Characteristics of Success in Funds

Some traits were found to have an edge year-to-date, using Morningstar's Factor Profile to map out mutual funds

Ian Tam, CFA 8 July, 2020 | 1:39AM

 

 

Ian Tam: As we pass the halfway point of 2020 and celebrate Canada's 153rd birthday, many investors are likely still recovering from the effects of the global pandemic that's really wreaked havoc on the economy and on your portfolio. But through all this volatility very few equity funds have been able to provide positive returns to investors and today we'll use Morningstar's factor profile to show you the characteristics of equity funds that have been up to that task.

As a quick reminder, the Morningstar factor profile can be thought of as an extension of the Morningstar Style Box. However, instead of two dimensions, style and size, the factor profile uses seven dimensions, each one pertaining to a characteristic of the underlying equity portfolio. Each capsule in the profile ranks a fund's holdings against a global universe to help you understand where the fund sits. For example, if we take a look at the first two capsules on the screen here, we can see that the Franklin Global Growth Fund indeed shows a tilt towards growth but pays a lower yield relative to the universe and to the category to which it belongs.

To help understand the characteristics of some of the best-performing funds, I ran a screen on Morningstar Direct to find all the 5-Star funds that have shown a positive performance year-to-date here in Canada. What I found was that there are 98 Canadian-domiciled equity funds that meet this criterion. You will see here by looking at the Morningstar category of each of these funds that the vast majority are global equity funds or U.S. equity funds.

If we take an average of each of the factor profile scores across these 98 funds, we can start to understand the characteristics of these funds as a group. For example, the average style rank amongst these 98 funds is 13.5%, showing a clear tilt towards growth. The average yield rank across these funds is about 83.6%, showing that the holdings across the funds providing lower yields than the broad universe.

Unfortunately, dividend investors are likely disappointed this year. The tables that we just saw show that the majority of the top-performing funds on a year-to-date basis actually don't really pay much of a yield and are growth tilted which might leave some conservative investors in the dust. This said, conservative investors are reminded that styles like value and growth are going to go in and out of favour over time. But your path to financial success is dependent on sticking close to an investment strategy or investment philosophy that is tied closely to your risk appetite.

For Morningstar, I'm Ian Tam.

About Author

Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

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