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Fund Insight

Five domestic focused small/mid cap equity funds likely to outperform

These medalist mutual funds have surpassed the BMO Small Cap Index over 10 years.

Ruth Saldanha 15 October, 2018 | 5:00PM
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Investors in the Canadian mutual fund market have a variety of options to choose from, depending on their risk appetite. Investors who can tolerate more risk look to invest in small- and mid-cap funds, as these have the potential to give higher returns but come with higher risks.

As of Sept. 28, the BMO Small Cap Index has lost 0.04% from a year earlier and has lost over 5% for the year to date. Over a longer timeframe, however, the Index has produced a total annualized return of 6.6% over the past 10 years, higher than the S&P/TSX Composite Index, that produced a total annualized return of 6.3% over the past 10 years.

So what are some of the funds that have done well, and have the potential to do well in the space? To answer this, we took at a look at the Canadian focused small and mid-cap equity funds. These funds must invest at least 50% and less than 90% of their equity holdings in securities domiciled in Canada, and their average market capitalization must be lower than the Canadian focused small/mid cap threshold.

In this category, there are more than 120 gold, silver and bronze-rated funds. To narrow down the search, we looked at the total annualized returns the funds gave over a 10-year period. It is important to note that past performance does not necessarily indicate the expected returns in the future, but the medalist-rated funds are more likely to outperform than their peers, according to the Morningstar analysis methodology.

Here we look at the five of these funds in some detail.

Name Category Quantitative
Rating		 10-Year
Total Return
Fidelity Special Situations Series F Canadian Focused Small/Mid Cap Eq. Gold 16.4
CI Can-Am Small Cap Corporate Class F Canadian Focused Small/Mid Cap Eq. Gold 9.2
Fidelity Greater Canada Series F Canadian Focused Small/Mid Cap Eq. Silver 8.9
Dynamic Small Business Canadian Focused Small/Mid Cap Eq. Silver 9.7
Sentry Small/Mid Cap Income F Canadian Focused Small/Mid Cap Eq. Bronze 15.3
Data as of Sept. 28, 2018

Fidelity Special Situations is a 5-star gold-rated fund that has returned 15.1% annualized over 10 years. The fund has with close to 47% of its portfolio holdings in Canadian equity, while an additional 44% is in US Equity. It also has a small percentage of its portfolio in international equity – around 5%. The fund is heavily overweight on technology and healthcare, and is underweight on energy. Since its inception in 2007, the fund has been managed by Mark Schmehl. Though it does not have a sustainability mandate, the fund has a Morningstar sustainability rating of above average. Some of its holdings include Canadian Pacific Railway (CP), Etsy (ETSY), Twitter (TWTR), Shopify and Cenovus.

CI Can-Am Small Cap is the second gold-rated fund on the list. It has 3-stars, and has returned 9.2% annualized over 10 years. The fund has almost 71% in Canadian equity. It has a little over 23% in US equity. It is heavily overweight on energy and financial services, and has significantly underweight positions in consumer cyclicals and industrials. Some of its top holdings include Atco Ltd Class 1 (ACO.Y), E-L Financial Corp, Canadian Western Bank, Macy’s and Alta Gas. It has been managed by Joe Jugovic since 2005, and Ian Cooke since 2015. It has a Morningstar sustainability rating of above average.

Fidelity Greater Canada is a 3-star, silver-rated fund, that returned 8.9% annualized over 10 years. The fund has a high cash holding of over 20%. It holds close to 48% of its portfolio in Canadian equities, and a little over 14% in US equities. It is extremely overweight on consumer defensive and communication services, but has underweight positions in consumer cyclicals, technology and energy. It has a high Morningstar sustainability rating. Some of its top holdings include Alimentation Couche-Tard, Loblaw Companies, Metro, GGP and Chipotle Mexican Grill. Since 2011, it has been managed by Hugo Lavallée.

Dynamic Small Business is the second silver-rated fund on this list and has a 4-star rating. It has returned 9.7% annualized over 10-years. Close to 22% of the holdings are in US equity. The fund is overweight on real estate and consumer cyclicals, and is underweight on industrials, energy and technology. Some of its top holdings include Maple Leaf foods, CCL Industries, Maxar Technologies, Morneau Shepell and Waste Connections. It has multiple managers – Oscar Belaiche has managed it since 2002, with Tom Dicker and Steven Hall managing it since 2014, and finally Vim Thasan joining the management team this year. The fund has an average Morningstar sustainability rating.

Sentry Small/Mid Cap is the only bronze-rated fund on the list. It is a 4-star fund that has returned a little under 14% annualized over 10 years. It has close to 57% of its portfolio in Canadian equity. The fund has overweight positions in industrials and financial services, and has underweight positions in technology, energy and consumer cyclicals. It has a Morningstar sustainability rating of above average. Some of its top holdings include Cargojet, Great Canadian Gaming Corp, TFI International, Liberty Global and Parkland Fuel Corp.

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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