Fund Investing

Three marijuana funds had returns over 30%, while one global equity and one U.S. equity fund made the top 5
By Ruth Saldanha | 05/04/19

2019 has been good to investors so far. After a cruel last quarter of 2018, the first quarter of this year has seen almost uniform gains across markets. The S&P TSX Composite index is up over 13% so far this year, while the S&P 500 is up over 10% in Canadian dollar terms, according to Morningstar Direct data.

About the Author
Ruth Saldanha is Senior Editor at Morningstar.ca

As a result, several mutual funds have also clocked positive returns. Over 5,800 Morningstar medalist funds had positive returns for the quarter, and of them, close to 1,000 had gold ratings.

But the best performing indexes in Canada, unsurprisingly, are healthcare and pharmaceutical related, all up because of the rally in marijuana stocks. The top performing index in Canada was the S&P/TSX Pharmaceuticals index, up over 56% for the first quarter. The next four top performers are also various healthcare sector indices, all with returns of over 48% for the quarter.

As a result, three of the top five mutual funds of the first quarter of 2019 are healthcare/marijuana focused, the fourth is a global equity fund, and the fifth is a US-focused fund. Here’s a look at them:

Name

Morningstar Category

3-month Return

Purpose Marijuana Opportunities Cl F

Sector Equity

56.38

Next Edge Bio-Tech Plus F

Sector Equity

36.18

Ninepoint UIT Alternative Health F

Sector Equity

31.83

Fidelity Global Innovators Cl F

Global Equity

23.28

Dynamic Power American Growth Ser F

US Equity

22.49

Morningstar Direct Data as of Mar. 29, 2019

The top-performing fund is the Purpose Marijuana Opportunities Cl F. The fund is up an eye-watering 56.38% for the first quarter. Fund manager Greg Taylor attributes the performance to the bounceback from the abysmal last quarter of 2018. “We saw a lot of underperformance in the last quarter of 2018, so for us, it was more a question of sticking to our strategy and holding the names we like, and watching them rise after the Christmas eve sell-off,” Taylor said.

Taylor did, however, make one tactical change to his strategy in the first three months of the year – he focused more on U.S. marijuana companies.

Growing U.S. cannabis opportunities

“We increased our exposure to the U.S. to around 35% of the overall portfolio. We have found that Canadian companies have not been able to ramp up. They have not been able to capitalize on recreational use, and as a result, have significantly lagged expectations. On the other hand, the U.S. companies have ramped up capacity, and have steady growth. There also has been consolidation there, which makes the sector more attractive,” he said. In terms of valuations as well, the U.S. was trading at a discount to Canadian peers in the last quarter of 2018, and since then, on average the valuations of U.S. and Canadian companies are the same, Taylor said.

One thing that has changed significantly in the portfolio since the second half of 2018 is the cash holdings. Taylor currently holds a little over 20% of the fund’s assets in cash, down from close to 50% in October 2018, when marijuana was legalized in Canada.

“We use cash as a tactical risk mitigator. We have seen a good run in our holdings so far this year, so we took some profit and are holding cash to deploy whenever valuations fall and become attractive,” Taylor said.

He likes three marijuana names to hold for the rest of the year – New Brunswick-based Organigram Holdings (OGI), Chicago-based Cresco Labs (CL) and Chicago-based Green Thumb Industries (GTII).

Let's look at one of the funds on the list that also has a gold-star rating: Dynamic Power American Growth. The fund was also one of the best performing funds of 2018. Managed by Noah Blackstein, it’s 99% invested in U.S. equities with significantly overweight positions in healthcare and technology, and invests over 55% of its holdings in technology stocks – more than double the category average of 20.62%. The fund is high risk with varying returns. Some of those returns have been exceptional, such as its 50.6% gain in 2013. But the negative periods have also been exceptionally painful: in 2008, it lost nearly 44% of its value compared with a loss of 28.3% for the average U.S. Equity fund, and in 2016 it lost more than 13% when the rest of the category gained nearly 6% on average. But while its standard deviation is significantly higher than that of its category peers, its long-term returns have also been among the very best.

Where should you invest?

Here at Morningstar, we don’t recommend that investors make decisions solely on quarterly performance. Instead, we recommend that investors use a long-term and comprehensive analysis. To decide what funds will outperform going ahead, we use Morningstar Quantitative Ratings (MQR). Here are the three top-performing gold-rated funds, including Blackstein’s fund, which we expect to continue to outperform going ahead!


  Name
  

 MQR 
  

  Category
  

  3-month
  Return   
                

  Manager           

  
  
  Dynamic Power
  American Growth
  Series F


 Gold
  

  US Equity
  

  22.49
  

  Noah
  Blackstein             
  

  DMP Power
  Global Growth Class
  Series F
  

 Gold
  

  Global Equity
  

  21.64
  

  Noah
  Blackstein
                              

  Fidelity
  Special Situations
  Class F
  

 Gold
  

  Canadian
  Focused
  Small/Mid Cap Equity

  20.55
  

  Mark
  Schmehl               
  

 

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