Fund in Focus: TD U.S. Mid-Cap Growth Fund
12/17/2018 2:58:46 AM
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By Dave Paterson  | Wednesday, November 07, 2018


 



Managed by T. Rowe Price, the TD U.S. Mid-Cap Growth Fund has been one of the strongest performers in its category over the past few years. For the five years ending Sept. 30, the fund delivered an average annual compounded rate of return of 17.9%, outpacing both the peer group and the Russell 2000, which returned an average annual 11.1% over the same period. Shorter term numbers are also solid, with the fund producing a 1-year gain of 20.4%. The fund has garnered the FundGrade A+® Award for the past three years, and currently has a FundGrade A Grade for September.

More impressive however is that the managers produced these results with a level of volatility that is well below the index and the peer group. For the past five years, the fund’s volatility has been roughly 60% of the index. The managers have also done a great job protecting capital, participating in roughly 65% of the downside of the market.

To achieve these numbers, the managers look for high-quality companies that have the potential to grow earnings or cash flow at a rate of at least 12% per year. They look for solid business models that offer competitive advantages, such as a differentiated product or a franchise brand. Such companies quite often will generate higher margins and higher returns on invested capital. While this is a growth-focused fund, the managers try to make sure they don’t overpay for that growth.

The portfolio is well diversified, consisting of between 120 and 140 names, with the top 10 making up less than 20% of the fund’s assets. Recent top holdings included aerospace company Textron Inc. (NYSE: TXT), medical instrument firms Teleflex Inc. (NYSE: TFX) and Cooper Companies Inc. (NYSE: COO), luxury fashion firm Coach Inc. (NYSE: TPR), and semiconductor manufacturer Microchip Technology Inc. (NASDAQ: MCHP).

Valuations, however, are rich, with valuation ratios well above the broader market. But this is somewhat offset by the growth rates, which are substantially higher than the index. Taken all together, this is a portfolio that has the potential to post above-average numbers in rising markets. But in volatile markets, it also has the potential to sell off more than the index.

While the managers have done a great job historically in protecting capital, the higher-than-normal valuation levels may make that a bigger challenge down the road. Still, this is an excellent fund, and if you hold it, and it is in line with your investment objectives and risk tolerance, there is no reason to sell it. But you may want to take some profits and get some money off the table.

At current levels, I’d be reluctant to take on a new position in the fund. If we do see a selloff, it may be a good time to start a new position.

TD U.S. Mid-Cap Growth Fund
Fund company:
TD Asset Management
Fund type:
U.S. Small/Mid Cap Equity
FundGrade Rating: A (September)
FundGrade A+ Awards: 2015, 2016, 2017
Style: Mid Cap Growth
Risk level: High
Load status: Optional
RRSP/RRIF suitability: Good
Managers: Brian Berghuis since Jan. 1994; John Wakeman since July 2006
MER: 2.55%
Fund code: TDB312 (Front-end load)
Minimum investment: $500

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

 

   
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