Christian Charest: For Morningstar, I'm Christian Charest. Our last monthly survey of fund performance showed that Canadian equity funds had lackluster returns for the month of May. I'm here with Morningstar manager research analyst Achilleas Taxildaris to dig a little bit deeper into those results.
Now, Achilleas, funds in the Canadian Equity category actually slightly outperformed the S&P/TSX Composite Index, and considering what a lousy month the energy sector had, one would think that those funds were underweight in that sector. But that wasn't the case.
Achilleas Taxildaris: That's correct. On aggregate, funds have similar levels of exposure in the energy sector, about 20%, and in terms of sectors, most of the outperformance versus the index came through underweight on the bad-performing material sector, but also an overweight on the two consumer sectors that did well in the month of May.
Charest: Now, the story was a little bit different with Canadian small-cap funds, and you noticed an interesting discrepancy there.
Taxildaris: Yes, correct. In the small cap-space, the index does a reconstitution of its holdings once a year in the fall, and what happened this fall given the dramatic shift in the energy prices, it basically went from an overweight in the energy sector versus the aggregate funds to an underweight. So this particular month, this underweight helped the small-cap index to outperform the funds in this space.
Charest: Now, let's talk about individual funds. Among the Morningstar Medalist Funds in the Canadian equity category, two of them did fairly well for the month of May.
Taxildaris: Yes, the EdgePoint Canadian Portfolio had another very good month, about 1%, adding to their year-to-date results of about 7.7% and it is a 5-Star fund, Silver-rated, managed by Tye Bousada and Geoff MacDonald. And the other fund that also had a very good month is the Fidelity True North. It's a 4-Star fund, rated Bronze, managed by Maxime Lemieux that has a year-to-date return of about 3.4%.
Charest: And what were the factors that led to that outperformance?
Taxildaris: The EdgePoint Canadian Portfolio did have an underweight in the materials sector that helped in terms of sector allocation, but the main story here is stock selection. Some of their stockholding picks had a very good month. One example is ATS Automation Tooling System that is a good story for this month, but an even better story long-term. It's a holding that the manager has had since initiation and has worked wonders for them.
In terms of Fidelity True North, allocation was a big component –an underweight in energy, significant underweight in materials as well as overweighting in the two consumer sectors, consumer staples and consumer discretionary, and that definitely added in the performance. In terms of stock selection, there was some positive contribution there as well. An example well-known in the space, Valeant Pharmaceuticals, had another strong month and that's also a positive story for the fund overall.
Charest: You also looked at three Medalist Funds that underperformed the benchmark in May, two of them for very similar reasons. But let's start with the outlier. That's Leith Wheeler Canadian Equity.
Taxildaris: Yes, this is a 4-Star Bronze-rated fund managed by a team led by Bill Dye. It has been historically a good performer indicated by the 4 stars, but recently has been challenged, and the main reason has been poor stock selection. An example in this month and longer-term has been Teck Resources, which hasn't worked well for the manager since purchased in mid-2011. Another name, Open Text Resources, had a poor month, but is still a positive contributor for the portfolio overall.
Charest: The other two are two funds that have very similar strategies, but that didn't necessarily perform as you would have expected.
Taxildaris: Yes, low volatility strategies have been on the rise and we do cover in our list two of the funds in the space. One is the RBC QUBE Low Volatility Canadian Equity Portfolio, which is a Bronze-rated fund, and it's quantitatively managed, but the team is led by Bill Tilford. The other one is TD Canadian Low Volatility, similarly run and the team is led by Vishal Bhatia. This is a Neutral-rated fund from our team.
Both of these strategies had a challenging month and year-to-date the RBC is slightly in the negative territory. The TD Fund is just less than 1% year-to-date. So they haven't been doing that well and the main story here has been poor stock selection across the portfolios. Now, as someone would expect, both of the strategies have low exposure in volatile sectors such as the energy and the materials sector and that was something that helped this month given how poorly these two sectors performed. However, that was not enough to help the funds post a strong month as poor stock selection outweighed most of that benefit.
Charest: Thank you very much, Achilleas.
Taxildaris: You're welcome.
Charest: For more on Morningstar's survey of fund performance for the month of May, please click on the link right below the video player and check back with us regularly for more news and updates.
