2023-12-26 11:49:34
Investors should, however, remember that cryptocurrencies, as an asset class, are fragile. (Photo: 123RF)
For investors in the global market, 2023 will have been a volatile year.
The Morningstar Canada Index increased in 2023 by approximately 7.64% from January 1 to December 11, significantly underperforming the Morningstar World Markets Index, which increased 16.85%.
While much has been made of the “Mercenary Seven” streak of performance that has driven most of the market’s gains this year, the real winner was bitcoin, which rose from $16,613 US at the start of the year at more than US$41,000 (as of December 11). Ethereum also had a volatile year, going from US$1,200 to US$2,185. As a result, most of the year’s best-performing funds were invested in bitcoin or ethereum. Here is the list:
Investors should, however, remember that cryptocurrencies, as an asset class, are fragile. “The spectacular returns of cryptoassets in 2023 should not be seen in a narrow context. Recall that an investor who took a position in bitcoin at the top of the market (unfortunately, many did) until the end of 2021 still suffered a significant loss despite the recovery of cryptocurrencies this year. “Investors with a shorter time horizon or generally lower risk tolerance may be wise to exercise extreme caution in such volatile asset classes or risk being unable to achieve their financial goals.” says Ian Tam, director of investment research at Morningstar Canada.
The most efficient
“Most of the traditional funds on this list are focused on technology, which is not surprising since it is the best performing sector year to date and has not seen any real weakness only in the third trimester. Investors should be careful when interpreting bitcoin results. This asset class is known to be very volatile, but it has performed well this year, especially since the start of the quarter,” said Danielle LeClair, director of manager research at Morningstar Canada.
Of the funds on the list that are NOT invested in cryptocurrencies, two earn a Morningstar Medalist Rating: the BMO ARK Innovation Fund, which earns a Neutral Morningstar Medalist Rating, and the BMO Nasdaq 100 Equity Fund Series F, which obtains a Bronze Rating.
According to Morningstar’s Manager Research team, the BMO ARK Innovation Fund portfolio maintains a cost advantage over its competitors, ranking in the lowest fee quintile among its peers. Its management team scores below average for the People pillar. The strategy deserves a below average rating for the Process pillar.
“Portfolio manager Cathie Wood lacks a robust approach to understanding or mitigating portfolio risk, as she instead relies on her instincts, which have not proven effective. The company, which has no risk management staff and only vaguely defined risk control mechanisms, approaches the subject almost exclusively through its bottom-up equity research. But that gives it little visibility into the portfolio’s overall exposure to risk, which can make or break a fund’s returns in one stock market environment or another. The company is poorly positioned to prepare and respond. The company’s large stakes in many of its portfolio companies magnify the difficulty of selling them without putting pressure on their stock prices, which is another unique downside risk to this strategy,” says analyst Robby Greengold.
When it comes to the BMO Nasdaq 100 Equity Fund, Morningstar’s Manager Research team reports that the portfolio maintains a significant cost advantage over its peers, being priced in the lowest fee quintile among peers. The strategy management team receives an average rating for the People pillar. The strategy deserves a below average rating for the Process pillar. The parent organization of the strategy earns it an Average rating under the Parent pillar.
“The companies that make up the bulk of this portfolio benefit from high valuations that reflect their potential. They tend to favor growth by reinvesting most of their profits in research and development. So while it is not a growth fund by design, the portfolio relies on a growth trend that mirrors the Russell 1000 Growth Index. A portfolio of 100 stocks and market cap weighting makes this product focused on large-cap stocks and overweighted accordingly. From May 2018 to April 2023, its average holding size was nearly 50% larger than the Russell 1000 Growth Index. And over this period, the 10 largest holdings represented 49% to 59% of the portfolio. “Investing heavily in the strongest stocks on the market has paid off over the past 15 years, but broad diversification is more attractive in the long term,” says analyst Ryan Jackson.
Why mutual fund fees matter
Fund fees are expressed on an annual basis, but typically charged monthly or quarterly. For most funds, fees are charged regardless of the performance of the investment manager. Assuming the overall cost of holding a fund is 2%, if in any year a fund returns 6%, you will receive approximately 4% for that year. On the other hand, if the fund loses 6%, you will lose 8% following fees.
“While they may not have a financial impact in a single year, the effects of fees are substantial over the long term. From a financial perspective, a $1,000 investment in the index in 1998 results in a portfolio value of $4,500 following 20 years if there are no fees, but only $3,000 if 2% fee is levied. In terms of percentage, following 10 years, the impact of a 2% commission translates into a difference of 18% less wealth compared to an investment without fees. After 20 years, this gap reaches 33%,” explains Mr. Tam.
In short, you need to be diligent in controlling the fees you are charged, because the fees you pay are detrimental to the amount of wealth you will end up holding.
Par Ruth Saldanha
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