For broad market investors, 2022 wasn’t the cautiously optimistic market of 2021. The Morningstar Canada Index in 2022 fell around 5.5% year to date, as of Dec 16th – faring better than the Morningstar Global Markets index, which was down 18.31%.
It may come as no surprise then that commodities were among the only sectors that effectively hedged this year, with the Morningstar Global Energy Index up nearly 30% as of Dec 16, 2022. Yesterday, we looked at top-performing medalist ETFs based on either a Morningstar Quantitative Rating or a Morningstar Analyst Rating. And energy dominated – but not like it does in Canadian mutual funds:
We knew energy did well but it’s still a surprise to see the leaderboard for what has become the ‘Year of Energy’ in the mutual fund asset class. There are some natural resources mixed in there, but it’s not quite the same variety as we saw in ETFs.
Demonstrating that best-in-class, sector-specific exposure at a fee (Management Expense Ratios, or MERs) of around one percent is possible, we have RBC Global Energy Fund F (also available in Series D). The fund had some major inflow – and outflow – action this year, after ranking 52nd out of 53 in its category percentile ranking in 2021. However, as of Dec 19, 2022, the five-star rated fund is in the 10th percentile rank.
In the second spot on the leaderboard, and last year’s first-place fund, we have Ninepoint Energy F (also available in Series D). Ninepoint’s Energy Fund strategy also placed third this year in the ETF rankings we covered yesterday. However, the Series D of the fund’s strategy charges an MER of 12.33%. According to the company, the additional charges in Series D relate to incentive fee shortfalls in older mutual fund series. Those incentive fees are “equal to 10% of the amount by which the return of the series exceeds the return of the S&P/TSX Capped Energy Total Return Index,” according to the Fund Fact documents. Any incentive fee, however, is too much, says Morningstar’s director of passive strategies research for North America, Bryan Armour. “Active fund managers should be aligned with their holders in striving to beat their benchmark regardless of an incentive fee,” he says. Ninepoint Energy Series F’s stock style is smaller-cap than the Energy Equity category (as of Nov 30, 2022), and has performed at the 29th percentile rank in the category of 50 peers for year-to-date performance as of Dec 19.
In third place here, and ranking at the fourth percentile in the Natural Resources Equity category among 90 peers year-to-date as of Dec 19, we have TD Resource Fund F (also available in Series D) with a very high conviction portfolio that’s only had 6% turnover as of the same date. The fund employs an approach that’s more large cap and value than the category as of Nov 30, 2022, and as of the same date is about 67% energy and 29% materials.
Next, with a stock style that’s close to the category in the large-blend department (as of Sep 30), Dynamic Energy Income Fund F took the fourth spot in the top-performing medalist mutual funds this year with the help of a whopping 7.68% yield in the 12 months leading up to Dec 19. The fund is true to its name with 100% energy holdings among 22 equities as of Sep 30.
With another impressive yield of 4.98% in the 12 months leading up to Dec 19, Canoe Energy Income Portfolio Class F has the 2nd highest fees (MER) of the bunch and the higher turnover at around 194%. As of September 30, the fund has 21 equities, with around 67% of assets in the top 10 holdings.
In sixth, with a refreshing change in sectors, we have Lysander-Crusader Equity Income Fund F. The fund didn’t produce yields as high as other funds here but pulled off an equity strategy that ended positively this year, which is commendable in itself. As of Oct 31, the fund has around 26% in fixed income, with equities split between energy, financial and healthcare sectors, at around 26%, 29% and 34% respectively.
Making one last stop in the energy sector for seventh place, Dynamic Strategic Energy Class F (also available in Series D) uses a mid-blend investment style with a turnover of 54% as of Dec 19. The fund is currently in the 82nd percentile of its category year-to-date as of Dec 19 – a reversal of fortune from the fund’s promising 28th percentile performance in 2020.
In eighth, but first place for low fees is RBC Canadian Small & Mid-Cap Resources F (available in Series D) with a stock style that’s smaller-cap and more growth-oriented than the Natural Resources Equity Category as of Nov 30 this year. As of the same date, the fund holds around 63% and 35% in energy and basic materials equities, respectively.
With a large-cap, growth-leaning stock style RBC Global Resources Fund F (also available in Series D) comes in at ninth, but earns a gold Morningstar medalist rating and is a top-quartile performer year-to-date (Dec 19), earning a five-star performance rating as well.
Wrapping up the leaderboard for top-performing medalist mutual funds in Canada, we have Fidelity Global Natural Resources Fund F with another five-star performance history. The fund may be coming up last on our list today, but it’s beaten both the index and the category since 2012.
Why Mutual Fund Fees Matter
Fund fees are expressed on an annual basis but are typically charged monthly or quarterly. For most funds, fees are charged regardless of how the investment manager performs. Assuming an overall cost of 2% to own a fund, if in one year a fund returns 6%, you’ll receive roughly 4% for that year. However, if the fund loses 6%, you lose 8% after fees.
“Though perhaps not financially impactful in a single year, over time the effects of fees are substantial. In dollar terms, a $1000 invested in the index in 1998 results in a portfolio value of $4,500 after 20 years if there were no fees, but only $3000 if a fee of 2% was charged. Put in percentage terms, after 10 years, the impact of a 2% fee results in a difference of 18% less wealth when compared to no fees. After 20 years, that gap balloons to 33%,” explains Morningstar Canada’s director of investment research Ian Tam.
Bottom line is, you need to be diligent in monitoring the fees you’re being charged, because the fees you pay are detrimental to the amount of wealth you will end up with.
