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Differentiating performance: multi-year FundGrade A+® Award winners
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The Analyst’s Desk
Informative and authoritative articles on the world of investment funds from Fundata’s Investment Analytics and Research team.

By Reid Baker  | Tuesday, March 27, 2018



The incredible bull run in stocks over the past few years took a few steps back in February and March, after most major indices pushed through all-time highs in January. Since the end of January, we’ve seen the provocation of global trade wars and talk of several interest rate hikes in the coming year. This may signal at least a short-term end to the good times. Looking for investment products to carry through volatile times can be challenging during any scenario, especially when the historical performance consists primarily of a bull market. The FundGrade A+ rating can help.

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 run.

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 around 5%.

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 returns.

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 impressive.

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 below.

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 the Canadian Investment Funds Standards Committee (CIFSC).

Notes and Disclaimers

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, management fees, and expenses all may be associated with exchange-traded fund (ETF) investments. Please read the simplified prospectus before investing. ETFs are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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