These are all terrible companies that have murdered cute puppies.

These are all terrible companies that have murdered cute puppies.

For the most part, I’m anti-mutual fund. I’m also anti-pants, because really, how is a man like me supposed to keep my junk from getting a nice breeze? I don’t think I’m asking for much.

The reasons why I’m opposed to most Canadian mutual funds are many, but it really boils down to this. The fees are too high. It’s hard enough to beat the market even when you don’t have a 2% handicap. Add on that sort of disadvantage and it’s as impossible as figuring out why your girlfriend is mad at you. I don’t know either, but it’s definitely your fault.

Say the stock market can be counted on to deliver a 9% return each year until the year 2051, when North Korea finally decides they’ve had enough of our crap and nukes 3820 cities at once. HEY. IT COULD HAPPEN. If a Canadian mutual fund charges a 2% management fee — which is actually a little less than average — then that fund manager has to get 11% annually just to match the market after fees. Most portfolio managers aren’t doing that. Not because they necessarily suck, but because of a myriad of other factors that don’t really translate into success.

Saying that, I’m not about to write off the whole asset class completely. Think of it like turd mining — there are a lot of turds out there, but among them, are some sparkling gems that just happen to be in the proximity of many bad stinky things. And thanks to the magic of computers, you don’t even have to get your hands dirty. Let the software pick out the best Canadian mutual funds for you, while you put on some hand sanitizer just to be safe.

Here are five Canadian mutual funds that have a demonstrated track record of success.

Chou Associates Fund

I profiled Francis Chou before. It can be found here.

In 1986, Francis Chou started two different mutual funds, The Chou Associates Fund and The Chou RRSP Fund, using the teachings of Benjamin Graham, Warren Buffett, and Prem Watsa as his guide. It turned out to be a pretty good decision. Almost three decades later, a $10,000 investment in the RRSP fund would be worth more than $144,000.

The performance of the Chou RRSP Fund not only trounces the average comparable fund, it also beats the pants off the TSX Composite Index. The fund has beaten the TSX Composite over the last month, year, three years, and five years, and lost to the index over the last decade by about half a percent a year.

Over the longer term, the performance is even more impressive. Over the last 20 years, Chou’s RRSP fund has delivered an 11.42% annual return, crushing the average fund that has been around that long by more than 4% annually.

Mawer Global Small-Cap Fund

The Mawer family of funds is all about keeping costs down. Most of its funds have management fees of less than 1%.

The Mawer Global Small-Cap Fund doesn’t, charging investors a relatively expensive 1.82% MER. But through the first eight years of the fund’s existence, it’s been money well spent, as it’s absolutely killed the TSX Composite and its comparable index.

Who knows if this performance can continue, but I’m convinced that if there’s one part of the market where an active manager can outperform, it’s in the small-cap universe.

A $10,000 investment in the Mawer Small-Cap Fund back when it started back in September, 2007, would now be worth $28,576. A $10,000 investment in the TSX Composite Index would be worth a whole $9,547. Comparing it to its index isn’t quite as impressive, but an investor would still have twice as much trusting Mawer with their cash than they would just investing in the index — at least since 2007.

This is truly one of the best Canadian mutual funds. That level of outperformance might not be sustained, but it’s obvious these guys are onto something.

Norrep Fund

Back in April 2000, as the stock market was just reaching its tech stock fueled frenzy, the fine folks at Norrep decided they were going to launch the world’s least interesting fund — if the name is any indication, anyway.

But what it lacked in a name, the fund made up for it in performance. Since inception, the fund has returned 16.66% annually, which I can promise isn’t a typo. A $10,000 investment in the fund back in 2000 is now worth more than $102,000, compared to just $26,000 if you’d stuck your cash in the index. Which you couldn’t have even done back then, since the TSX Composite Small-Cap Index Fund (TSX:XCS) has only been around since 2007.

The MER is rich, coming in at 2.34%, and it even has a front-end load. But hey, they’ve just opened it back up to investors, provided you don’t live in Quebec or one of the territories. Those places suck, so good for you for avoiding them.

Nunavut. Yes, I will have none of vit. Go pay $8 for an apple, sucker.

Beutel Goodman Small-Cap Fund

Although the Beutel Goodman Small-Cap Fund isn’t quite as exciting as the Norrep Fund, it still has a long history of demonstrated outperformance.

Launching in January, 1995, the fund has delivered an annual return of more than 12% per year, easily trouncing its peers and its index. A $10,000 investment in the Beutel Goodman Small-Cap Fund at inception has grown to almost $115,000, compared to just over $46,000 for the index. That’s a good result, especially for such a long time period.

The fund even has reasonable fees, only charging investors a MER of 1.47%, but that does come with a front end sales load. Those tricky bastards. It’s still a relatively small fund too, only having $64 million under management.


BMO Dividend Fund (Series A)

Sometimes, a mutual fund company has different series of funds, which have different management fees. Some won’t pay a trailer fee as an example, which is a fund that investment professionals might invest in. That makes comparing apples to apples tricky, since obviously a series of fund that has less fees will outperform.

But even though the BMO Dividend Fund has such a setup, the series A is the one investors can buy, as confirmed by the nearly $2 billion under management. Yet even though it’s bigger than each of the other four funds combined, it’s been a solid performer for years now, beating the index over a five-year, 15-year, and 20-year time horizon. And during the 10-year period up to August 31st, it underperformed the index by a lousy 0.3% per year. And that’s after the handicap of chargingĀ a 1.84% MER.

A $10,000 investment in the fund starting in October, 1994, would be worth nearly $79,000 today. The same investment in the index would be worth just about $52,000. That’s a solid outperformance, and easily earns it the title of Canada’s best large-cap mutual fund.

The Dividend Fund did switch managers back in 2012, but the new managers have trounced the market since then, which gives me a little confidence the outperformance could very well continue.

Should you buy funds?

Look, for the most part, buying funds is a sucker’s game. Even if these guys have beaten the market over the last 10-20 years, some of the reason might be chalked up to luck.

Saying that, there are some potential gems here. I’m convinced active management in the micro-cap or small-cap space can outperform. And a guy like Francis Chou is smart enough that I think he’ll continue to do well.

Not all of the Canadian mutual funds out there suck. Most do, but there are some good ones. For an investor without any exposure to something like micro-caps, one of these funds could be an interesting addition to a portfolio.

Tell everyone, yo!