January 2016 fund performance

Weights to China and the energy sector only tell part of the story about the performance of Morningstar's Medalist funds in January.

Shehryar Khan, CFA 16 February, 2016 | 1:00PM
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Shehryar Khan: So the Canadian economy's struggles continued in January as the decline in oil prices continued to hurt western provinces, specifically Alberta. The continued weakness in the Canadian dollar and weakening economic data also contributed to an overall index decline of the S&P/TSX Composite in January of 1.2%.

Canadian equity funds didn't fare so badly, but of the funds that we cover, only one posted a positive return, which is Franklin Bissett Canadian Equity Fund, which we rate Silver. That’s despite the fact that it had considerable energy exposure as well as materials exposure. 10 of its top 20 performers for the month of January came from the energy sector, including, most notably, Tourmaline Oil. So that helped the fund outperform the index in January.

EdgePoint Canadian Portfolio Series, which is the worst performer for the month of January of all the medalist funds in Canadian Equity, had a rough January. But that was mainly due to stock selection, and not so much anything relating to do with the materials and energy sector. They had larger holdings like ATS Automation Tooling Systems and Constellation. Both suffered declines, and those aren't energy stocks. So it really had nothing to do with that. So, again, it sort of brings into life that you always have to keep context in mind when looking at declines of funds versus the index.

So the U.S. market had a rough start to the year as well. The Fed raised interest rates, which was expected, but also weakening economic data contributed to a 5% decline in U.S. dollar terms for the S&P 500. Currency gains for Canadian investors, however, offset some of that decline and they only had a loss of about 3.7%. So, again, the currency helped them as it has for about a year now.

When it comes to the funds that we rate, the most notable fund is Bronze-rated RBC O'Shaughnessy U.S. Value. This fund has struggled for a considerable amount of time now, mostly in large part due to currency as it is fully hedged against many of its peers which are unhedged. It has a big headwind overcoming the appreciation of the U.S. dollar relative to the Canadian dollar. So, in U.S. dollar terms, the fund hasn't fared as badly as it looks in Canadian dollars. But also, as a value-oriented strategy, it has gone through a patch where it's out of favour, which has been contributed to by its holdings in energy and mining. But overall, we still think the fund has long-term prospects, and for a long-term investor, it's still a worthy option to consider.

Between the U.S., Canadian and international markets, international did the worst for the month of January, declining 6%. China had a big part to do with that. And for funds that we cover, their exposure to Asia, in particular, had a big impact on their outperformance or underperformance relative to the benchmark for the month of January. But again, we'd like to keep this in context and try to look at what exactly drove the under or outperformance. You have to look at the stocks for a case like Mawer International Equity, which despite having an overweight to China outperformed its peers and the index for the month of January. Their worst holding in China was Alibaba, which was less than a 1% weight in the portfolio. So, it didn't hurt them too much, having that exposure.

For a name like CI Black Creek, however, which was the worst performer of all the medalists that we looked at in the International Equity category for the month, their holdings in China, which were significantly overweight, did hurt them. In particular, Dialog Semiconductor was their worst performer in China. But if you look at overall stock picking for the fund, their actual worst performer was a stock from Cyprus, which is called Prosafe. So, again, just the overweight to China does not explain their underperformance for the month. You have to keep the big picture in mind.

And overall, we think Mawer is rated Gold, Black Creek is rated Silver and won the Foreign Equity Manager of the Year Award in 2015. So, we really still have strong conviction for both the funds' long-term prospects.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alibaba Group Holding Ltd ADR86.13 USD-2.44Rating
ATS Corp45.06 CAD-5.16
Constellation Software Inc3,707.93 CAD0.35
Prosafe SE4.95 USD2.06
Tourmaline Oil Corp67.47 CAD0.06

About Author

Shehryar Khan, CFA

Shehryar Khan, CFA  Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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