The past decade and a half appear to have been quite unkind to many Canadian equity fund investors, as well as worse to people invested elsewhere. Actually, performance figures for that 15-year period through December 2015 show fixed-income funds fared nearly as well and in some cases better than their stock-driven kin.
Overall, Canadian equity funds averaged a substance annual yield of five percent through 2015, as the Canadian equity category itself averaged 4.3 percent; Canadian fixed-income funds overall averaged 3.8 per cent as the category itself averaged 4.1 per cent. Those all compare well to the returns from U.S. (1.8 percent), European (two percent), global (2.3 per cent) and international (0.8 per cent) equity funds. Only 13 funds in neuro-scientific a lot more than 1,100 with 15-year histories managed double-digit average annual returns.
Granted, there is an component of bias in those equity figures – the S&P/TSX Composite Index, for instance, continues to be bouncing round the 12-13,000 range within the last couple of months, rich its August 2014 peak of 15,625. With both ends of the yardstick moving, the yield relationship can change quickly and Mark Raes, head of product at BMO Global Asset Management in Toronto, cautions against drawing conclusions from such long time frames.
What you should search for when picking stocks to carry in your RRSPIt may be time for you to repatriate your US$ investments and book those currency gainsThe answer to getting more money when your boss won’t provide you with a raise
“You have to look at year-by-year performance,” he states. “Those figures reveal that, for instance, equities have outperformed bonds in 13 of the past 20 years. The web end result is that there are times you would like more equity or fixed income; it depends on market conditions. From an investor’s point of view, you have to experience the ride among. It’s area of the journey to get there.”
On the other hand, currency shifts taken into account a lot of Canada’s outperformance, a minimum of during the first decade of those 15 years once the Canadian dollar was around the ascendancy, however that it’s fallen that tailwind is finished.
“Currency is really a key cause of performance,” Raes says. “When the CAD was rising, whether it was unhedged, it meant something, now that it’s going the other way this means just the opposite.
“The main element for Canada is the commodity supercycle,” Raes adds, pointing towards the continuing slowdown in global demand, particularly from China. “It’s difficult to see demand ever rising to the levels of past years. We’re feeling being in a far more diversified global portfolio will probably be beneficial simply because from the global downturn in commodities.”
Three of the five top-performing fund categories – real estate equity (8.9 per cent), alternate strategies (6.9 per cent) and long-term fixed income (6.8 per cent) – comprised only 11 funds; precious metal equity (7.8 per cent) added another 10 to that total.
For the rest, the majority of funds, equities and fixed income alike, had 15-year returns ranging south from five percent: Emerging markets equity (4.8 per cent), high-yield fixed-income (4.7 percent), North American equity (4.6 percent), U.S. small/mid-cap equity (4.3 per cent), global neutral balanced (4.3 per cent) Asia ex Japan equity (4.3 per cent), Canadian equity (4.3 percent), Canadian neutral balanced (4.1 per cent) and Canadian fixed income (4.1 percent).
The 53-fund Canadian small/mid cap category would be a big exception to the norm. It had been the best-performing broad category with a healthy margin at 7.7 percent, partly because nine of those 13 double-digit overachievers were Canadian small/mid-caps. (Interestingly, the S&P/TSX Smallcap Index TR averaged a mere 3.2 per cent over the same period.)
Three of those nine (IA Clarington Small Cap, Mawer New Canada and National Bank Quebec Growth) were top-10 performers in last year’s 15-year review (along with RBC Global Gold and silver Fund and Vertex Fund, another strategies listing).
Mawer New Canada topped all funds through 2015 with a 16.3 per cent 15-year return, because it did last year with 16.7 percent, while RBC placed third this season (13.2 percent) but was second last year (13.4 percent). Norrep Fund was tops the year before (for Fifteen years through 2013) while Mawer was second and IA Clarington third; Fiera Capital Equity Growth Fund, BMO Enterprise Fund and Beutel Goodman Small Cap Fund were all up there that year as well.
So many repeats in the same few funds, so many of them Canadian small/mid caps – that’s some remarkably consistent and concentrated outperformance.
Active managers take advantage of stock selection, as well as in small caps where information is less than perfect, there are real possibilities to find companies that can consistently add value to a portfolio
“It shows the way a good active manager can also add value to some portfolio,” Raes says. “Active managers benefit from stock selection, and in small caps where details are sub-standard, you will find real opportunities to find companies that can consistently add value to a portfolio.”
Alex Sasso of Norrep Investments, Toronto-based lead manager of the Norrep Fund, agrees that small/mid caps can have a number of potential trading advantages over large caps, and suggests the BMO Small Cap Index, which since its inception in 1969 has generated annual returns “only a hair shy of 10 per cent.”
“That’s how much from small/mid caps over the long term,” he states.
“Many of these companies are unloved and underfollowed to allow them to get mispriced,” Sasso adds. “Maybe there’s no analyst covering a regular – it takes place quite often with small/mid caps, although not with large caps, simply because they have a lot of analysts following them. And with small/mid caps you really get focused exposure. Large caps have large revenues, large products, they touch many industries.”
Adds Ralph Lindenblatt, senior vice-president and portfolio manager at Franklin Bissett Investment Management in Calgary, and manager of the Franklin Bissett Microcap Fund: “It’s a lot easier to maneuver the development needle with a smaller company. For those who have several billion in revenues it’s hard to grow the company, but when it’s $50 or $100 million it’s easier.”
Another benefit to small/mid cap companies, Sasso says, is that, when they’re acquired, “they’re often acquired at a large premium – that’s happened to us numerous times.” And, he adds, there’s more choice.
“You will find roughly 100 large-cap companies on the TSX, there may be roughly 100 names in the portfolio, so that all you should do is adjust the weightings,” he states.
“A percentage of every portfolio ought to be small/mid caps,” Sasso says. “That’s the sleeve that provides growth. There is some volatility, but if you hold on for 3 to 5 years you want to do well.”