It is pretty tough for a U.S. large cap fund to outpace the S&P 500, but this fund did that in 2015, and has for the past five years. While the S&P 500 has earned an annualized 20% for the past five years, this fund is up more than 21% (in Canadian dollar terms).
As impressive as these numbers are, I wouldn’t bet on them being sustainable over the long term. While the manager uses a fundamentally driven, bottom up investment process, it has a decided growth focus to it. Growth has been in favour recently, but in time, market leadership is expected to shift to more value focused names, resulting in some underperformance from this offering. Also, a significant decline in the value of the Canadian dollar relative to the U.S. greenback has boosted absolute numbers. While there may be some further weakness in the Canadian dollar, it is unlikely we will see the returns repeated.
It is currently overweight healthcare, tech, and consumer discretionary. These sectors have had a tremendous run, pushing the fund’s valuation metrics to the high side, with price to earnings, price to cash flow, and price to book ratios that far exceed the index and peer group. The flip side of this is these sectors also shows the strongest rate of earnings growth, both on a historical and forward looking basis. Factoring in the growth projections of the underlying portfolio, it may not be as overvalued as appears in isolation.
Another concern I have is the fund tends to be significantly more volatile than the broader market and its peers. For the past five years, the S&P 500 has had a standard deviation of 9.2%, while the fund was 12.0%. It tends to outperform when the index is positive, but underperforms by a greater margin when it falls.
Looking ahead, I still believe this will be one of the stronger U.S. equity funds over the long term. That said, I think you are better off using a low cost index product that tracks the S&P 500, more often than not. For that, I would look at the TD U.S. Index Fund (TDB 661 –No Load Units), which track the S&P and has a 0.55% MER. Alternatively, you could use the currency hedged version (TDB 655). It costs a bit more at 0.89%, but will take currency moves out of the equation. If you prefer an ETF, XSP or XUS are excellent options too with very low MERs.