income F2.241.16-0.1-15.6-12.48.69.7-18.8-5.1n/a
Fidelity Canadian Opportunities Sr F3.251.12-1.1-6.4-7.015.513.8-15.9-1.5-18.4
Caldwell Cdn. Value Momentum Ser F3.840.88-7.8-7.0-2.989.18.7-21.2-5.0n/a
Steadyhand Equity5.641.42-1.3-11.8-8.36.77.2-14.40.9-19.3
Mackenzie Canadian Growth F5.851.011.5-11.4-7.88.39.5-16.4-1.9-17.8
Canada Life Cdn. Focused Growth F56.051.271.4-11.4-7.98.19.4-16.4-1.9n/a
Fidelity Greater Canada Sr F6.351.150.9-11.9-10.920.717.5-19.61.8-24.0
Fidelity Canadian Large Cap Sr F6.551.13-1.96.510.913.910.7-13.3-1.1-22.2
Fidelity Concntr Val Priv Pool Sr F6.551.02-1.86.511.114.010.8-13.2-1.0n/a
Manulife Fundamental Equity F6.851.08-0.5-7.4-1.411.211.9-14.1-0.6-21.5
BMO Growth Opportunities F8.040.830.4-16.6-14.47.710.4-21.0-1.5n/a

Source: Morningstar Direct

Although these funds have struggled so far this year, most have outperformed the S&P/TSX Composite Index over the past three and five years. Importantly, all the funds outperformed during the short economic recession experienced at the beginning of the COVID pandemic, and all the funds that experienced the financial crisis in 2008-09 also prevailed. Furthermore, all these funds outperformed during the maximum drawdown period (the most a fund has dropped, from peak to trough) over the past three years.

It should be noted that there is a fair amount of style diversity in this list – meaning there are options for growth-, value- or dividend-focused investors.

Possibly the most interesting outcome from this screen is that no exchange-traded funds made the list. This may be because many ETFs passively track broad market indexes and therefore would have a minimum benchmark-weight exposure to banks. One might have assumed the rise in active ETFs should have resulted in at least some options, but this is not what our screen uncovered.

Note that the management expense ratios (MERs) listed here are reflective of the F-class (also known as fee-based share classes). In the table, F-class shares exclude the cost of advice and are held in fee-based accounts where the adviser charges separately for advice.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Danielle LeClair, MFin, is director of manager research, Canada for Morningstar Research Inc.

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