The director of research at Morningstar Canada, Toronto, shares his top two fund picks
Christopher Davis, director of research at Morningstar Canada, shares his top two investment picks.
Brandes Emerging Markets: “Despite rallying sharply in 2016, emerging market stocks still appear reasonably valued,” Davis says. “This offering, rated Silver by Morningstar analysts, looks cheaper still. On average, its holdings trade at 25% discount to its MSCI Emerging Markets benchmark on a price/earnings basis. To find cheap stocks, the fund’s seasoned five-person management committee often court economic and political uncertainty, as it has in recent years by building big stakes in Russia and Brazil. This contrarian streak isn’t a recipe for consistency. The fund is bound to lag when its deep-value style is out of favour, as its losses in 2014-15 demonstrate. Yet years like 2016, when its 20% gain trounced its peers, can make the bumpy ride worthwhile. To reap the benefits, though, investors must be as patient and disciplined as management itself.”
iShares MSCI Europe IMI ETF (XEU): “Uncertainty surrounding Brexit and the fate of the Eurozone has made Europe investors (understandably) nervous. Such anxiety may provide a buying opportunity, however, especially for Canadian portfolios heavy on U.S. stocks: European stocks trade at a 40% discount to S&P 500 Index based on its cyclically-adjusted price/earnings ratio (often called the CAPE or “Schiller P/E”). This metric poorly predicts short-term returns and ugly headlines in 2017 could make European stocks even cheaper. This measure, though, has been a reliable long-term indicator, boding well for Europe and thus this ETF, which includes 99% of the developed European stocks by market cap. Investors worried about currency risk can choose the CAD-hedged version of this ETF. An added bonus: Because it holds the stocks directly instead of through another ETF, foreign withholding taxes are refundable for investors in non-registered accounts. Morningstar rates its nearly-identical U.S.-based iShares Europe ETF sibling Gold, indicating analysts’ high conviction in the fund.”
