December 2015 fund performance

Varying approaches to the embattled energy sector make the difference for Canadian Equity funds in 2015.

Jeffrey Bunce, CFA 15 January, 2016 | 6:00PM
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Jeffrey Bunce: The market for the year in Canada was down 8.3%. So that was the S&P/TSX Composite that was down. Digging a little bit deeper, it was really the resource sectors that drove the majority of that decline. The energy sector was down 24%, the [materials] sector was down 21%. We also had industrials, in which a lot of those companies service the resource sectors, and that was also down 13% for the year.

However, there were some bright spots in the market. So the healthcare sector, despite the second half sell-off of Valeant Pharmaceuticals, was still up 24%, and that led the way in the Canadian market. We also had the information technology sector up 14% and consumer staples was also up over 11%.

Investment style this year definitely played a role and had an impact on returns. To gauge this, we can turn to the MSCI Canada indexes to get a sense of what the styles did for the year. So if we look at the MSCI Canada Growth Index it was down about 5.7%, and outperformed the market overall. Whereas if we look at the Value Index, it was down over 11%. So definitely value style was a headwind for active managers in this sense.

This is the second straight year that growth has beaten value. So growth's on a bit of a run, but maybe now with some of the declines in the Canadian market, value might pick up in the year ahead. However, if we look at the Quality Index, it had actually beaten both Growth and Value for the year. So funds or stocks that are more concentrated or higher-quality were definitely ones that performed better for the year.

The good news for active management in Canada, as far as the Canadian Equity category, goes is that active managers on the whole outperformed the market. So they on a whole were down about 6.1% and outperformed the market by over 2%. So they were successful in mitigating some of the losses in the market for the year.

Having said that, there was a decent amount of dispersion in returns for funds. So if you are looking at the top decile performers, they had a loss of 1% on the year or better. But if you go to the bottom decile funds, those returned anywhere from -10% or lower. So depending on what fund you own, you could have an experience closer to flat or down significantly 10% or so.

If we recap that growth and quality did better for the year, it's not surprising to see that some of the managers who focus on quality and growth are the ones that performed better for the year. For instance, Mawer Canadian Equity focuses more on quality and looks for companies with resilient business models that have higher ROE. So in this environment, where quality was favoured, they held up quite well. So in particular in the energy sector, they stuck with some of the higher quality names there, such as Suncor and Canadian Natural Resources, as well as Raging River Exploration, and underweight to the sector overall helped them as well. They also had some good stock picks as well in other sectors, such as Constellation Software, Brookfield Asset Management and CCL Industries.

Another fund that performed quite well was the Bronze-rated Fidelity True North, run by Maxime Lemieux. The portfolio spent the last few years defensively positioned, based on Lemieux's bearish outlook of the Chinese economy and what impact that would have on Canada's resource-heavy market. So from that perspective it served them well this year, because he's been underweight in the energy and material sectors. He's also shifted some of his portfolio into more defensive sectors like consumer staples and a higher cash balance. As well, some foreign holdings also helped him for the year.

The last medalist fund that we want to highlight that performed well was Fidelity's Canadian Disciplined. So that is run by Andrew Marchese, and it really utilizes Fidelity's deep analyst team that look at stocks on a growth-at-a-reasonable-price basis. From that perspective, some of the growthier names that they held did quite well, such as Alimentation Couche-Tard, Gildan Activewear and Kinaxis. So it was really the stock picks that drove the performance for that fund. They keep their sector bets pretty close to the benchmark.

The medalist funds that we saw struggle in 2015 were those that had more of a strict value orientation. They tended to wade into the energy sector a little bit too early. So basically, on the first drop of the oil price, they moved into that sector in a bigger way than some other managers, and obviously they have been hurt as the oil price continued to fall.

So this is what partially tripped up the Leith Wheeler Canadian Equity Fund, which is Bronze-rated. It underperformed the benchmark by about 5%. It had one of the worst returns of Canadian equity funds this year. It was mainly, again, the energy sector that tripped them up. Names like Tourmaline, Baytex and Encana were the ones that they struggled with. Beyond energy, though, they also had the resource sector hurt them as well. So picks like Teck Resources and First Quantum Minerals also hurt, as it was not just in energy or the oil sector that declined; it was basically commodities across the board.

The other fund that we wanted to highlight in this section was the Sionna Canadian Equity fund, Bronze-rated as well. It also follows a value approach. While they managed to eke out a small gain over the benchmark and outperformed by a small margin, they trailed the overall peer group by over 2%.

Its picks in energy were actually not what hurt it. They had some higher quality names like Suncor and Canadian Oil Sands. But it was actually the overweight to the sector overall as they, again, moved up the weighting in that sector as the oil price came down, anticipating a rebound in the oil price.

Similar to Leith Wheeler, Sionna also held Teck Resources, which hurt them quite a bit. And they also had a position in Finning International, which is an industrials name that is highly levered to resource activity and continuing expansion of that sector.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alimentation Couche-Tard Inc75.90 CAD-3.78
Bausch Health Companies Inc8.67 CAD2.36
Baytex Energy Corp4.38 CAD-2.23
Brookfield Corp Registered Shs -A- Limited Vtg56.24 CAD-0.21
Canadian Natural Resources Ltd46.62 CAD-0.53
CCL Industries Inc Registered Shs -A- Voting73.51 CAD5.39
Constellation Software Inc3,800.00 CAD0.39
Finning International Inc39.06 CAD-0.99
First Quantum Minerals Ltd16.49 CAD1.73
Gildan Activewear Inc51.62 CAD-0.37Rating
Kinaxis Inc149.05 CAD-0.13
Ovintiv Inc62.91 CAD-2.28
Suncor Energy Inc50.26 CAD-0.89
Teck Resources Ltd Ordinary Shares - Class A (New)65.00 CAD-0.47
Tourmaline Oil Corp63.13 CAD-0.57

About Author

Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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