Top performing mutual funds in the third quarter

This is clearly borne out by a look at the top performers, all of which are high-risk funds:

	Name	Category	Quantitative Rating	3-month Total Return
	Purpose Marijuana Opportunities Cl F	Sector Equity	n/a	43.7
	Ninepoint UIT Alternative Health D	Sector Equity	n/a	34.7
	Marquest Canadian Resource F	Natural Resources Equity	Negative	13.8
	Dynamic Power American Growth Ser F	U.S. Equity	Gold	11.7
	Dynamic American F	U.S. Equity	Silver	10.7
	Data as of Sept. 28, 2018

Unsurprisingly, the top two performers were Marijuana funds. The North American Marijuana Index was up over 30% for the three months ending Sept. 28. Two funds outperformed the index: Purpose Marijuana Opportunities Cl F, which was the highest performer for the quarter with a three-month return of close to 44%, and Ninepoint UIT Alternative Health D, which had a return of close to 35%.

"What we have done differently is we have brought in active management in the fund, to manage net exposure to the sector," says Greg Taylor, portfolio manager of Purpose Marijuana. "When we find a stock rolling over, we move to cash. We have recently sold some of the high flyers like Tilray (TLRY), Canopy Growth (WEED) and Cronos Group (CRON) because we believe the valuations are too high. Instead, we have moved to more mid-tier opportunities, where the valuations are more realistic," he said.

It is important to note that both the sector and some of these stocks are extremely volatile.

For example, Tilray was a stock that debuted on the NASDAQ in July at a price of around US$22 per share. The stock hit a high of above US$214 per share in September, before crashing to around US$99 per share a week later. It has since recovered and is currently hovering around US$130 a share.

There is further volatility expected in the sector when the Canadian government legalizes marijuana on October 17.

"We are going into this month extremely cautious, because we see the chance of major sell offs. Though we believe in six months the sector will keep growing, we are going to be cautious in the short term," says Taylor. To deal with this, the fund is moving into cash, and Taylor said he would be comfortable holding up to 30% in cash for the short term.

Marquest Canadian Resource

One surprising name in the top performers list is Marquest Canadian Resource. The fund has returned 13.8% over the past three months, compared with a 6.5% loss for the average fund in the Natural Resources Equity category.

The result is stark, considering that the two worst-performing funds for the quarter are both Natural Resources Equity funds: Qwest Energy Canadian Resource Cl Sr F, which was down over 23% for the quarter, and Dundee Global Resource Class A, which was down 19.4%.

The fund is very small, with assets of $1.6 million. It holds a large amount of its portfolio in micro-caps, and so is extremely risky and volatile.

The fund was insulated from the crash by holding 46% in cash. It also holds over 9% of its portfolio in an unlisted security -- Cordillera Gold. For the portion it holds in equity, only NexGen Energy (NXE) is up 7.8% for the quarter. All of its other holdings are negative, with some holdings down over 14%.

The fund is rated 1-star and has a forward-looking Quantitative Rating of Negative, which means the fund is likely to underperform going ahead. Though the fund has outperformed for the past quarter, it has a return of -9.1% annualized over 10 years.

Dynamic Power American Growth

Dynamic Power American Growth is a 5-star, Gold-rated fund. It has returned 11.7% over the past quarter.

The fund is almost entirely invested in U.S. equities and has significantly overweight positions in healthcare and technology. It invests over 40% of its holdings in technology stocks -- more than double the category average of 21.45%. This has contributed to its outperformance, as the Morningstar U.S. Technology index produced a total return of 7.4% over three months and the NASDAQ Composite Index had a total return of 5.6%, when converted to Canadian dollars.

Some of its top holdings are retailer  Five Below (FIVE), scanner services company Align Technology (ALGN), food technology company  GrubHub (GRUB), mid-cap healthcare firm Abiomed (ABMD) and technology company  Palo Alto Networks (PANW). Significantly, the only FAANG stock on the top-10 list is  Netflix (NFLX).

The fund is a high-risk one, with varying returns. Some of those returns have been exceptional, such as its 50.6% gain in 2013 and the 53.1% it has racked up so far in 2018. But the negative periods have been exceptionally painful: in 2008, it lost nearly 44% compared to a loss of 28.3% for the average U.S. Equity fund, and in 2016 it lost more than 13% when the rest of the category gained nearly 6% on average. But while its standard deviation is significantly higher than that of its category peers, its long-term returns have also been among the very best.

Dynamic American

The 4-star, Silver rated Dynamic American is less volatile than Dynamic Power American Growth, but its returns have been almost as high, leading to exceptional risk-adjusted returns as measured by the Sharpe ratio.

Portfolio manager David Fingold aims to hold a portfolio of 25 companies or fewer, in which he can take advantage of what is going well while avoiding danger spots. For example, he will never own stocks in sectors like utilities or telecom, and he doesn't like U.S. banks either, saying the U.S. banking system is not a crucial piece of the economy. "The bond market, including corporate debt, is the U.S.'s primary source of financing. You don't need a thriving banking system to have a thriving economy, but you do need a thriving credit market, which we have."

The sectors he likes are technology, consumer discretionary, industrials and healthcare. "Historically, these have been the best sectors, and going ahead, we are positive on them. Within healthcare, for example, we like animal healthcare. Short of socialism, we don't see any major political risk, and frankly, if capitalism is over, we can't help our clients," he said.