Fund Investing

Why we picked Mawer, EdgePoint and PH&N for top honours.
By Christopher Davis | 28/11/14

Chart-topping performance isn't enough to win one of Morningstar's Fund Manager of the Year awards. If that's all it took, we'd have a pretty easy job: We'd rank funds by their year-to-date returns and give the best performers a trophy. These wouldn't necessarily be deserving winners, though. That's because there's a lot of noise in short-term numbers. A one-year hot streak is often the result of luck or extreme risk-taking.

About the Author
Christopher Davis is Director of Morningstar Research at Morningstar Canada. In this role, he oversees Morningstar’s Canada active fund research analyst team and sits on the Canadian Morningstar Analyst Ratings Committee. He is Morningstar Canada's lead analyst for the Fidelity and Sentry fund families. He also represents Morningstar on the Canadian Investment Funds Standards Committee. Prior to assuming his current role in 2012, he was a senior fund analyst in Morningstar's U.S. office. During his tenure, he led Morningstar's coverage of Fidelity Investments and was the editor of the Fidelity Funds Newsletter. He also served as the lead analyst on several other asset managers including the Baron, FPA, Columbia Acorn, Ariel, and T. Rowe Price fund familes, as well as for the health-care category. His specialties included behavioral finance, income oriented, and tax-managed fund. He also oversaw Morningstar's target-date fund coverage of the Fidelity and TIAA-CREF series. Davis joined Morningstar in 1999 as a data analyst and became a fund analyst in 2000. Davis holds a bachelor’s degree in economics and political science from the University of Illinois Urbana-Champaign.

Although our awards acknowledge strong performance over the past year, no manager wins without having delivered over the long haul. What's more, we won't give them the prize unless we're confident they'll continue to succeed.

We recognize Managers of the Year in three categories: domestic equity, foreign equity and fixed income. Finalists must meet the following criteria:

  • Management's fund (or funds) should be Morningstar Medalists. That is, they've earned a positive Analyst Rating (Gold, Silver or Bronze) from our manager research team, meaning we think the strategy is likely to outperform in the long term. The rating stems from our confidence in management's abilities, the strength and risks of its strategy and the quality of its investment decisions. We also examine risk-adjusted returns and factors such as fund capacity (its ability to buy suitable securities given its asset level) to gauge the likelihood of a finalist repeating its past success.
  • Finalists should have turned in strong numbers in the current calendar year and prior 12-month period. We look for evidence that these returns are consistent with management's strategy.
  • Finalists should also have a history of fundholder-friendly behaviour. For example, we like managers who keep a close watch on their fund's capacity and align their financial interests with those of unitholders by heavily investing their own money in the mandates they oversee.
  • In October, each member of our five-person manager research team presented nominees for all three awards. Analysts presented their rationale for their nominations to the group, which plays a devil's advocate role to ensure nominees are thoroughly vetted and meet the standard for the award. After winnowing down the field to a short list of finalists, the group then chooses a winner in each of the three categories.

    We unveiled our winners at the 20th annual Morningstar Awards on Nov. 26. Below, you'll see the list of finalists and winners.

    Domestic Equity: Investment discipline breeds success

    Finalists: Michael Simpson and Aubrey Hearn, Sentry Canadian Income

    This offering has continued its lengthy winning streak versus the S&P/TSX Composite Index, with yet another market- and peer-beating year. For the first 10 months of 2014, the fund was up 13%, topping the index's 10% gain and the typical Canadian Focused Equity fund's 8% rise. Although the team's focus on stronger-performing large caps gave it a bit of a tailwind, winning picks like Union Pacific Corp. UNP, Loblaw Companies Ltd. L and Tim Hortons Inc. THI primarily drove returns.

    Over the long haul, the fund's performance has been impressive. While they have delivered strong returns in up markets, the managers' focus on quality and income has protected on the downside. As a result, the fund's Sharpe Ratio, a measure of risk-adjusted returns, is the category's highest over the 10-year period.

    One strike against Sentry Canadian Income is its 2.67% management-expense ratio, which is a high hurdle for Simpson and Hearn to overcome. The fund's swelling size – it has grown from $3.4 billion to $5.1 billion over the past year -- could limit management's flexibility. Moreover, with Simpson now leading four Sentry mandates, his plate looks increasingly full.

    Finalists: Stephen Arpin and William Otton, Beutel Goodman Small Cap

    Stephen Arpin and William Otton were part of the Beutel Goodman team that took the Domestic Equity Manager of the Year honours in 2013 for their part in managing Beutel Goodman Canadian Equity. In this go-around, we're acknowledging the duo's success at Beutel Goodman Small Cap, where they've turned in another fine year. While wayward energy and materials picks have hurt many small-cap funds this year, they've been a boon for this fund. Thanks to winners like Paramount Resources Ltd. POU and CCL Industries Inc. CCL.A, the fund returned 8% through October, placing it 2.75% ahead of its rivals in the Canadian Focused Small/Mid Cap Equity category for the year to date.

    The managers have been long-term successes, too. Arpin, who has been aboard since the fund's early 1995 inception, is 3.6% in front of the category average over his tenure. (Otton, who has been on board since 2007, is the relative newcomer.) The fund has done well in rallies, but the strength of the managers' valuation-conscious approach shows in downturns. We expect the managers can stay ahead of the pack, though they'll have to do so while being less nimble; between this fund and its institutional sibling (which is closed to new accounts), Arpin and Otton oversee $1.5 billion -- a formidable sum to put to work in small caps.

    Winner: Martin Ferguson and Jeff Mo, Mawer New Canada

    Ferguson and Mo, finalists in 2013, win top honours this year for their outstanding year at Mawer New Canada. The fund's 16% gain for the year to date through October 2014 sits near the top of the Canadian Focused Small/Mid Cap Equity category. (It's also the highest return of any of our finalists.) Big winners in energy and industrials, such as Canadian Energy Services & Technology Corp. CEU and Stella Jones Inc. SJ, drove the fund's success. Indicative of the team's long-term approach, these winners are hardly newcomers to the portfolio. Stella Jones, for example, was an early 2010 addition.

    Focused on high-quality firms trading at reasonable valuations, Ferguson and Mo share the same sound approach used by their Mawer counterparts. (We recognized Mawer as Analyst Choice Fund Company of the Year in 2013 and 2014 in part to recognize this strength.) While Mo, who has only been co-manager since 2012, is a relative newbie, Ferguson has come to rely on him for his sharp research skills. Mo's valuation consciousness has also improved the fund's sell discipline.

    It's worth noting Mawer New Canada is closed to new investments.

    Foreign Equity: Thinking differently than the crowd pays off

    Finalist: Paul MorozMawer Global Small Cap

    Moroz, our Foreign Equity Fund Manager of the Year in 2013, has fared well enough this year to earn a spot as a finalist. With a 9% gain for the year to date, Mawer Global Small Cap places 2 percentage points ahead of the Global Small/Mid Cap Equity category average. As is typically the case at Mawer, stock selection, not country or sector bets, has driven performance, with big winners like Constellation Software Inc. (CSU) giving the fund a boost.

    Moroz, also Mawer's deputy CIO, is among the most thoughtful managers our analysts speak with. He applies Mawer's trademark house style, which includes a focus on high-quality firms trading at reasonable valuation, to the global small-cap realm. Since the fund's 2007 launch, it has beaten all of its competitors. The fund's size bears watching, but Mawer has stemmed inflows by closing it to institutional investors.

    Finalist: Francis Chou, Chou Associates

    Chou, a past Morningstar Manager of the Decade winner, wouldn't have much looked like a finalist earlier in the year. With a sizable cash weighting, Chou Associates lagged for much of 2014. His fortunes reversed in early October's turbulence, and it continued as the markets perked back up. With a 9% gain for the year to date, the fund is more than 2 percentage points ahead of its Global Equity peers.

    Over the long haul, Chou's record is virtually unmatched. His success isn't by chance. He looks for stocks trading at steep discounts, keeps a highly concentrated portfolio, and will let cash build when he can't find values. (Cash currently makes up about a third of the portfolio.) Chou's idiosyncratic approach means the fund won't move in lock-step with its rivals or benchmark. With no analyst support and little support staff otherwise, Chou is a one-man show. But he's been a show well worth following.

    Winners: Tye Bousada and Geoff MacDonald, EdgePoint Global Portfolio

    In their first nomination for Morningstar Manager of the Year honours, Bousada and MacDonald have come away winners. It's not hard to see why: EdgePoint Global Portfolio's 12% gain through October trounces its typical Global Equity rival by five percentage points. The fund benefited handsomely from its heavy U.S. weighting, especially in financials like Wells Fargo & Co. WFC and tech holdings such as Microsoft MSFT.

    Their fund's late 2008 launch date gave Bousada and MacDonald a golden opportunity to build their portfolio when stocks were trading at ultra-low price tags, paving the way for stellar performance. The fund's five-year return, for instance, beats that of 95% of its peers. The managers, though, are more experienced than their tenure here suggests. Bousada and MacDonald delivered strong results at Trimark (now called Invesco Canada) in the 2000s, and the pair has worked together since 1996. Edgepoint's disciplined investment process and unitholder-friendly ethos seals the fund's appeal.

    Fixed Income: Formidable human and technical resources win the day

    Finalist: John Braive and Patrick O'Toole, CIBC Canadian Bond

    Bonds are a game of inches. The opportunity to earn big returns is small; the best you can do as a bond investor is get your principal back. And whereas stock managers can win with a handful of big winners, bond managers can torpedo a year's worth of returns with a few big mistakes. Fortunately, Braive and O'Toole avoided big mistakes while enjoying enough successes, such as an overweight to strong-performing corporate bonds, to place CIBC Canadian Bond in the Canadian Fixed Income category's top third for the year to date.

    Braive and O'Toole have fared just as well over the long term. We think they can keep up this act thanks not just to their experience but also the above-average resources they have at their disposal. The team benefits from a six-person credit research team -- among the largest in the country -- and strong proprietary quantitative tools to identify opportunities and manage risk.

    Winner: P&HN Fixed Income Team, PH&N Total Return BondPH&N Bond 

    PH&N's fixed-income team used a similar playbook as their CIBC rivals this year, emphasizing rallying corporate bonds as well. The team just executed better: Through October, PH&N Total Return Bond beats 90% of its peers in the Canadian Fixed Income category for the year to date.

    Like its CIBC counterpart, the PH&N team benefits from seasoned managers and analysts. But its technical resources are virtually unrivaled by any Canadian competitors. PH&N's BondLab software allows the managers to precisely tailor their portfolio to their desired risk profile and to anticipate the impact of any trade. Moreover, their portfolio construction tools have helped limit the impact of mistakes, such as holding troubled names like Lehman Brothers in 2008. The PH&N team also gets a substantial advantage from moderate fees. All told, PH&N Total Return Bond beats 80% of its peers over the five-year period, and 90% over the past 10 years.

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