For this low-vol fund, F is better than A

TD Global Low Volatility combines a proprietary quantitative model and the judgment of an investment team to create a portfolio of less-volatile securities that does not sacrifice returns. While the team managing this strategy has significant depth, their investment approach doesn't set them apart from peers. Fees are a key factor for this quantitatively driven strategy, and unlike the fund's commission-based option, the fee-based series' competitive price leads to increased conviction in this fund's ability to outperform over the longer term, resulting in a Morningstar Analyst Rating of Bronze.

TD's in-house model narrows down a universe of 2500 stocks to a portfolio of securities that have experienced the least amount of volatility over the prior three years. The team found the three-year period to be a sweet spot when referring to historical price data, as it balances both the amount and relevancy of available data. In addition to continuously improving the model, the team will also override the quantitative output when they believe it is necessary. This intervention usually comes in the face of market events such as mergers and acquisitions or company scandals. For instance, the fund exited its position in SABMiller when it was acquired by

Anheuser-Busch InBev ( BUD ) in 2015.

The fund uses a team-based approach, with the broader low-volatility group split into separate functional teams, including strategy & R&D, data computations, and portfolio management. Lead managers Jean Masson and Wilcox Chan are supported by a deep and stable team of 16 investment professionals and have broader firm resources at their disposal. The team's compensation arrangement is an area of weakness, however. Unlike other managers at TDAM, the low-volatility team's compensation is not yet tied to fund performance.

TD Global Low Volatility's philosophy is that taking on more risk doesn't necessarily translate into higher returns. The team intends to take on two thirds less risk relative to the benchmark in a typical market environment and aims to do so without sacrificing returns. Through this less-volatile portfolio, the fund expects to protect capital during market downturns.

In line with its mandate, the fund maintains overweight positions in sectors that tend to be less volatile, such as telecommunication services and utilities, while underweighting volatile sectors, such as health care and technology. This positioning has hurt the fund's performance since its inception in December 2011 through the end of December 2016. However, the fact the fund has not significantly deviated from its positioning shows consistency with its investment process and may serve it well in the case of severe market downturn. That being said, the fund's overweight to interest-rate sensitive sectors could also detract from performance in a rising rate environment.

The fund's low-volatility profile and sector exposure also shows through its higher dividend yield, which as of December 2016 was at 4.0% relative to the benchmark's 2.8% yield and average peers of 2.6%. Furthermore, the team's claim of staying clear of overvalued names is apparent with the fund's valuation metrics (price/earnings, price/book, price/sales) coming below than that of the benchmark and average peer.

The fund diversifies company-specific risk through its portfolio 303 holdings, with the top 10 holdings only representing 8.4% of the portfolio (as of November 2016). Despite the large number of stocks in the portfolio, the turnover level remains modest, with the fund's four-year average turnover (2012 to 2015) at 16%.

The fund's lower volatility mandate shows through its performance. Since December 2011 through the end of December 2016, the fee-based series returned 14.2% annualized, outpacing the average peer by 189 basis points, but lagging the MSCI ACWI Index by 110 basis points. However, the fund's lower volatility, as measured by standard deviation, leads to its stronger risk-adjusted returns, as measured by the Sharpe and Sortino ratios. From its inception to the end of December, the fund's Sharpe ratio of 1.70 exceeded both the benchmark's ratio of 1.59 and the average peer's 1.35 ratio.

The fund has fared well in down markets, but has yet to endure a severe market meltdown. The fund aims to perform better in market downturns and since inception has lost less than the MSCI ACWI in 12 out of 16 negative months for the index. However, the fund has not seen an environment such as 2008, where the fund's goal of capital preservation would be truly assessed.

The fund's fee-based option is priced attractively. With a management expense ratio of 1.12%, the fund is cheaper than its average global equity peer. Lower trading costs make the F series' overall price tag that much more competitive, as it lands within the cheapest quintile of its peer group. TD announced a 10-basis-point cut in the fund's management fee, which will take effect in March 2017.

Unlike the fund's fee-based series, commission-based options are not as attractively priced. The fund's A and I series charge management expense ratios of 2.56% and 2.53%, respectively, which is in line with the average category peer. Although lower trading costs make the fund more competitive, the fee on an absolute basis can be considered high given the strategy's quantitative approach. Management fees for the A and I series options will also be reduced by 10 basis points effective March 2017.