Finding a fund that works for you
Mutual funds may not be fashionable, but there are still plenty of great options
UTUAL funds often get dumped on by the experts, including personal finance writers. And often for good reason: they can be costly to own and many don’t beat their benchmark.
So, the theory for more than a decade has been investors are better off owning a fund — likely an exchangetraded fund (ETF) — mirroring performance of a broad index like the TSX Composite rather than buying a mutual fund that aims to beat it, but likely won’t over the long term.
The problem with this idea is it gives people the impression that every single mutual fund isn’t worth the trouble. And that’s not true.
Plenty of great funds exist. You just need to find them.
Mutual funds often excel when they focus on specific sectors, themes or ideas where the expertise of the managers is worth the additional fee.
Yet there are hundreds of funds to sift through, which makes finding those worth considering challenging. A little help can’t hurt. So, with that in mind, here are four mutual funds with either long track records of performance, or that provide exposure to themes that may be of interest to average Joes and Janes, who don’t have the time, skill or inclination to invest in on their own.
(Oh, and one more thing: just because these funds are discussed in positive light, doesn’t mean investing in them will turn out well. Every investment, no matter its track record, involves risk. And so, you’ve been warned.)
MTD Entertainment and Communications Fund
Rated five stars by Morningstar — its highest — the TD Entertainment and Communications Fund started out in the heady days of the tech craze in 1997. But it’s by no means just a tech fund. As the name states, it focuses on companies involved in media, telecom and a bit of technology, too. “There are a lot of trends going on in this space that are very durable and powerful, and that creates a lot of winners and losers,” says fund manager Paul Greene, who runs Baltimore-based T Rowe Price’s Communications & Technology Fund, from which the TD fund is cloned. T Rowe Price’s management has been very good at picking winners, including Alibaba, Amazon and Netflix, while avoiding the losers. Since its inception, returns have been about 12 per cent per year after fees. Put into monetary terms: $10,000 invested in 1997 would be worth about $110,000 today. The management expense ratio (MER) is fairly high — 2.82 per cent — but a 300-plus per cent total return over the last decade has provided investors value for fee cost. While it holds the big names of tech (Alphabet and Microsoft) and of consumer discretionary groups such as Amazon and Netflix, it also owns companies that support these sectors — such as real estate investment trusts (REITs) owning wireless towers, which often provide stable, low-double-digit percentage returns annually. Another plus: “It has had very good upside/ downside capture, meaning the fund goes up more than the benchmark in good markets and down less in down markets,” Greene says.
StoneCastle Cannabis Growth Fund
From something old to a fund that is very new: StoneCastle’s Cannabis Growth Fund launched just last month, so very little performance data exists at this juncture. But, for individuals who want to invest in cannabis stocks but don’t know what to buy, this is a good option. Fund manager Bruce Campbell is one of the first analysts to follow this burgeoning industry, which has captured the attention of investors around the globe. Cannabis stocks have provided insanely high returns for some investors. Millionaires have been made in the span of a few months. That said, the segment has also crushed the capital of investors who have entered the space at the wrong time. Looking forward, Campbell believes the cannabis industry will “be one of the fastest-growing sectors in the next decade.” Yet, it will remain volatile, creating both opportunity and stomach-churning drops in value. That’s where this fund aims to help. “We think it’s important that you manage around it (volatility),” he says. “When the sector is in its uptrend, you want to be fully invested, and when the sector is in its downtrend, you want to be less invested so you have cash when the tide turns to buy at lower prices and capture the upside.” The fee is about one per cent for do-it-yourself investors buying from a discount brokerage, and two per cent through an advisor. (No MER exists because the fund is less than a year old.) Additionally, StoneCastle charges an extra, hedgefund-like performance fee that is
20 per cent of the fund’s return that exceeds the return of its benchmark, the North American Marijuana Index.
BMO Fossil Fuel Free Fund
Another new fund — though this one was launched in 2016 — the Fossil Fuel Free Fund is for investors seeking to own companies that are part of the climate-change solution rather than part of the problem. “The main difference compared with other responsible funds is that we really do want to look at the positives of companies — though we do have one negative screen and that is fossil fuels,” Serge Pepin with BMO Global Asset Management says. Central to its premise is buying firms that address one of the United Nations’ 17 sustainable development goals. But the Fossil Fuel Free Fund shouldn’t be considered a niche product. “It’s a global equity fund that can compete in that category against any other global equity mutual funds.” Year-to-date, the fund has returned 20 per cent and 15 per cent since its launch, putting it among the first quartile of global equity funds. Still, given that it launched during the downturn in energy prices one might ask whether it will outperform when oil prices are on the upswing. Pepin argues it will, because it invests in companies promoting energy efficiency or providing alternative energy. Both segments tend to do well when oil prices rise, and consumers and businesses start looking for ways to reduce consumption. Additionally, given most Canadian investors have a home bias — meaning they own a lot of Canadian firms directly or indirectly involved oil and gas — the Fossil Fuel Free Fund is a good addition to diversify their portfolio. (Of note, RBC also has a fossil-fuel-free offering, and you can expect more to choose from as demand grows.)
Mawer Global Small Cap Fund
This mutual fund also is a good complementary investment for individuals seeking to diversify beyond Canada, only with a twist. As its name suggests, the Mawer Global Small Cap Fund owns companies around the world with market capitalization sizes of US$3 billion or less. But the strategy behind it is more like that of a largecap dividend fund. “We want to own blue chip, small-cap companies that are among the best in the world at what they do, but they also must offer good value,” Mawer money manager Karan Phadke says. “Another way to put it is we want to buy Ferraris at the cost of a Toyota.” It’s a proven formula, generating good returns for more than a decade. Since its launch in 2007, Mawer Global Small Cap has returned about 13 per cent per year compared with its benchmark, about eight per cent annually. Key to its success is finding firms with “sticky, recurring revenues,” he says. These are businesses which — similar to the large, blue chip companies in North America — have regular income streams that are difficult to disrupt. Their customers need what they make and would have trouble switching to a competitor without upsetting their business model in the process. Additionally, Phadke notes that unlike most small-cap-focused funds, which are generally prone to big swings in price, the Mawer fund is designed to help investors “sleep at night and have a reasonable rate of return.” In other words, you get blue-chip performance similar to large companies — like Canada’s big banks — only in a space that is less covered by analysts. “So there is the potential for outperformance,” he says.
Many investors are seeking ownership in companies that are part of the climate-change solution.