Fund in Focus: TD Canadian Low Volatility Fund

FundGrade A+® Award winner

With a phenomenon known as the low-volatility anomaly, lower-volatility stocks have historically outperformed those with higher volatility on a risk-adjusted basis over the long term. In a fund structure, you have an investment with the potential to deliver most of the equity market’s upside with much lower downside participation. TD Canadian Low Volatility Fund, one of the first low-volatility offerings for retail investors, debuted in April 2014, and is managed Jean Masson and his team.

The managers look for Canadian equities that have exhibited the least amount of volatility over the past 36 months. They also consider valuation and blend quantitative analysis with the judgment of the management team in the portfolio process. In fact, the team will override the model in certain circumstances.

The portfolio is very well diversified with more than 160 names, and the top 10 making up less than 30% of the fund. Looking for the best risk-adjusted return, the managers rebalance frequently, while remaining mindful of trading costs. The fund is currently overweight financial services, utilities, consumer services, and telecommunications. But rare for a Canadian equity fund, it is significantly underweight healthcare, technology, basic materials, energy, and industrials.

With growing interest in low-volatility investments over the past year, the fund has been trading at valuation levels slightly higher than the broader market. In the past few months, of course, all equity funds were swept up in the March market meltdown, suffering steep losses in March. However, most have recovered their losses to some extent. This fund has lagged on the upside, however, owing to its low-volatility mandate, and has a year-to-date loss of 8.6% compared with the Canadian Equity category average loss of 6.3%.

Longer-term returns have been very strong, however, particularly on a risk-adjusted basis, with a 5-year average annual compounded rate of return of 4.0% to July 31, outpacing the category average return of 3.3%. Its 3-year annualized 3.0% return has compares with the category average 2.7%.

What’s impressive is that true to its name, the fund has delivered returns with 3-year average standard deviation of 11.7, well below the category’s 14.6, according to Fundata. Over the past five years, the fund has generated nearly 80% of the market upside while experiencing less than 60% of the downside.

I expect the near term may be a bit tough for low-volatility funds. However, if we experience a meaningful uptick in volatility or see the markets sell off sharply again, I expect we will see these low-volatility funds hold up very well.

TD Canadian Low Volatility Fund
Fund company: TD Asset Management
Fund type: Canadian Equity
FundGrade: B (July)
FundGrade A+ Award: 2019
Style: Rules-based – Volatility focus
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Excellent
Manager: Jean Masson since April 2014
MER: 2.03%
Fund Code: TDB2940 – (No load)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

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. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.