Last week we introduced a new series on Cut The Crap Investing. Real readers share their (horror) stories of investing in poor-performing high-fee mutual funds. These same readers admit that they don’t really know how to leave behind these funds that get in the way of true wealth creation. They want to move to lower-fee ETF solutions. We will chronicle the experience so that more readers can discover how to break free. The reason for leaving is the poor performance that often comes attached to poor advice or no advice. For Craig, we’ll have a look at the poor performance of his AGF Mutual Funds.
Here’s the post from last Sunday, moving out of mutual funds.
The fees? That’s MERder
In that post we highlighted the underperformance of Craig’s AGF Global Balanced Growth Fund. You can check out that link for the fund’s approach, holdings and returns.
The fund has a crippling MER of 2.58%. That is MERder for your portfolio we might add 🙂
Over the last 10 years the global fund has delivered an average annual return of 7.7%. Those (poor) returns are in line with the peer group of Canadian global balanced mutual funds. Most Canadians have poor performing funds to this magnitude.
When I run a Balanced Growth ETF Portfolio model on portfolio visualizer I get returns of 10.5% annual. And for the record I did overweight the U.S. allocation to match the AGF fund. And that’s with using a U.S. dollar ETF (a Canadian dollar version is not available for the time period) and not accounting for the near 20% appreciation of the U.S. dollar vs the Canadian dollar. Add about another 1% annual for the currency boost.
That is some incredible underperformance.
The poor returns south of the border
Craig is also invested in the AGFiQ U.S. Sector Class fund.
That fund has underperformed its peer group by 2.8% annual.
The peer group would represent the average of Canadian mutual funds in the category. That is they are underperforming against a very poor group of funds.
The peer group is greatly underperforming a simple low cost ETF such as iShares XUU that buys the U.S. stock market, including some small cap and mid cap stocks.
XUU has returned 16.17% over the last 5 years. The period is to end of June 2021 to match the available reporting of the AGF fund.
Oh my, how do you underperform a passive benchmark by almost 5% annual? Well the MER (management fees) of 2.53% will pitch in big time, but it goes beyond fees into portfolio management as well.
The mutual fund uses sector selection in the attempt to deliver less volatility. It was mildly successful in that regard during the COVID correction. It was not worth the level of total underperformance in my opinion. Not even close.
The amount of additional wealth creation one would gain by way of a additional returns of 10.54% vs 16.17% is life changing.
Again, this is the reality and the opportunity cost for the typical Canadian investor.
The “common sense” fund
Craig’s advisor is with Primerica. About two-thirds of Craig’s assets are in a Primerica Common Sense fund – Asset Builder IV. That fund is managed by AGF.
The MERder rate on this one is 2.57%.
From Primerica (doc sent to Craig) … A person who invested $1,000 in the fund 10 years ago would now have $1,608. That works out to an average return of 4.9% a year.
We’ll let Morningstar do the returns comparison on this one. Morningstar is a wonderful resource in many respects, and especially for performance comparisons.
Craig’s fund is in Blue, the category average in Yellow. The index represents a passive and blended benchmark – something you might attain with a conservative ETF portfolio. You would have to apply the low MERs of the ETFs.
I’ve told Craig we would be moving him to that red line.
That Morningstar chart shows the incredible discrepancy in wealth creation, even over a 10-year period. That separation increases over time. One could certainly end up with twice or three times the wealth (portfolio value) over an investment lifetime.
Check in with that fee calculator on the site of Larry Bates, the author of Beat The Bank.
How much are you giving away?
When I was an advisor with Tangerine Investments, I often saw Canadians with very little returns for their outside (non Tangerine) investments. I did portfolio reviews as part of my duties. They also recently introduced the Tangerine Global ETF Portfolios. Tangerine is a very good option for Canadian investors.
Of course you would have lower fees (compared to Tangerine) when you create your own ETF Portfolio. Fees for an all-in-one asset allocation ETF would be in the range of 0.20%-0.25%. These are game changers as we describe on MoneySense in the Best ETFs for 2021.
You can look into the …
There are many options for breaking free from your high-fee mutual funds. Doing so is a no-brainer. Just look at the returns. I suggest that you benchmark your portfolio returns on Morningstar.
Craig’s next moves
Craig’s investments are mostly in DSC funds. There are some massive fees that can be triggered for selling out. That said, there are schedules for how an investor can remove monies from DSC funds over time, without triggering those fees.
This will also be an exercise in how to leave the DSC funds.
Given the level of assets that Craig holds, he is offered a modest fee break of 0.80%-1.0%. But that is not near enough to undo the performance damage.
There are also trading expense ratios (TER) that pile on to the MERder story.
Thanks for reading the poor returns of AGF mutual funds. Please drop by the comment section to offer your thoughts.
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