Analyst explains fund manager choice

Using returns to narrow the field is no help since good managers can deliver substandard results if their assigned mandates don’t jive well with current market conditions. Similarly, writes Morningstar senior analyst, David O’Leary, substandard managers “can look particularly good if he or she is measured only by selected time periods that happen to be positive.”

This year, the Morningstar selection committee, recognized Kim Shannon of Sionna Investment Managers as Canada’s Fund Manager of the Year. Shannon is a favourite pick for many advisors as well, but to help Morningstar (and Advisor.ca) readers understand the decision, O’Leary published a notice this morning to explain how parts of the award selection process work.

To start, he says analysts focus on risk adjusted trailing returns, how a fund has performed relative to its peers over the time period shown, for the past three, five and 10 years. “We couldn’t help but acknowledge that Shannon is rarely going to place at the top of the one year return charts,” writes O’Leary. “In fact, she’ll rarely top the three year charts.”

Shannon’s investment style that tends to limit absolute returns, however, also keeps the fund’s risk scores to a bare minimum. “In any given one, two or even three year period there are numerous, more aggressive managers whose returns overshadow Shannon’s, but few managers look as good over the long haul. This is especially true when we consider risk-adjusted returns,” he says. “What Shannon lacks in octane, she makes up for in consistency.”

That consistency has led the CI Canadian Investment Fund to produce negative returns only 12% of the time, compared to the index that has been in the red three times as often. When Shannon’s fund does produce a loss, the analyst says it loses 6.8% on average compared to 12% for the index. As well, he says “Shannon has never experienced a loss over any three year period, whereas the benchmark has lost money one-fifth of the time. CI Canadian Investment’s volatility scores make it look more like a balanced fund than a Canadian equity fund.”

As well, he points out that Shannon’s processes, holdings and her thoughts on various investment topics are transparent and well published.

Finally, he says a significant factor in making the decision was the fact that Shannon’s fund is accessible and has benefited more investors than honorable mention, Tom Stanley of Resolute Funds. O’Leary says Stanley demonstrates equal excellence in a completely different way, a function of his widely different mandate, but runs money for a much smaller group of investors – one fund is capped and the other requires a minimum investment $150,000.

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com