Over the last decade, millions of Canadian investors have pivoted away from high-fee mutual funds and put their retirement savings into exchange-traded funds (ETFs).
The main reason for this shift is, of course, fees. Countless studies have confirmed that most mutual funds cannot beat their benchmark indexes over the long term, mainly because their high fees drag on performance.
If a fund returns 10% per year but charges a 2% management fee, total returns fall to 8%. A fund must beat its index by at least the amount of its management fee to post a net return higher than the market. That's a tough ask, even for top finance professionals.
Do Canadians still invest in mutual funds?
Many Canadians still have the bulk of their wealth in mutual funds. Financial advisors, especially those working at big banks, often sell these investment products. Investors know they have to get into the stock market, and these advisors can make it happen relatively painlessly.
Financial advisors also provide other valuable services to investors, including tax advice, financial planning, and estate preparedness. In many instances, these services are partially paid for by trailing commissions on mutual fund investments.
Mutual funds do offer some nice perks
Investors can see their net asset value (NAV) and performance anytime. Redemption features offer liquidity for folks who'd like to cash out at any point. And, as previously mentioned, financial advisors make buying these funds much more accessible than a do-it-yourself approach.
Although most mutual funds don't beat the market, a select few have a demonstrated ability to outperform their benchmarks. These funds aren't easy to find and sometimes aren't even open to new investors. Still, they exist and can be a powerful tool to help Canadian investors build their wealth.
Let's look at 10 of these mutual funds, hidden gems that have helped investors build wealth over the long term.
What are the best mutual funds in Canada?
- CI Canadian Dividend Fund Series F
- Mackenzie Bluewater Canadian Balance Fund Series F
- AGF Global Select Series F
- Blue Bay Emerging Markets Corporate Bond Fund
- Mawer Global Equity Fund
- RBC Life Science and Technology Fund Series F
- TD U.S. Mid-Cap Growth Fund Class F
- Dynamic Canadian Dividend Series I
- North Growth Canadian Equity Fund Series F
- PH&N Small Float Fund Series F
CI Canadian Dividend Fund Series F
10-year annual return: 10.41%
Index 10-year annual return: 7.61%
Many mutual funds can outperform over a year or two, but keeping it up for a decade requires a special skill. The CI Canadian Dividend Fund has achieved just that.
The fund invests in Canadian and U.S. equities, with about 80% of assets invested in local stocks. It has handily beaten its benchmark index over the last decade, even after investors pay the 1.33% management expense ratio (MER).
One of the main things that separate this fund from the many others that invest in dividend stocks is how concentrated the portfolio is. The fund holds just 42 different stocks, while the typical peer would hold hundreds. Many of these top holdings have been held for years, benefiting investors by loading up on excellent companies and patiently waiting for these proven winners to deliver returns.
Investors who want to invest in this fund can do so with just a $500 initial investment.
Mackenzie Bluewater Canadian Balance Fund Series F
10-year annual return: 9.56%
Index 10-year annual return: 7.60%
IGM Financial, the parent group of IG Wealth Management, owns Mackenzie Financial. Many investors have a poor opinion of IG -- previously known as Investors Group -- because its army of investment advisors has a reputation for selling underperforming funds with high fees.
This fund is a perfect example of why investors need to dig deeper when looking for good mutual funds.
The fund is invested in a mixture of Canadian stocks and bonds with a mix of approximately 60% stocks and 40% fixed income. It also has a small number of assets invested in international markets.
Although past performance does not guarantee future returns, investors should be encouraged by this fund's long history. It has been around since 1999 and has delivered solid returns even as it has grown to $5.4B in assets. The management fee is under 1%, too.
Finally, I'd like to mention Dina DeGeer, the head portfolio manager of the fund. Since its inception, she has steered the fund and was recently named one of the world's top 30 female fund managers, beating out nearly 1,800 competitors. Morningstar also agrees; they rank this fund as one of the best Canadian balanced funds.
AGF Global Select Series F
10-year annual return: 16.49%
Index 10-year annual return: 11.53%
AGF Global Select is a global equity fund, giving investors instant diversification to many different countries around the globe. Approximately 50% of assets are invested in the U.S., while Canadian equity is just 2.7% of total assets. The rest is invested in Europe, Asia, and Latin America jurisdictions.
This fund got off to a lacklustre start after launching in 2000, dropping more than 50% in the 2002-03 bear market. It also declined during the 2008-09 financial crisis. But it has delivered excellent returns since, beating its benchmark index by nearly 5% annually over the last decade. It has continued to provide solid returns even after growing substantially. These days, the fund has more than $3B in assets. It also has a 1.22% MER, although larger investors qualify for a discount.
This fund requires only a $500 investment and a minimum of just $25 for subsequent investments.
Blue Bay Emerging Markets Corporate Bond Fund
10-year annual return: 1.97%
Index 10-year annual return: 1.53%
Blue Bay is a London-based asset manager primarily managing European fixed-income debt. Its products have been available in Canada for over ten years after the Royal Bank of Canada acquired it.
Although the return of this fund doesn't seem that impressive at first glance, it has performed admirably. Most bonds don't offer much in yield, meaning even a small outperformance is impressive on a percentage basis.
And remember, this fund charges a 0.92% MER. This outperformance is incredibly impressive, considering fees took approximately a third of total returns.
Most assets are invested outside North America, giving investors extra diversification.
Mawer Global Equity Fund
10-year annual return: 12.51%
Index 10-year annual return: 11.53%
Based in Calgary, Mawer is an independent asset manager with a simple mandate. It seeks to deliver solid long-term returns by investing in portfolios of steady, unspectacular stocks. Mawer's slogan is Be Boring. Make Money.
The Mawer Global Equity fund follows that slogan to a T. It's stuffed with boring stocks from around the world, the kinds of understated companies that appear in your everyday life. Top holdings include Johnson & Johnson, Microsoft, and Alimentation Couche-Tard, the convenience store giant.
The fund can easily be purchased from any Canadian online brokerage with a low minimum initial investment of just $500. It is RRSP and TFSA eligible, too.
Most importantly, the Mawer Global Equity fund has beaten most comparable equity funds over the last decade and since its 2009 inception by approximately 1% per year after expenses. There's no guarantee this historical annual outperformance will continue. Still, a long history of good results is usually a good sign.
RBC Life Science and Technology Fund Series F
10-year annual return: 18.82%
Index 10-year annual return: 15.07%
One reason investors have been flocking to NASDAQ stocks -- rather than more boring names on the TSX or S&P 500 -- is that NASDAQ stocks have delivered better returns over the last decade. Tech stocks have benefitted the most from a strong economy and increased optimism.
Despite going up against an index that delivered 15%+ returns each year for the last decade, the RBC Life Science and Technology Fund has handily beaten its benchmark by almost 4% each year. A 4% beat might not seem like much, but it adds up over time.
Two downfalls to this fund are it tends to perform much worse than safer investments when market sentiment turns negative, and its 0.94% management fee eats up any dividends generated by the fund. These haven't hurt long-term returns in the past but could be going forward.
TD U.S. Mid-Cap Growth Fund Class F
10-year annual return: 14.63%
Index 10-year annual return: 13.36%
Many investors make small and mid-cap stocks a core component of their portfolio, buoyed by these smaller companies' traditionally delivered better returns than their larger counterparts. These companies are often underfollowed and are a fertile hunting ground for good mutual fund managers.
Investors pay an elevated management fee for this expertise, with this fund charging a 1.13% MER. But they're getting good long-term value, with the fund consistently delivering returns higher than its benchmark.
A closer look at this fund reveals top holdings in boring, unfamiliar names like Hologic Inc., Ingersoll-Rand, and Textron Inc. Even active investors can learn a thing or two from this fund.
You'll need a mere $100 to begin investing in this fund, and it can easily be purchased through your online broker.
Dynamic Canadian Dividend Series I
10-year annual return: 10.77%
Index 10-year annual return: 7.89%
Many retirees turn to dividend mutual funds and ETFs to help convert their hard-earned savings into the income they need to pay their bills. The problem is figuring out the best names in a sea of mediocre funds.
One of the best funds in this space over the last decade (and more) has been the Dynamic Canadian Dividend Fund, a conservatively managed fund stuffed with some of the best companies in Canada. Top holdings include Toronto-Dominion Bank, Power Corporation of Canada, and Enbridge.
This fund is designed to pay a generous dividend and has delivered. The current yield is just a hair under 5%, and this fund has a minuscule 0.08% MER, meaning most of that income flows to investors.
North Growth Canadian Equity Fund Series F
10-year annual return: 11.52%
Index 10-year annual return: 4.85%
The Canadian small and mid-cap space is a fertile hunting ground for skilled managers, with many outperforming the lacklustre TSX Composite Index by massive amounts over long periods.
Like the PH&N fund profiled earlier, the North Growth Canadian Equity Fund follows a similar strategy. It runs a concentrated portfolio filled with small stocks that offer solid growth opportunities trading at reasonable valuations. It's completely different from the top-heavy index and can lead to massive outperformance.
This is a small fund, with just under $70M in assets and a 0.70% MER. Note the fund company has a mandate that all fund managers must personally invest in their funds, an investor-friendly provision this writer thinks every fund should have.
PH&N Small Float Fund Series F
10-year annual return: 11.84%
Index 10-year annual return: 4.85%
No, that's not a typo. The PH & N Small Float Fund beat its index by nearly 7% annually.
To put that outperformance into perspective, $10,000 invested in the index a decade ago is worth just $14,096. The same investment in the fund is worth more than $32,000. This fund has also posted stellar returns since its 2002 inception, growing the portfolio by 10.1% annually.
The fund uses a couple of different strategies to generate these stellar returns. It takes concentrated positions in top holdings, with approximately half the fund's assets in its top 10 holdings. It also is much more likely to invest in smaller Canadian stocks. At the same time, its index has a significant weighting towards larger names.
One last note -- this fund is only for Royal Bank clients. The management fee is then negotiated depending on how much is invested.