This article from the indexology blog details the continued underperformance of Canadian actively managed mutual funds vs the passive benchmarks. The scorecard is based on the Canada SPIVA report. SPIVA tracks the performance of actively managed mutual funds in North America and around the world.
Let’s get to the juicy underperformance stuff. A common claim from the active management crowd is that skill can and will show up in periods of market volatility and during severe market shocks. It’s all phooey of course. 2018 was a sleepy year that saw some decent gains until the market took a deep dive at the end of the year. You might think that with skilled eyeballs on the market the active managers would have steered their clients towards safer harbours, but we saw nothing of the sort, of course.
That’s some considerable underperformance for a one -year number. When markets behave poorly, active management can add insult to injury. Consider that in a down market you’re still paying a high fee for that underperformance. They can’t even beat the poor passive indices. And certainly those fees are going to hurt the chances of the active managers. Even if the actual assets ‘beat’ the market by 2%, but they run a fund with a 2.5% MER, they are going to show up on the underperform side of the ledger.
And we know that too many of them buy many of the same stocks. There’s really not much to choose from in the Canadian large cap space. That’s why it will often come down to the fees. How much do you want to pay to own the big Canadian banks 2.2% or .05% with a market ETF? Not only that, with your index-skimming mutual fund you often get no advice (that you’re also paying for). Why pay your bank or advisor when they are not offering any advice? And as you can see from that chart the underperformance was consistent across all regions.
The active management crowd will also claim that it is the small cap space where they can really add value. Small cap points to smaller companies that are not as well known and not followed as closely as the household names that we’ll see in the TSX 60 such as the big Canadian banks, telco’s, retailers and leading energy companies. The thinking goes that it’s more than difficult to demonstrate skill in the large cap space as there are so many analysts and portfolio managers evaluating and pricing those stocks, and that the markets have become quite efficient. Even the world’s greatest investor, Warren Buffett, suggests that it in near impossible (even for The Oracle) to outperform in the large cap space. As I like to say, it’s hard for a stock to hide in plain site.
But give them the free reigns in the small cap space where there is less attention and they should be able to find many opportunities where the market is wrong, where there is hidden value.
That is incredible. When they have more opportunity, their talent does more harm.
One company that does demonstrate some talent in the small cap and in many areas is Mawer Investments. What’s more than unique is that the outperformance in mostly across the board. It’s the disciplined value approach that is working. They claim to have a boring strategy, but obviously it’s smart and boring.
Their mantra is Be Boring. Make Money.
That said, be careful if you chase active mutual fund performance. The norm is that the outperforming mutual funds typically slip to the bottom of pile in the next market cycle. Perhaps Mawer is special – they’re boring.
How about a little extra volatility to go along with that underperformance?
Investors obviously want the greatest returns with as little risk as possible. On ETF.com Larry Swedroe points to studies that show that more active management leads to greater volatility. The more active, the more volatility, the larger the drawdowns in major corrections. That active management typically and usually delivers the exact opposite of what investors seek.
All told, high fee actively managed funds are just not a good deal. They do no deliver on the promise. In 2018 the story continued for Canadian mutual fund investors. The only reason to buy a mutual fund is to get returns that beat the market. That’s the promise, but they mostly fail. Instead, we can buy the market and create our own ETF Portfolios for fees that might be in the range of .10%-.15%. We can buy one ticket asset allocation portfolios with fees in the range. of .20%-.25%. And we can sign up with one of the Canadian Robo Advisors who can offer various levels of advice and portfolios with fees in the range of .40%-.80%. And of course many self-directed investors choose to build portfolios of individual stocks.
And for those who need a more extensive financial plan they might seek out a fee-for-service advisor.
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