10 Most Popular Canadian Mutual Funds in 2022

My colleagues Paul Kaplan, Thomas Idzorek and James Xiong, along with Yale’s Roger Ibbotson wrote a book called Popularity: A Bridge Between Classical and Behavioral Finance, in which they say, “We believe that most of the best-known market premiums and anomalies can be explained by an intuitive and naturally occurring (social or behavioural) phenomenon observed in countless settings: popularity.” Simply put, investors are willing to pay more for securities with popular characteristics and less for securities with unpopular characteristics.

10 Most Popular Canadian Mutual Funds of 2022

With that said, let’s take a look at our most popular mutual funds. Most of the funds on the list have a Morningstar Quantitative Medalist Rating, but only one of them gets the coveted Gold-medal – the Mawer Balanced A. One also has a Morningstar Analyst Rating of Neutral. More on that later, but first, here’s the list:

Why Are Balanced Funds and Income Funds So Popular?

Balanced funds and dividend funds topped the list of the most popular mutual funds in Canada.

“Balanced funds offer investors a one-stop-shop that benefits from professional asset allocators with diversified exposures. Particularly for investors who do not have access to formal investment advice, balanced funds offer an appealing option,” explains Danielle LeClair, director of Manager Research for Morningstar Canada.

“Dividend and income funds have been popular options for Canadian investors because they offer an alternative to traditional fixed income products, which have faced challenges in the lower interest rate environment we have seen the last few years,” she adds.

Fidelity Global Innovators A: A Great, but Expensive, Fund

Let’s look at the only fund on the list to earn a Morningstar Analyst Rating, the Fidelity Global Innovators Class A. As a reminder, the Morningstar Analyst Rating for Funds is not a short-term market call, but instead provides a forward-looking perspective on a fund’s likelihood to outperform. A fund that receives a medalist rating of Gold, Silver, or Bronze, is expected to outperform similar funds over a full market cycle. The Fidelity Global Innovators fund earns an analyst rating of ‘Neutral.’

“Canadian investors have access to great mutual funds that earn strong People and Process ratings from our analyst team, but the fees these funds charge are so high that the benefit of owning them are in some cases diminished,” LeClair says.

“The fund’s global mandate outside of manager Mark Schmehl’s historical bailiwick, anchored to North American securities, earns this strategy a Morningstar Analyst Rating of Bronze for its cheapest share class and Neutral for the most expensive,” analyst Abdulai Mohamed writes, adding that Fidelity has strong centralized research teams located across the globe.

“Schmehl’s investment process is unique and difficult to replicate which gives him a strong competitive advantage over his peers. The process focuses on two tails of the market—companies with weak fundamentals that are starting to improve, and companies at the forefront of innovation—high-expectation securities. While it may be possible for anyone to identify these areas of the market, not everyone has the level of conviction and ability to execute consistently for long stretches; that’s where Schmehl demonstrates skill,” he says but notes that though Schmehl intends to manage the fund for years to come, it carries a strong key-man risk: he believes the fund is unlikely to exhibit similar returns under a different manager.

Under Schmehl’s watch, the strategy has performed admirably. From inception to July 2022, the strategy’s F-class 17.65% annualized return outpaced the Morningstar Category benchmark of 12.82% and the Morningstar Global Markets Gross Index benchmark of 10.63%.

Mawer Balanced A: This Fund is Gold

Meanwhile, the only fund to earn a Morningstar Quantitative Rating of ‘Gold’ is the Mawer Balanced A, with the analysis reading, “A strong management team and sound investment process underpin Mawer Balanced A's Morningstar Quantitative Rating of Gold. The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers. The strategy has been able to retain portfolio managers, which builds stability and continuity and results in a High People Pillar rating. The strategy's sensible investment philosophy earns a High Process Pillar rating. The portfolio has overweighted the Europe-Developed region and has an underweight in the energy sector compared with category peers. The strategy has a strong parent, as shown by its a favourable lineup success ratio. It still has weak spots to strengthen, including elevated portfolio management turnover. The firm gets an Above Average Parent Pillar rating.”

Fees Are a Crucial Predictor of Long-Term Investor Success

Finally, keep an eye on the fees, or management expense ratios (MERs) of the funds. Morningstar Canada’s Director of Investment Research Ian Tam says having access to investment funds with low fees is vitally important to the long-term success of the Canadian investor.

“In essence, the fees paid take away from what the investor gets in her pocket which can be substantial when compounded over the investment time horizon. It would serve investors well to pay close attention to not only management fees (paid to the portfolio manager) but also any trailer fees or other one-time commissions (paid to advisors), especially if the investor doesn't feel like she's getting good value for the advice that is received. Advice is valuable, but only if you receive it,” Tam warns.