5 sustainable funds for outperformance

These funds have the highest Morningstar Sustainability Rating, as well as the highest Morningstar Quantitative Rating of ‘Gold’

Ruth Saldanha 23 September, 2019 | 1:56AM

5 trees in row

This article is a part of Morningstar Canada’s ESG Special Report week

Canadian equities are having an amazing 2019. The S&P/TSX Composite index is up over 20% year to date, as of the 18th of September. In contrast, the S&P 500 is up only (haha!) 16.5% in Canadian dollar terms for the same period.

But take a step back. Let’s not forget the horror that was the last quarter of 2018. If you factor that in, then for one year, the S&P/TSX Composite is up 8% in total return terms, while the S&P 500 gained a little under 6% from a year ago. Not as great, but not terrible.

It’s worth it to take a look at the funds that have had a great year, just to see what comes up. It is important to note that here at Morningstar, we don’t recommend that investors make decisions solely on quarterly or yearly past performance. Remember, past performance is no guarantee of future returns. Instead, we recommend that investors use a long-term and comprehensive analysis.

With that out of the way, here’s a look at some of the top performing mutual funds in the past year:

Name

1-yr Ret

5-yr Ret

10-yr Ret

MQR

MSR

Mackenzie Precious Metals Cl F

55.98

11.56

2.65

Bronze

Average

CIBC Precious Metals

55.55

1.96

-3.30

Negative

Above Average

TD Precious Metals - F

55.20

5.27

-1.03

Neutral

Above Average

NBI Precious Metals A

54.10

8.18

2.09

Bronze

Above Average

RBC Global Precious Metals F

50.67

10.17

3.82

Gold

Above Average

Data as of 09/18/2019

Notice something? They’re all precious metal funds. That’s probably because gold went from close to US$1200/oz at this time last year, to nearly US$1500/oz a year later. But that’s still less than a 30% increase. What has driven these funds to over 50% returns?

All the top 10 holdings of these funds are in gold mining companies – some of which have done phenomenally well. For example, all these funds hold Kirkland Lake Gold (KL), which has seen an astounding 158% gain since last year. They also hold Barrick Gold Corp (ABX), which is up 78% from last year, and Agnico Eagle Mines (AEM), which is up 73%. Mackenzie Precious Metals, top of the list, also holds Anglogold Ashanti (AU) up 127%.

All of which may give you major envy, but remember, this sector doesn’t always do well. If you look at the five-year performance, all the funds have underperformed the S&P 500, which gained close to 13% (the S&P/TSX Composite was up around 5% for that time), and all significantly underperformed both the S&P 500 (13.44%) and the S&P/TSX Composite (7%) over 10 years.

Which is in line with one of the other myths we busted: You need to invest in gold.

The funds are also all average or above average on our Morningstar Sustainability Rating (MSR). What happens if we look for the best performers that also have a ‘High’ MSR – the highest sustainable rating?

Name

1-yr Ret

5-yr Ret

10-yr Ret

MQR

MSR

Mackenzie US Growth Cl F

14.56

12.86

11.47

Neutral

High

BMO Greater China Class F

13.63

11.94

 

Neutral

High

Desjardins SocieTerra American Equity F

12.17

   

Neutral

High

Canoe International Equity F6

12.02

   

Neutral

High

Sun Life MFS US Equity O

11.91

15.04

 

Gold

High

Data as of 09/18/2019

The funds are all international equity funds – most of them with large U.S. exposures, and one focused on China. Again, past performance is no indicator of future returns. To decide what funds will outperform going ahead, we use Morningstar Quantitative Ratings (MQR). Now let’s take a look at funds that not only have a high MSR, but also the highest possible MQR – Gold. The results are surprising. 

Name

1-yr Ret

5-yr Ret

10-yr Ret

MQR

MSR

North Growth US Equity

7.99

12.69

14.68

Gold

High

Manulife Fundamental Dividend Class FT6

7.46

   

Gold

High

Sun Life MFS US Equity F

10.86

13.84

13.33

Gold

High

CC&L Equity Income and Growth F

9.08

6.51

 

Gold

High

CC&L Diversified Income Portfolio Sr F

7.20

5.59

7.48

Gold

High

Data as of 09/18/2019

Though not outperforming over the past one-year, the funds that have the history have all outperformed both the S&P 500 and the S&P/TSX Composite over both five and 10 years. And the “Gold” rating indicates that we believe these funds will outperform in the future as well.

Two of these funds are U.S. focused, and three are focused on income or dividends. You notice what’s missing, though? Sector funds like Cannabis, or Bitcoin, or Gold.

You can find our page on Sustainability here

Securities Mentioned in Article

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca