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number cruncher

What are we looking for?

Mutual funds from a small but winning category.

The screen

A look back at 2020 across all 60 fund categories in Canada revealed a smattering of standout categories that might offer some ideas for those who believe the performance trend will continue. Alongside funds that invested primarily in Asian equities, funds that belonged to the precious metals equity and Canadian-focused small/mid cap categories produced average returns in excess of 20 per cent over the prior calendar year.

Although precious metals equity funds produced higher returns, as a group they showed higher volatility than Canadian-focused small/mid-cap funds. (The latter category must hold between 50 per cent and 90 per cent Canadian companies that, on average, have a market capitalization of less than $7.2-billion). The small/mid-cap category is itself small, with only 19 funds (counting the oldest share classes only), but might offer choices for investors who wish to augment their core holdings with riskier domestic assets. To find winners that might have the capacity to outperform peers in the future, I screened this universe of 19 funds to look for those that have:

  • A Morningstar Rating (informally known as the “star rating”) of four stars or better. Recall that Morningstar’s star rating is a look back at historical risk-adjusted returns after fees, relative to peers. The star ratings are not forward-looking, but our data show that over the past decade, five-star funds domiciled in Canada were less than half as likely to be liquidated or merged than one-star funds. The star rating is a great starting point for further research.
  • A Morningstar Quantitative Rating of gold, silver or bronze. This is Morningstar’s forward-looking assessment of a fund’s ability to outperform in the future. In the years that the rating has been in existence we’ve found that as a group, medalist-rated funds have outperformed neutral or negatively rated funds, after receiving their ratings.

What we found

The three funds that meet the above requirements are listed in the accompanying table alongside their ratings, management expense ratios, inception dates and trailing performance. As it happens, the one-year trailing period measured today coincides with the bottom of the market last year, which will lead to optically outsized returns over this time frame. Readers are reminded to not only consider the short-term trailing returns, but also what has happened in the more distant past. To this end, the past five years of calendar returns are also displayed in the table.

This article does not constitute financial advice. It is always recommended to speak with a financial adviser or investment professional before purchasing any of the products listed here.

Select Canadian-focused small/mid cap funds 

FundMorningstar Quantitative RatingMorningstar Rating OverallMER (%)YTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)10Y Ann. Ttl. Rtn. (%)2020 Ttl. Rtn. (%)2019 Ttl. Rtn. (%)2018 Ttl. Rtn. (%)2017 Ttl. Rtn. (%)2016 Ttl. Rtn. (%)Inception Date
Fidelity Greater Canada Sr FBronze5 Stars1.178.4112.729.320.813.954.922.41.43.620.21/7/2008
Pender Small Cap Opportunities FGold5 Stars1.5021.1118.
Fidelity Special Situations Series FSilver5 Stars1.11-0.9103.320.820.716.159.031.4-12.421.118.34/18/2007

Source: Morningstar Direct. Data as of March 23 

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

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

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