2019 has been good to investors so far. After a cruel last quarter of 2018, the first quarter of this year has seen almost uniform gains across markets. The S&P TSX Composite index is up over 13% so far this year, while the S&P 500 is up over 10% in Canadian dollar terms, according to Morningstar Direct data.
As a result, several mutual funds have also clocked positive returns. Over 5,800 Morningstar medalist funds had positive returns for the quarter, and of them, close to 1,000 had gold ratings.
But the best performing indexes in Canada, unsurprisingly, are healthcare and
As a result, three of the top five mutual funds of the first quarter of 2019 are healthcare/marijuana focused, the fourth is a global equity fund, and the fifth is a US-focused fund. Here’s a look at them:
|
Name |
Morningstar Category |
3-month Return |
|
Sector Equity |
56.38 |
|
|
Sector Equity |
36.18 |
|
|
Sector Equity |
31.83 |
|
|
Global Equity |
23.28 |
|
|
US Equity |
22.49 |
The top-performing fund is the Purpose Marijuana Opportunities Cl F. The fund is up an eye-watering 56.38% for the first quarter. Fund manager Greg Taylor attributes the performance to the bounceback from the abysmal last quarter of 2018. “We saw a lot of underperformance in the last quarter of 2018, so for us, it was more a question of sticking to our strategy and holding the names we like, and watching them rise after the Christmas eve sell-off,” Taylor said.
Taylor did, however, make one tactical change to his strategy in the first three months of the year – he focused more on U.S. marijuana companies.
Growing U.S. cannabis opportunities
“We increased our exposure to the U.S. to around 35% of the overall portfolio. We have found that Canadian companies have not been able to ramp up. They have not been able to capitalize on recreational use, and as a result, have significantly lagged expectations. On the other hand, the U.S. companies have ramped up capacity, and have steady growth. There also has been consolidation there, which makes the sector more attractive,” he said. In terms of valuations as well, the U.S. was trading at a discount to Canadian peers in the last quarter of 2018, and since then, on average the valuations of U.S. and Canadian companies are the same, Taylor said.
One thing that has changed significantly in the portfolio since the second half of 2018 is the cash holdings. Taylor currently holds a little over 20% of the fund’s assets in cash, down from close to 50% in October 2018, when marijuana was legalized in Canada.
“We use cash as a tactical risk mitigator. We have seen a good run in our holdings so far this year, so we took some profit and are holding cash to deploy whenever valuations fall and become attractive,” Taylor said.
He likes three marijuana names to hold for the rest of the year – New Brunswick-based Organigram Holdings (OGI), Chicago-based Cresco Labs (CL) and Chicago-based Green Thumb Industries (GTII).
Let's look at one of the funds on the list that also has a gold-star rating: Dynamic Power American Growth. The fund was also one of the best performing funds of 2018. Managed by Noah Blackstein, it’s 99% invested in U.S. equities with significantly overweight positions in healthcare and technology, and invests over 55% of its holdings in technology stocks – more than double the category average of 20.62%. The fund is high risk with varying returns. Some of those returns have been exceptional, such as its 50.6% gain in 2013. But the negative periods have also been exceptionally painful: in 2008, it lost nearly 44% of its value compared with 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.
Where should you invest?
Here at Morningstar, we don’t recommend that investors make decisions solely on quarterly performance. Instead, we recommend that investors use a long-term and comprehensive analysis. To decide what funds will outperform going ahead, we use Morningstar Quantitative Ratings (MQR). Here are the three top-performing gold-rated funds, including Blackstein’s fund, which we expect to continue to outperform going ahead!
Name |
MQR |
Category |
3-month Return |
Manager |
| Dynamic Power American Growth Series F |
Gold |
US Equity |
22.49 |
Noah Blackstein |
DMP Power Global Growth Class Series F |
Gold |
Global Equity |
21.64 |
Noah Blackstein |
Fidelity Special Situations Class F |
Gold |
Canadian Focused Small/Mid Cap Equity |
20.55 |
Mark Schmehl |
