What are we looking for?
Actively managed mutual funds available to DIY investors.
There is no doubt that the growth of exchange-traded funds in Canada has appealed to the do-it-yourself investor. After all, ETFs can often grant wide exposure to an asset class at very little cost. That said, of the 1,130 ETFs listed on Canadian exchanges, just more than half are indexed funds. The remainder are either actively managed or strategic beta ETFs (those that straddle the line between active and passive); of these, 300 were launched after 2018 with relatively short performance histories. Hence for the DIY investor looking for active management (perhaps for asset classes where it is more difficult to buy individual securities, such as bonds, for example), funds with long track records are few and far between. To help with this conundrum, I turned my attention to the mutual fund world, specifically those that are available for purchase (at a lower cost) through discount brokerages. For a few ideas, I used Morningstar Direct to screen for funds that have:
- A Morningstar Rating (informally known as the “star rating”) of five stars. 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. 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 (gold, silver or bronze) have outperformed neutral or negatively rated funds, after receiving their ratings.
Only funds available for sale through discount brokerages were considered.
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.
What we found
The funds that met the above requirements are listed in the accompanying table alongside their management expense ratios, ratings, trailing returns, and inception dates. Remember, the ratings posted are relative to category averages. As such, it is important to first look at the category to which each fund belongs to gain an understanding of the types of securities the fund holds and whether they fit into your overall portfolio and risk profile. The table is sorted first by broad category group (fixed income, equities, allocation) then by Morningstar category. Note that the allocation group are also known as balanced funds.
This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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