Assets in Canadian thematic funds grew dramatically last year, though flows slowed after a booming first quarter as performance suffered, a report from Morningstar Inc. says.
As of December, thematic funds in Canada held more than US$2.6 billion after adding more than US$1.1 billion last year.
“As seen in other regions, inflows started off strong in 2021, but they cooled down as performance went from being a tailwind to a headwind,” the report said, with US$755 million in flows coming in Q1.
The number of Canadian thematic fund launches “exploded” in 2021, with fund providers launching 23 new products. Between 2016 and 2020, 30 thematic funds were launched, the report said.
The iShares Global Water Index ETF was by far Canada’s largest thematic fund with almost US$375 million in AUM at the end of 2021, representing 14% of all Canadian thematic fund assets.
According to Morningstar, only five other funds had more than US$200 million in assets: the Horizons Marijuana Life Sciences Index ETF, the Evolve Cyber Security Index Fund, the Desjardins Societerra Cleantech Fund, the Dynamic Energy Evolution Fund and the Manulife Global Thematic Opportunities Fund.
Most funds have much smaller asset bases: the median thematic fund in Canada had about US$20 million in assets, while only 11 had more than US$100 million in assets, the report said.
“Funds with smaller asset bases (those with less than $100 million) indicate that a strategy or theme has not gained (and may not ever gain) traction,” the report said. “Caution is warranted with these smaller funds as they could potentially liquidate because of a lack of interest.”
Horizons ETFs and Evolve ETFs were the largest thematic fund providers in terms of both AUM and the number of funds.
Thematic funds charge higher fees on average, the report found, with the difference most pronounced among passive funds. And those elevated fees contribute to poor performance over longer periods.
Over three years, about half of thematic funds in Canada survived and outperformed the Morningstar Global Markets Index; over five years, the success rate drops below 20%.
Growth strategies dominate Canadian thematic funds, accounting for about 87%, compared to 2% for value.
Globally, assets in thematic funds increased threefold over three years to US$806 billion at the end of 2021, Morningstar said, with new fund launches more than doubling last year.
The same performance caveat for thematic funds applied globally: “Some have delivered phenomenal
performance,” the report said. “Others have been duds.”