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  10 | INVESTMENT EXECUTIVE NEWS Momentum fuelled fund gains
March 2020
   Fund families benefited last year as markets recovered from a 20% plunge in stock prices in late 2018
investment returns for
mutual funds in 2019 were helped by interest rate cuts. Not only did those provide a lift to fixed-income investments, but they also gave equities inves- tors confidence that, at the time, there was no recession in sight.
The result was a 30.4% increase in the S&P 500 com- posite index, despite flat to nega- tive earnings growth. The gains were driven by momentum, says Philip Petursson, chief invest- ment strategist with Manulife Investment Management. That company’s mutual fund family had 89.3% of its long-term assets under management (AUM) held in funds that were ranked in the first or second quartile — i.e., above average — by Morningstar Canada as of Dec. 31, 2019. (All companies are based in Toronto unless otherwise noted.)
Petursson explains that the momentum was partly a recov- ery from the 20% plunge in stock prices in late 2018, but also from the three interest rate cuts made by the U.S. Federal Reserve Board between August and October as well as the U.S./China Phase 1 trade agreement, announced in December and signed in January.
However, as Petursson points out, the enthusiasm for stocks wasn’t broad-based. The gains were concentrated in the huge technology compan- ies, including Microsoft Corp. and the FAANGs — Facebook Inc., Inc., Apple Inc., Netflix Inc. and Alphabet Inc. (Google’s parent). He notes that Apple alone had an 89.6% increase in its stock price.
Last year was a difficult year for market-timers. The momen- tum was concentrated in the first four and final three months, with ups and downs in between. Sadiq Adatia, chief investment officer (CIO) with Sun Life Global Investments (Canada) Inc., attrib- utes the strong results for his firm’s mutual fund family — 80.9% of long-term AUM in above-average performing funds — mainly to making the right tactical asset-al- location decisions at the right times. “We read the markets well,” he says, “providing downside pro- tection in certain periods and add- ing risk at other times.”
Adjusting asset allocation isn’t a strategy used by all firms. For example, Beutel Goodman & Co. Ltd.’s portfolio managers use a “deep value” strategy to provide downside protection by investing only in high-quality companies. That strategy can result in relatively weak perform- ance when momentum is driving markets, as was the case in 2019, when the company had only 9.4% of AUM in funds with first- or second-quartile performance.
“Popular growth or momen- tum stocks do not fit with our pro- cess,” says James Black, Beutel’s
director of research, “as we are looking for undervalued compan- ies and have a focus on downside protection.”
Deep value is similar to — but not the same as — a bottom-up stock-picking style. Both empha- size the quality of the business model and of management. But stock-pickers tend to pick from a broader universe, which can include growth equities.
Calgary-based Mawer Investment Management Ltd. is a case in point. Paul Moroz, CIO and portfolio co-man- ager of global equity and global small-cap funds, says stock-pick- ing usually doesn’t do as well in “risk on” or momentum years. Yet Mawer’s mutual fund family had 75.1% of AUM in above-aver- age performing funds.
Invesco Canada Ltd.’s port- folio managers also are stock-pick- ers — and they did well. Invesco’s fund family came in just below Mawer’s, with 74.2% of AUM in funds ranked in the top two quar- tiles. On the equities side, Invesco’s fund portfolio managers typically look for about five new invest- ments over a year. That strat- egy gives the portfolio managers lots of time to put together a list of possibilities and fully explore them, says Rob Mikalachki, CIO for the equities team. “We spend a lot of time travelling the world to understand first-hand the markets and companies we invest in.”
RBC Global Asset Manage- ment Inc. (RBCGAM) rounded out the top five. (See table, right.)
Other firms that continued to struggle include Winnipeg-based Investors Group Inc. (38.2%) and Franklin Templeton Investments Corp. (34.6%).
Here’s a look in more detail at the strong performers and rela- tive underperformers last year: ■● manulife investment management. Speaking in early February, Petursson predicted equi- ties markets would be more lack- lustre this year, with below-average returns. He notes that U.S. stocks are fully valued and earnings ex- pectations are modest — adding that those modest expectations may be a little high. He also says the market euphoria following the U.S./China Phase 1 trade deal isn’t justified, as the deal doesn’t resolve the underlying issues.
That said, Petursson believes his firm’s approach will continue to deliver good returns because of the quality of the funds’ port- folio managers: “We don’t have one investment philosophy, but are rather a conglomerate of bou- tique investment teams, each empowered to make its own bot- tom-up stock selections.”
■● sun life global invest­ ments (canada) inc. Adatia attributes 70% of 2019’s equi- ties returns to U.S. interest rate cuts, 20% to more optimism about global trade and just 10%
to earnings. Looking ahead, he notes that there are opportun- ities in emerging markets due to supply-chain changes that came about as a result of the U.S./ China trade war. U.S. companies unable to buy from China have increased purchases of agricul- tural goods from Brazil and tech- nology inputs from Thailand and Vietnam. He thinks there also could be changes relating to auto manufacturing supply chains. ■● mawer investment management ltd. Mawer’s successful picks include a couple of U.K. firms — Aon PLC and Diploma PLC — and New
York-based S&P Global Inc.
“In an increasingly risky world, there are more things that have to be insured, including guarding against cyberattacks and environmental liabilities,” says Moroz. Aon is benefiting: its stock price rose by 45.1% last year. Diploma is a holding com- pany involved in distributing
and servicing specialized tech- nical niche products to compan- ies in Europe, North America and Australia. Moroz says Diploma is “really well run, with a high return on capital.” The stock price rose by 64.7% in 2019.
S&P Global, along with
  How mutual fund families performed last year
 Mutual fund family1 AUM* in first and second quartiles Long-term AUM2
Y/E ’19 Y/E ’18 Y/E ’17 Y/E ’19 Y/E ’18 (%) (%) (%) ($bil.) ($bil.)
 Manulife Mutual Funds/Manulife Asset Mgmt. 89.3 37.8 68.7 76.6 62.9
 Sun Life Global Investments (Canada) 80.8 75.2 66.5 24.6 17.7
 Mawer Investment Management 75.1 90.1 85.7 37.8 28.3
 Invesco Canada 73.8 20.1 68.9 30.7 28.8
 RBC Asset Management 69.3 58.1 62.9 379.7 303.2
 Desjardins Investments 63.9 26.5 53.4 65.4 58.3
 Dynamic Funds3 60.7 82.6 58.2 57.1 46.4
 Cdn. Imp. Bank of Comm./CIBC Asset Mgmt. 59.0 49.5 52.7 63.6 56.3
 TD Mutual Funds 56.4 44.3 32.3 196.7 163.1
 PIMCO Canada 56.1 97.2 58.1 25.1 18.9
 National Bank Securities 55.8 38.7 54.5 52.9 42.4
 Quadrus Investment Services 55.3 72.7 53.8 28.2 25.6
 CI Investments 55.0 42.1 32.1 136.6 110.9
 BMO Investments 54.3 53.0 65.0 74.7 63.2
 Fidelity Investment Canada 50.8 80.8 32.2 150.5 134.4
 Mackenzie Investments 49.8 60.5 51.2 63.5 56.6
 iA Clarington Investments 47.8 60.8 31.8 17.6 16.2
 MD Financial Management3 46.1 48.7 33.0 21.1 15.9
 Scotia Asset Management3 41.2 78.6 56.8 60.9 52.8
 HSBC Global Asset Mgmt. (Canada) 41.1 16.0 61.7 16.6 10.3
 Investors Group 38.2 34.0 25.4 98.1 94.2
 Franklin Templeton Investments 34.6 34.7 25.7 22.6 25.1
 AGF Funds 32.2 61.4 44.1 24.7 23.2
 Russell Investments Canada 20.5 43.1 33.1 20.6 17.5
 Beutel Goodman & Co. 9.4 79.4 92.3 17.0 15.4
 *AUM = assets under management
1. Fund families with $15 billion or more of long-term AUM held in funds ranked by Morningstar Canada
2. AUM for funds for which Morningstar Canada produced ranking data. When only one figure is provided
for funds with different versions, AUM is divided equally among the versions. There can be double-counting when funds are invested in other funds in the family.
3. Dynamic Funds, MD Financial Manage- ment and Scotia Asset Management are owned by Bank of Nova Scotia
Source: Morningstar Canada
         The momentum was concentrated in the first four months and the final three months, with ups and downs in between

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