The best equity funds for a rising market
In our September edition, we looked highlighted a number of core equity funds that provided investors with the best downside protection for when markets we falling. In this edition, we have scoured the mutual fund universe to find some of the funds that provide the best opportunity for strong gains when markets move higher.
Looking at the historic returns of the S&P 500 dating back to January 1950, we see that it is September and October which have historically been the worst months for investors. September has typically produced the lowest average returns, while October has been the most volatile. What the chart also shows is that based on history, November and December have been some of the most rewarding months for investors.
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Performance of the S&P 500 from January 1950 to July 2012 |
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|
Average Monthly Return |
Worst Monthly Return |
Best Monthly Return |
Range of Returns |
Standard Deviation |
|
| January |
1.10% |
-8.57% |
13.18% |
21.74% |
4.88% |
| February |
-0.12% |
-10.99% |
7.15% |
18.14% |
3.54% |
| March |
1.18% |
-10.18% |
9.67% |
19.85% |
3.40% |
| April |
1.49% |
-9.05% |
9.39% |
18.44% |
3.86% |
| May |
0.14% |
-8.60% |
9.20% |
17.80% |
3.75% |
| June |
-0.02% |
-8.60% |
8.23% |
16.83% |
3.49% |
| July |
0.96% |
-7.90% |
8.84% |
16.74% |
4.11% |
| August |
-0.04% |
-14.58% |
11.60% |
26.18% |
4.67% |
| September |
-0.57% |
-11.93% |
8.76% |
20.69% |
4.54% |
| October |
0.78% |
-21.76% |
16.30% |
38.07% |
5.65% |
| November |
1.52% |
-11.39% |
10.24% |
21.62% |
4.41% |
| December |
1.71% |
-6.03% |
11.16% |
17.19% |
3.17% |
Source: Yahoo Finance
That is not to say that we expect the markets to be “clear sailing” from here on in. In fact, it is quite the contrary. There is still a significant amount of headline risk that continues to overhang the markets. Much uncertainty remains regarding the European debt crisis. Recently, France and Germany have expressed differences of opinion on how the situation should be remedied. This further adds to the uncertainty. Another source of concern is the slowdown in China, which will continue to hang over the markets, dragging economic growth levels downward.
Fortunately, September has been a relatively peaceful month in the markets. October however, is historically the most volatile. We expect that to be the case this year. Once we get into November and December, we would expect that things will settle down.
With that in mind, we went out to find the best equity funds to hold when markets do rise higher. To determine this, we looked at a measure which is known as the “Upside Capture Ratio.” This looks at the historic performance of a fund in markets when the broader indices rose and compares the fund’s performance to the benchmark. Those funds which have a higher upside capture ratio are preferred to those with a lower ratio because they posted gains that were higher than the market.
In ranking our fund universe, we looked at the performance for the most recent 60 month period ending August 31, 2012. Only funds that had a five year track record were included in our search.
Our list of the funds with the best upside capture ratio is:
| Fund |
Fund Type |
Upside Capture Ratio |
Best Monthly Return |
| TD Entertainment & Communications Fund |
Global Equity |
145.74% |
10.61% |
| Dynamic Power Global Growth Class |
Global Equity |
137.07% |
14.81% |
| Black Creek Global Leaders Fund |
Global Equity |
128.20% |
9.09% |
| Northwest U.S. Equity Fund |
U.S. Equity |
125.34% |
12.95% |
| Dynamic Power American Growth Fund |
U.S. Equity |
124.85% |
11.92% |
| Dynamic Power Canadian Growth Fund |
Canadian Focused Equity |
124.18% |
14.49% |
| Mac Cundill American Class |
U.S. Equity |
123.13% |
13.61% |
| Harbour Foreign Equity Corporate Class |
Global Equity |
122.40% |
16.38% |
Source: Paterson & Associates database, Fundata
TD Entertainment & Communications Fund (TDB 652) – This is a neat little fund that invests in companies that are involved in the entertainment, media and communications industries. It is classified as a global equity fund, but definitely not for the faint of heart given the narrowness of its mandate and the potential for very high levels of volatility. We don’t see a problem adding a bit of this fund into your portfolio as a way to boost returns, but would not suggest it be used as a core global equity holding for most investors.
Dynamic Power Global Growth Class (DYN 014) – For investors looking for a little bit of kick to their portfolios, this is a good fund to consider. It is managed by Noah Blackstein using a high turnover, concentrated approach. He uses a quantitative screen that looks to identify companies that are showing strong earnings momentum and have a history of upside earnings surprises. Turnover is high, averaging well north of 300% per year for the most recent five year period. Like most Power branded funds, this is not for everybody given it’s volatility that is substantially higher than the broader market. For those who can accept the risk, this fund has the potential to deliver strong gains in rising markets.
Black Creek Global Leaders Fund (CIG 11106) – Of the funds that we have looked at so far, this is the first that we would be comfortable recommending as a core holding for most investors. While the others have offered better upside participation, they have also been considerably more risky. This fund, managed by the team of Bill Kanko and Richard Jenkins has a go anywhere mandate and can invest in companies of any size. It is concentrated, holding between 20 and 25 names and the managers aren’t afraid to invest in stocks that are considered “off the beaten path.” They focus on companies that have the ability to grow, but are careful not to overpay for this growth. Performance has been strong since they took over the fund in 2006 and except for 2011, it has outperformed the index in every year. An added bonus is that both managers have a significant amount of their personal money invested in the funds, which puts them on the same side of the table as investors. A downside to their process is that with the concentrated nature of the fund, it can be more volatile than more diversified funds. For investors with a long time horizon and a medium or higher risk tolerance, this is a good pick over the long term.
Northwest U.S. Equity Fund (NWT 132) – While this fund may be a great performer in rising markets, its drawback is that it is also a very poor performer when markets are falling. In fact, based on our analysis, it has lost more than it has gained by a substantial margin, with a down capture ratio of more than 145%. Managed by Richard Fogler using a process that looks to identify companies which they believe will add shareholder value over the long term. Unfortunately the fund has largely underperformed, posting a five year return of -3.4% while the S&P 500 gained 1.5% per year during the same time period. Despite the strong performance in rising markets, we believe that there are better options available in the U.S. equity category.
Dynamic Power American Growth Fund (DYN 004) – This is the second of three Power branded funds on our list. It is managed by Noah Blackstein in a way that is very similar to the Dynamic Power Global Growth Class Fund – a very high turnover, high conviction process. Perhaps the biggest difference between the two funds is that this one is focused solely on the U.S. market. While the fund is classified as a U.S. equity fund, we would be reluctant to recommend it as a core holding for most investors for a few reasons. First, it is heavily concentrated in the technology sector. As of August 31, more than half was invested in technology. Second, it is highly volatile, with a standard deviation that is more than 1.65 times the broader market. While these may prevent it from being a core holding, we believe that it can be a nice addition to a well diversified portfolio as a way to provide additional return. Before adding it to your portfolio however, make sure you are comfortable with the potential risk.
Dynamic Power Canadian Growth Fund (DYN 052) – With a level of volatility that is more than 1.7 times the broader Canadian equity market, this is not a fund that should be considered to be a core holding for any investor. Granted, it does have a history of performing well in up markets, but it has also taken its lumps in falling markets. After the sharp declines in 2008, long serving manager Rohit Seghal has made some tweaks to his investment process that has the potential to reduce the overall volatility in the fund. For example, he is now looking for more opportunities outside of Canada, with nearly 40% invested globally as of August 31. Despite these changes, we would still be hesitant to suggest this fund be used by anyone other than those investors who have a very high tolerance for risk.
Mac Cundill American Class (MFC 1588) – Managed using Cundill’s deep value, high conviction process, this fund looks for U.S. based companies that are out of favour, trading at deep discounts to their estimate of its true worth. Like other Cundill funds of late, it has struggled, dramatically underperforming not only the index, but also its peer group. It was crushed in 2008, dropping nearly 40%, but in 2009 and 2010 rose sharply recapturing most of the losses. While we are big believers in the deep value style used by the managers, it is our opinion that there are much better U.S. equity choices available for longer term investors
Harbour Foreign Equity Corporate Class (CIG 1413) – Despite a level of volatility that is higher than both the category average and the MSCI World Index, this is a global equity fund that can easily be considered a core holding for most investors. Managed by the team of Stephen Jenkins and Gerald Coleman, this concentrated fund looks for well managed, financial sound, industry leading companies that are trading at a significant discount to its intrinsic value. Unlike a number of the other funds we have looked at which are managed using a very active style, the managers of this fund take a much longer term outlook, which has resulted in more modest levels of portfolio turnover. Performance has been decent finishing in the upper half of the category every year since 2006 except for 2008. Costs are reasonable with an MER of 2.44%, which is well below the category average. All things considered, this is a great core global equity holding for most investors.
Bottom Line: If one simply looks at the upside capture ratio, there is little doubt that these funds look very attractive to anyone. However, the reality is that while they can provide great returns when markets are moving higher, most will also hurt you on the way down. Out of the eight funds presented here, there are really only two that we would consider to be suitable as a core holding in a portfolio; Harbour Foreign Equity and Black Creek Global Leaders. While some of the others may have a place in a well diversified portfolio, they should be approached with caution. In our opinion, they are best used sparingly in a portfolio as a way to add some incremental return. Overall exposure should be limited for investors except those with the highest risk tolerance.