A number of quality funds available from the big six banks!
Mutual funds offered by the big six banks remain some of the favourites among Canadian investors. From being small players a just a few years ago, to major players today, there is no denying that the banks are now forces to be reckoned with in the Canadian mutual fund landscape.
The banks have done this by using their vast network of bricks and mortar branches to focus on the small investors, and by working to build awareness of their funds within the advisor channel. Perhaps the most surprising part of this is how much acceptance the banks have been able to find with independent financial advisors right across the country. They did this the old fashioned way; by building one on one relationships with advisors and having a decent stable of investment products.
While there has been strong growth in their assets, the question remains: are bank funds any good? In the “olden days” their funds were mostly very conservatively managed, index-like funds that played it safe and were lucky to finish in the middle of the pack when measured against their peers. Today, at least at some of the banks, that appears to have changed.
To get an idea of the relative quality of the bank funds, we looked at their performance over the most recent one, three, five and ten year periods and tracked the number of funds that were above average for each bank in each of the various time periods. We excluded any advisor focused offerings offered by the banks, and for RBC we excluded PH&N. We also excluded multiple versions of the same fund and focused on the main series. The results are in the table below:
|
Percentage of Funds with Above Average Returns |
|||||
|
1 Year |
3 Year |
5 Year |
10 Year |
Overall |
|
| Royal |
63% |
55% |
36% |
61% |
54% |
| TD |
49% |
61% |
47% |
52% |
52% |
| BMO |
43% |
49% |
21% |
58% |
42% |
| CIBC |
34% |
42% |
42% |
39% |
39% |
| Scotia |
49% |
35% |
26% |
36% |
37% |
| National Bank |
17% |
27% |
43% |
50% |
33% |
| HSBC |
50% |
11% |
11% |
27% |
25% |
| Returns to February 28, 2013 | |||||
| Source: Fundata | |||||
As you can see, Royal and TD were leading the pack, each with more than 50% of their funds finishing in the upper half of their respective categories. Perhaps coincidentally, these are also two of the banks that have made the biggest inroads within the advisor channel. For comparison purposes, we put three of the larger fund advisor-focused fund companies, CI, Mackenzie and Fidelity, through the same screen. They all fared somewhat better than the banks with Mackenzie having 52% of their funds in the upper half, while CI and Fidelity had 64% and 65% respectively finishing above average.
Next, we set out to identify the best bank-offered funds in a number of categories including core fixed income, Canadian equity, U.S. equity, Global equity and sectors. Our list of the top bank funds follows:
Fixed Income Funds
TD Canadian Bond Fund (TDB 162) – This has been one of our favourite bond funds since we started analyzing mutual funds more than a decade ago. It is run by a great team and is very focused on corporate bonds, has a yield higher than the benchmark and a duration that is lower. This positioning will help it to outperform while interest rates remain stable, and to provide better downside protection when they begin to move higher.
TD Canadian Core Plus Bond Fund (TDB 694) – This is very similar to the TD Canadian Bond Fund with its focus on investment grade Canadian bonds. The difference is this fund can invest up to 30% in tactical strategies such as global bonds and high yield debt. Because of this, we consider it to be a bit higher risk, but we believe that this tactical overlay will allow for improved returns in both a flat and rising interest rate environments.
Some may be wondering how the PH&N Bond Fund and PH&N Total Return Bond Fund would rank if they were considered. The simple answer is it depends on what series you are buying. If you are buying the Series D units directly from PH&N, then they would rate as our top picks. However, if you must buy the higher cost units through an RBC branch or an advisor, then the higher MER erodes any excess return, leaving the TD offerings as our top picks.
Balanced Funds
RBC Monthly Income Fund (RBF 448) – This conservatively managed balanced fund has a proven track record of delivering above average returns with lower than average risk. It has a target asset mix of 55% bonds, 40% equity and 5% cash. It pays a monthly distribution of $0.0425 per unit, which works out to an annualized yield of around 3.8%. The biggest drawback to this fund is it is not available in registered plans.
TD Monthly Income Fund (TDB 622) – With just under 37% invested in fixed income, this balanced fund is more aggressively positioned than the RBC offering. As a result, volatility has been higher, and we expect that to be the case going forward. To date, investors have been rewarded for taking on this additional risk with better long-term returns. Further, with the higher equity weighting, we expect this fund to outperform as rates begin to rise.
Canadian Equity Funds
RBC Canadian Equity Income Fund (RBF 591) – This actively managed Canadian dividend and equity income fund has consistently delivered above average returns with an MER that is in the lower half of the category average. While we don’t expect it to deliver the same absolute level of returns that it has historically, we believe that it can deliver above average risk adjusted returns for investors.
RBC North American Value Fund (RBF 554) – There are many reasons to like this Canadian focused equity fund including a strong management team, a solid investment process and a reasonable MER. The fund is also at a size that the managers should not have any difficulty implementing their process. All things considered, this is a great core fund for most investors.
U.S. Equity Fund
TD U.S. Blue Chip Equity Fund (TDB 977) – As the name suggests, this fund invests in some of the best and biggest companies in the U.S. such as Google, Amazon, and Apple. An interesting bent to this fund is that unlike other blue chip focused funds which tend to be more value driven in approach, it is more growth oriented. As a result, it tends to be a bit more volatile than the S&P 500. Its biggest drawback is the 2.55% MER.
TD U.S. Equity Portfolio (TDB 962) – This is a fund of funds that holds a number of U.S. equity funds that are managed by TD. It provides exposure to both growth and value styles. While the focus is on large caps, there is some exposure to small and mid caps, which currently make up about 15% of the fund. Volatility has been in line with the Index. Performance has consistently been in the upper half of the U.S. equity category. Again, cost is the main drawback, with an MER of 2.59%.
Global Equity
Scotia Global Growth (BNS 374) – The only Scotia offering on our list invests in a diversified portfolio of companies located around the world. The focus is on big companies, but it does have some exposure to midsized names as well. It is more growth focused in approach, meaning that it is likely to be more volatile at times. Performance has been in the upper half of the global equity category for the past five years. The MER is a bit high at 2.57%.
TD Global Dividend Fund (TDB 231) – With its emphasis on dividends, this global equity fund has more of a value tilt than the Scotia offering. It looks for well managed companies anywhere in the world that pay a dividend. Not surprisingly it is heavily weighted towards the more defensive sectors such as consumer staples and healthcare. Performance, particularly the shorter term numbers, has been strong on both an absolute and relative basis. It’s not a cheap fund with an MER of 2.57%.
Specialty / Sector Funds
TD Health Sciences (TDB 976) – This is without a doubt, one of the best healthcare funds in the country. It focuses on companies of any size that are operating in the healthcare sector, with about half the fund invested in large caps. The manager has done a great job of keeping volatility in check, and returns have consistently been above the category average.
CIBC Real Estate Fund (CIB 506) – Investing in a mix of real estate companies and REITs, this has been one of our favourite real estate funds for a while now. Despite lagging both the index and its peers last year, the longer term numbers remain quite strong. Volatility is in line with the average. The biggest drawback is the MER, which is 2.96%.
Bottom Line: There is little doubt that the banks are now a force to be reckoned with in the mutual fund industry. In recent years, a number of banks have shown a marked improvement in their product lineup. Specifically, RBC, TD, and BMO now have a product lineup that can rival many of their advisor sold peers for selection, performance and overall quality. As with all mutual funds, investors are wise to do a bit of research before investing, since not all funds are created equally.