Most sectors and asset classes were in on the fun over the past eight or
nine years, making it difficult to differentiate one manager from the next
and tough for a fund to outperform. What I mean by that is that the gap
between top- and bottom-performing funds gets closer together during a bull
In the following graph, the black line shows the difference in one-year
returns between first-quartile equity funds and the mean. The red line
represents the difference between fourth-quartile equity funds and the
mean. Over the past 20 years, the lines have gotten closer together, with
increased separation in 2008-09. In fact, in 2017, the difference between
the first quartile and the mean was the smallest it’s been in 20 years, at
With the margin for outperformance getting smaller, it’s hard to identify
top-performing funds by looking only at returns. This makes it even more
important to look at volatility and downside protection combined with
The recent market correction saw a 10% drop in the
S&P 500 Composite Index and just over 8% in the
S&P/TSX Composite Index, and many analysts think there is more volatility to come in the near
future. It’s the risk-adjusted performance that really differentiates the
funds that will outperform in all markets, and that’s where Fundata’s FundGrade
and FundGrade A+®
ratings come in. The average 5-year maximum drawdown for A+ funds is 8.8%,
while the 5-year drawdown for non-A+ funds is 11.2%. That’s the kind of
downside protection that investors will be looking for in coming years.
This past January, as in each of the past six years, Fundata handed out
FundGrade A+ Awards to funds that produced consistently high FundGrade
scores through the calendar year of 2017. Each year, A+ funds represent
about 6% of the eligible universe, so it’s tough enough to make the cut,
but it’s the funds that repeat as winners every year that are most
There are 21 funds that have won the award in each of the six years since
Fundata debuted the A+ Awards, the full list can be found in the table
Of this group of 21 funds, 12 are equity funds, and the average 5-year
maximum drawdown for the equity funds is 10.3%. To put that in perspective
the 5 year max drawdown for the TSX Composite is 17.9%. The average
downside capture of these 12 equity funds is 0.66, while the average
downside capture for non-A+ funds is 0.92. This means that the 12 equity
funds on this list are avoiding losses 28% more often than non-A+ funds
when the market is down.
This is the sort of downside protection that any investor should be looking
for in a manager, especially during times of rising interest rates, the
threat of global trade wars, and rising geopolitical uncertainty.
Reid Baker is Director, Analytics and Data, at
Fundata Canada Inc., a leading source for investment fund information, and is Chairman of
Canadian Investment Funds Standards Committee (CIFSC).
Notes and Disclaimers
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is for general information purposes only and is the opinion of the writer.
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