Managed Mutual Fund Performance Declines Yet Again

downward graph

Despite claims that Managed Mutual Funds will outperform Index Funds in a down market (TSX –8.8% in 2018), the vast majority still managed to underperform the market in 2018.

77% of Canadian managed mutual funds underperformed the market
Standard and Poors SPIVA (S&P Index versus Active) report on the performance of Canadian managed mutual funds just came out for 2018, and the news is not good. For 2018, 77% of Canadian managed equity funds underperformed the market. The poor performance of Canadian fund managers when compared to the appropriate index worsened, so that over a 10 year period, 91% of Canadian equity funds underperformed the index. It was worse for Canadian managed US equities, with 97.5 % underperforming. But the winner was Canadian dividend funds, where 100% underperformed the relevant index over 10 years. See the SPIVA report here:

SPIVA Canada 2018

Why is managed mutual fund performance so poor ? There are the two main reasons:
1. Canadian mutual fund fees are amongst the highest in the world. The average mutual fund fee is 2.1%. That means that over a ten year period, the fund has to beat the index by more than 21%, a feat that is proving impossible for 91% or more of fund managers. Compare that to Exchange Traded Fund (ETF) index trackers, which charge around .05%.
2. Big Canadian and US mutual funds are predominantly closet indexers. For example, a typical big bank fund with $3 billion in assets, has got to buy all of the largest names in the index in order to find places for the investors money. If you examine the top ten holdings of the big bank funds, you will find that they constitute around 50% of the fund’s total value, and that around 70% of their holdings are also in the top ten list of the index. If you examine the top twenty holdings, they are almost all the top companies by market capitalization in the index. There is no other place to invest so much money in a small economy and stock market like Canada. Even in a much larger market like the US, the mutual funds are so big that they have to follow the same approach. For example, the Fidelity Contra Fund, which should be anything but an indexer, has US$ 92 billion in assets. Where do they find that amount of investible contra companies ? So investors are paying high fees for so called management which is forced by the size of the funds to buy many of the same large cap companies that are in the index.

big bank mf vs etf

Don’t buy over priced Mutual Funds

The solution is simple. Don’t buy over priced managed mutual funds, and instead invest in low cost index tracking ETFs. This lesson has been well learned in the US, where the largest fund, a Vanguard Total US Market ETF has an astonishing US$261 Billion in assets.
The S&P 500 has returned a total average annual compounded return of 9% over the long haul. That means that in a tax sheltered account, and doing absolutely nothing, your investment doubles in 8 years on average. In the period from 1983 to 2018, the S&P 500 increased 19 fold. That is 3 times better than real estate or any other investment. The intelligent investor will therefore avoid greed, avoid trying for a home run, and be satisfied with getting rich at a very reasonable rate in the simplest, low fee way possible.

The best ETF Funds in Canada

For a list of the best ETFs in Canada, see this article from MoneySense here:

MoneySense Best ETFs 2019

For those with a Globe and Mail subscription, see Rob Carrick’s excellent 2019 ETF Buyer’s Guide here:

Rob Carrick’s ETF Buyers uide

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