Serial A+ winner Mawer Canadian Equity Fund’s value focus

By John Krisko
July 25, 2016

Mawer Canadian Equity Fund is the only pure Canadian equity mutual fund (at least 90% of its equity holdings domiciled in Canada) that has earned a Fundata FundGrade A+™ Award for outstanding performance every year since the Award’s inception in 2011. Incredibly, the fund has achieved an annualized return of 9.55% since its launch in June 1991, easily earning a place within the ranks of the top-performing mutual funds in Canadian history. Here’s a look at what makes this winner tick.

Of course, investors should look at volatility as well as return when selecting investments. The Fundata A+ methodology does exactly this by considering risk-adjusted performance ratios, including the Sharpe Ratio, to determine the best-in-category funds each year.

How is it that Mawer Canadian Equity Fund has earned an A+ Award and a spot among the top Canadian Equity funds year after year? Is growth or value behaviour driving the fund’s performance? A regression of the Series A monthly returns against those of the Dow Jones Canada Select Value Index and the Dow Jones Canada Select Growth Index (both consisting of mid-cap and large-cap equities) may provide some insight.

The model considers 60 monthly returns from 2011, the first calendar year for which a Fundata A+ Award was given. The results are interesting. The analysis finds that the fund behaves most like the value index. Mawer Canadian Equity Fund states that it employs a value strategy by creating a “portfolio of wealth-creating companies bought at discounts to their intrinsic value.” The finding is an important confirmation that the fund delivers the strategy that it advertises.

Similarities to growth index
In addition to the value index, there are some similarities between the fund and the growth index. This could be an example of the fund’s flexibility, but the growth coefficient has the lowest significance (97%) of the analysis, and the relationship would disappear if the model were more specific. This means that it is more likely an indication that some value stocks exhibit traits of growth stocks or of differences in the definition of a “value stock” used by the manager and index provider.

The last result is the measure of the manager’s contribution to fund performance solely due to the skillful selection of investments. This is the manager’s alpha. In this case, if both indices returned 0% for a given month, the model indicates Mawer Canadian Equity Fund could still be expected to earn a return of 0.67%. The A+ Award attempts to capture manager skill through the Information Ratio, which considers the risk-adjusted alpha of a manager. Where managers that stand out by adding positive value to fund performance are rewarded, a fund that is only indexing might perform well but would not distinguish itself from its peers.

The two indices and manager alpha explain 70% of Mawer Canadian Equity Fund’s returns, but clearly it is not the entire story. A look at sources of return not captured here would be necessary and might include returns of U.S. holdings (average allocation of 1.6% over 3 years), small-cap stocks, and dividends.

Mawer Canadian Equity Fund has earned four consecutive A+ Awards from Fundata by delivering consistent returns with minimal volatility. Taking a deeper look at the returns confirms that the fund delivers on its promise of a value-focused strategy with an added boost from skillful stock selection by the manager. Mawer Canadian Equity Fund has a below-average MER of 1.22% and is a solid choice for the Canadian Equity Value component of investor portfolios.

John Krisko, BBA, is Senior Analyst, Analytics & Data, at Fundata Canada Inc. This article is not intended as personalized investment advice. Securities mentioned are not guaranteed, involve risk of loss, and are subject to commissions.

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