Fund Investing

Morningstar helps you build a portfolio using global, U.S., international, and emerging market equity, and fixed income and balanced mutual funds
By Shehryar Khan, CFA | 11/03/19

Investors should approach planning for their retirement the same way they would for a long road trip. Anyone who has driven a vast distance knows that choosing the vehicle that will get you where you need to go is a critical decision. A convertible may be the sexy choice, but chances are it isn't as practical as an SUV.

About the Author
Shehryar Khan, CFA, is a senior investment analyst for Morningstar’s Investment Management group. Before joining Morningstar in 2014, Khan worked for Segal Rogerscasey Canada for three years as an analyst and then associate. He was part of a team responsible for Canadian fund manager research and investment consulting. Khan holds a bachelor’s of commerce degree in finance from Concordia University in Montreal. He also holds the Chartered Financial Analyst® designation.

Over the course of their life, investors will face the financial equivalent of the many detours, rain and snow storms, dead-ends and traffic jams, that they would on the road. Therefore, their choice of vehicle needs to not only be strong enough to get them to their destination, but also sturdy enough to withstand the numerous obstacles (and there will be many) that will be faced along the way.

Younger investors who have a long time-horizons should prioritize investing in funds that will provide steady capital appreciation. A sportscar may not be everyone’s cup of tea, so make sure you don’t take on more volatility than you can handle.

When it comes to investors who are closer to (or perhaps already in) retirement, always think safety first. But as we all know, the safest of cars can still move pretty fast, and today’s environment of low interest rates, combined with the fact that people are living longer, the old mantra of just sticking to bonds will likely mean investors will exhaust their funds long before they pass away. As such, a reasonable amount of equity exposure is still not only reasonable, it may be necessary.

For those of us who prefer that someone else takes the wheel, allowing them to enjoy the scenery, a balanced fund makes sense. For those who prefer to be the ones doing the steering, building a best-of-breed portfolio can have its benefits, but will also require vigilance.

Cost is also a significant factor; younger investors who are starting out by investing small amounts can consider the efficiency of their choice so that their costs don't eat into the spending they plan to do when they reach their destination. It's worth examining whether they would be well-served by using low-cost ETFs as their vehicle of choice.

Additionally, a portfolio should be diversified and its success should not rest with one single region -- therefore investing globally makes sense. Also, a longer-time horizon allows for an investor (if they are willing) to take on slightly more volatility, so some small- and mid-cap exposure might also be of benefit.

Now that we know what we're looking for, here are some funds worth considering as the core of your portfolio for the long-term that will, in our opinion, be your best bet to get to your destination.

Global Equity
Edgepoint Global Portfolio
As mentioned previously, a longer-term time horizon makes it sensible to consider a global option for the equity portion of the portfolio. Managers Geoff MacDonald and Tye Bousada target market-leading firms with strong competitive advantages that are run by managers with proven records of good capital allocation. Most importantly, the managers want to only invest in firms into which they believe they have a unique insight. Their all-cap approach and willingness to ignore the benchmark has led to tremendous success. Many rivals share similar approaches, but the team's disciplined execution and focus on the long term has resulted in a track record that is among the top in the category.

Black Creek Global Leaders
The investment team at Black Creek Investment Management is focused on identifying “winning” businesses, businesses that are (or will be) market leaders that gain significant market share with significant barriers to entry. This focus may be shared by other investment managers, but Bill Kanko and the rest of the team are more contrarian than most, building concentrated portfolios that look, and consequently behave, quite differently from the benchmark, the MSCI World Index. Long-term, patient investors who are looking for differentiated global equities to include in their portfolio will be well-served by the Black Creek Global Leader’s fund, although costs take the gloss off this otherwise top-notch offering.

A drawback of a global equity fund is that the manager’s stock selection will drive your regional exposures, and even though we live in an increasingly globalized world, that can still lead to meaningful underweights to major regions like the US market when valuations get out of sync across countries. A solution is to pick a few core building blocks with a regional focus and rebalancing on a regular basis to ensure your asset mix doesn’t stray from your desired weights. Below you’ll find a few options in each asset class that are worth considering as long-term holdings in your portfolio:

U.S. Equity
Beutel Goodman American Equity
Managed by a veteran team and using a disciplined investment process, the Beutel Goodman American Equity fund employs a traditional value approach that requires a 30% discount to their assessment of the intrinsic value of a business, and a total projected return of 50% or more over a three-year period. Once a stock's target price is reached, the managers automatically sell one-third of their position. The position is then reassessed and if the estimate of intrinsic value hasn't increased, the entire position is sold. This disciplined approach prevents the fund from holding pricier stocks and provides some downside protection.

Bristol Gate Concentrated U.S. Equity
Managed using an approach that blends quantitative screening tools and fundamental analysis, the investment and data team at Bristol Gate want to target quality companies that not only are paying dividends but use machine-learning tools to target those firms that are growing those dividends at a rate higher than the market. Offered to retail investors as an ETF, DIY investors especially can get this dividend-growth strategy for an attractive price.

International Equity
Mawer International Equity
Managed by David Ragan, Morningstar's 2012 Foreign Equity Manager of the Year, this fund has used Mawer's quality-oriented investment philosophy, a thoughtful approach to portfolio construction and robust risk management to deliver strong returns to fundholders. Simply put, Mawer invests in firms with sustainable competitive advantages trading at a discount to intrinsic value, after rigorously vetting their theses. Valuations are a potential headwind: As low interest rates have pushed stock prices higher, Ragan would rather hold on to quality businesses, even if they're expensive, than sacrifice quality in a search for bargains. While this should pay off in the long term, there may be short-term pain along the way. Mawer does not hedge foreign currency exposure. Manulife World Investment Class is a replica of this fund and is available to investors who make use of an advisor.

Oakmark International Natixis
The fund's high-conviction, value-oriented manager David Herro is one of the most tenured and decorated non-U.S. stock-pickers around and has proved himself through multiple market cycles and is backed by a deep team. This fund buys stocks at steep discounts to the team's estimates of underlying business values. This often involves investing in the midst of fearsome news or macroeconomic events, such as buying Japanese shares after 2011's catastrophic earthquake and tsunami, snapping up mining conglomerate Glencore in the midst of a commodity rout in 2015, buying U.K. stocks after the 2016 Brexit vote, or holding European automakers and financials amid global trade war fears in 2018. These aren't macro-driven moves, though. Herro and his team are inveterate, bottom-up investors who spend a lot of time traveling and studying business models and balance sheets, building an approved list of companies they'd like to own and then waiting for their share prices to diverge from their issuers' intrinsic values. The result is a portfolio that pays little heed to index or average peer group allocations, and that can often look out of step with peers and benchmarks. Patience is required though, but has paid off here in the past.

Emerging Markets Equity
RBC Emerging Markets Equity
While they're in the headlines these days for their struggling economies due to various, emerging market countries are, in many cases, growing at a faster pace than larger, more developed economies. For a long-term investor, a reasonable allocation to the countries that could provide a meaningful chunk of the future growth of the world might be prudent. Manager Philippe Langham and the team that manages RBC Emerging Markets Equity aim to achieve strong returns by identifying secular themes or structural changes that are expected to benefit businesses operating in the emerging markets. Their approach means the fund should do better when emerging markets lag, as they did in 2011, but will struggle to keep up in racier markets where lower quality stocks tend to outperform. For investors who prefer ETFs, iShares All Country World ex-Canada (XAW) allows for both global and emerging market exposure in one low-cost product.

Invesco Emerging Markets Equity
Managed by a global team led by Jeff Feng, investors in this fund will get a bottom-up approach that aims to identify high-quality businesses with sustainable competitive advantages and seeks to buy them at reasonable valuations. Feng defines quality as stocks with strong organic growth, free cash flows and returns on invested capital; and capable management teams that are aligned with investors. Feng usually seeks a 30% discount to a stock's intrinsic value before buying, but he won't compromise quality for cheap valuations and will pay up for what he feels are truly exceptional businesses. His high-quality, low-turnover approach tends to do better than most in equity market sell-offs, which, despite a higher price tag, makes this fund an option worth considering for investors seeking dedicated emerging markets exposure in their portfolios.

Fixed Income
TD Canadian Bond
TD’s core Canadian bond offering is managed by a huge investment team of many credit analysts and portfolio managers, led by veteran Rob Pemberton. The managers focus on preserving their investors' capital and on their expertise in credit selection. By focusing on a lever where they have a proven ability to add value, and less so on trying to forecast future interest movements by managing the portfolio's duration, the fund improves its prospects of outperforming its benchmark -- the FTSE TMX Canada Universe Bond Index -- and passively-managed ETFs like BMO Aggregate Bond ETF (ZAG). Combined with a strong performance track record and competitive costs, this fund merits strong consideration for investors seeking actively managed domestic bond exposure.

Templeton Global Bond
This isn't your typical bond fund, but investors who have the stomach to survive the speedbumps have been rewarded in the long-run. Manager Michael Hasenstab, who along with co-manager Sonal Desai picked up Morningstar's Fixed-Income Manager of the Year Award in 2013, aim to identify value among currencies, sovereign credits and interest rates in countries with healthy or improving fundamentals that they think the market underappreciates. The team attempts to find those opportunities early on and then watch as their theses unfold over several years. The fund isn't for the faint of heart, as Hasenstab has also shown a willingness to buy what the rest of the market shuns, and over the long-term that should pay off.

Balanced
Mawer Balanced
This fund offers those who prefer to let the experts do the driving a one-stop solution to their investing needs. The fund offers exposure to all the major asset classes, and its low costs also argue in its favour. Lead manager Greg Peterson is primarily responsible for managing this fund's asset mix. Shifts tend not to be extravagant, as the fund doesn't steer too far away from its base mix of 40% fixed income and 60% equities. Additionally, the fund offers geographic diversification benefits, giving unitholders exposure to global markets.

Rather than buying individual stocks and bonds, Peterson buys units of other Mawer funds. The managers of Mawer Canadian Equity, Mawer International Equity and Mawer Global Small Cap have built enviable records on their respective funds. Peterson also holds Mawer New Canada, Mawer U.S. Equity and Mawer Canadian Bond and Mawer Global Bond.

Steadyhand Founders Fund
Steadyhand is one of the country’s most transparent and investor friendly firms. Cofounded by Tom Bradley, formerly of PH&N, the firm offers their investors low-cost actively-managed funds across most asset classes. The Founder’s Fund is made up of other Steadyhand funds, which are subadvised by the likes of Fiera Capital, Galibier Capital, and CC&L, but the asset mix reflects the views of Bradley and his comanager Salman Ahmed. One of the fund’s best features is one meant to incentivize investors to think long-term: The longer you stay invested in the funds at Steadyhand, the lower your fees.

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