Five Canadian equity large-cap funds likely to outperform

These gold-rated mutual funds have surpassed the S&P/TSX Composite over 15 years.

Ruth Saldanha 3 October, 2018 | 5:00PM

Most of us love to hear about get-rich-quick schemes that will double our investment overnight. The allure of these propositions increases when the underlying idea is new, or complicated, or sounds like a sure bet, backed by technology or endorsed by several of our peers. Some of these ideas that have become popular recently include cryptocurrencies, marijuana and gold.

However, for consistent long-term financial health, sticking to the ideas that have worked over several investment cycles and have proven track records is usually the best bet.

One of these ideas is Canadian large cap equity. As of Sept. 28, the S&P/TSX Composite Index has returned 3.9% from a year earlier, and just under 1% for the year to date. Over a longer timeframe, however, the S&P/TSX Composite Index has produced a total annualized return of 8% over the past 15 years.

At Morningstar.ca, we recently launched our Morningstar Quantitative Rating system, that assigns ratings to funds that we believe will outperform in the future, based on various metrics including price, portfolio and performance. There are over 180 large-cap-focused funds spread among the Canadian Equity, Canadian Focused Equity and Canadian Dividend & Income Equity categories that have the highest possible rating of Gold.

To narrow down the search, we looked at the total annualized returns the funds gave over a 15-year period. It is important to note that past performance does not necessarily indicate the expected returns in the future, but the gold-rated funds are more likely to outperform than their peers, according to the Morningstar analysis methodology.

In the Canadian equity large-cap space, two-dozen gold-rated funds have outperformed the index. Here we look at the top five of these funds in some detail.

Name Category Quantitative
Rating
15-Year
Total Return
Fidelity Canadian Growth Company Sr F Canadian Focused Equity Gold 12.3
Fidelity Canadian Large Cap Sr F Canadian Focused Equity Gold 11.9
RBC North American Value Sr F Canadian Focused Equity Gold 10.9
Mawer Canadian Equity A Canadian Equity Gold 10.4
Manulife Dividend Income Plus Class F Canadian Focused Equity Gold 10.4
Data as of Sept. 28, 2018

Fidelity Canadian Growth Company, a 5-star gold-rated fund, has returned 12.2% annualized over 15 years. It currently holds around 48% in Canadian equity and around 45% in U.S. equity. It is heavily overweight on technology, and also overweight on consumer cyclical. The fund has been managed since 2011 by Mark Schmehl. Some of its top holdings include  Canadian Pacific Railway (CP),  Suncor Energy (SU),  Canadian Natural Resources (CNQ),  Twitter (TWTR) and  Etsy (ETSY). Though it does not have a sustainability mandate, the fund has a Morningstar Sustainability Rating of average.

Fidelity Canadian Large Cap is a 4-star rated fund that has returned nearly 12% annualized over 15 years. The fund has over 50% of its assets in Canadian equity, while international equity accounts for a little over 9%. It holds about 7.3% in cash. This fund also has an allocation to precious metals through a 9.5% position in SPDR Gold Shares (GLD). The fund is overweight on consumer defensives, communication services and technology, and has underweight positions in financial services and industrials. Some of its top holdings are Imperial Brands (IMBBF),  Rogers Communications (RCI.B),  Fairfax Financial Holdings (FFH) and Thomson Reuters (TRI). The fund has been managed by Daniel Dupont since 2011.

RBC North American Value has returned close to 11% annualized over 15 years. The 5-star fund has close to 58% of its assets in Canadian equity and another 34% in U.S. equity. It has overweight positions in financial services and energy, and has underweight positions in industrials and technology. Three of its top holdings are banks: The  Toronto-Dominion Bank (TD),  Bank of Nova Scotia (BNS) and  Royal Bank of Canada (RY). Other holdings include  Suncor Energy (SU) and  Canadian National Railway (CNR).

Mawer Canadian Equity is a 5-star rated fund that has returned 10.4% annualized over 15 years. The fund is a pure play on Canadian equities, with more than 96% of its assets in domestic stocks. Managed by Jim Hall since 1999 and Vijay Viswanathan since 2011, the fund has overweight positions in the financial services, industrials, communication services and technology sectors. Some of its top holdings include  Toronto-Dominion Bank (TD),  Royal Bank of Canada (RY),  Canadian Pacific Railway (CP), Brookfield Asset Management (BAM.A) and  Suncor Energy (SU). Though it does not have a sustainability mandate, the fund has a Morningstar Sustainability rating of average.

Manulife Dividend Income Plus has returned 10.3% annualized over 15 years and is rated 5-stars. It holds close to 58% in Canadian equity, while U.S. equity accounts for close to 24% of its assets. The fund is heavily overweight on consumer cyclicals and technology, and holds underweight positions in financial services.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Nova Scotia74.47 CAD-0.67
Brookfield Asset Management Inc Class A69.93 CAD-1.81
Canadian National Railway Co121.01 CAD-1.08
Canadian Natural Resources Ltd37.97 CAD12.84
Canadian Pacific Railway Ltd306.64 CAD0.92
Etsy Inc57.84 USD1.72
Fairfax Financial Holdings Ltd Shs Subord.Vtg587.49 CAD-1.20
Imperial Brands PLC27.25 USD1.45
Rogers Communications Inc Class B66.83 CAD-0.92
Royal Bank of Canada105.39 CAD0.13
Suncor Energy Inc42.99 CAD6.54
The Toronto-Dominion Bank75.27 CAD0.08
Thomson Reuters Corp87.70 CAD-1.32
Twitter Inc42.76 USD0.30

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca