by Alex Roslin
The Montreal Gazette
Monday, March 10, 2008
The rush to make contributions to Registered Retirement Savings Plans for last year is now closed, and you might be wondering where to park all those new funds.
If you’re considering a mutual fund, you might want to read a new report from market research firm Standard & Poor’s. It found the vast majority of actively managed Canadian mutual funds lagged the market last year.
Just 24 per cent of Canadian equity mutual funds outperformed the benchmark S&P/TSX composite index in 2007.
The numbers were even worse over the longer term. Over the past three years, only 13 per cent of the funds beat the index, while over five years, a mere eight per cent succeeded.
The figures were also bad in other categories of mutual funds. Among Canadian dividend and income equity funds, a dismal three per cent of active managers beat the benchmark dividend index over the past three years; over five years, not one of 37 funds beat the index.
In international equity funds, the results were a little better but still fairly miserable, with just 19 percent of active managers beating the market over three years and 13 percent over five.
The only categories in which a majority of managers beat the index in 2007 were Canadian small- and mid-cap equity funds and blended Canadian-focus funds that have a half-and-half split between Canadian and international equities.
In these groups, 52 percent of managers beat the market.
But over the three-year period, only 40 percent of the blended Canadian-international funds beat the index. Data was available for longer periods for the small- and mid-cap Canadian funds.
The reason for the lackluster performance? The main problem is management fees charged on investments in mutual funds, said Jasmit Bhandal, author of the report and director of Canadian index services at S&P Canada.
“It really boils down to the arithmetic of active investing,” she said.
“On average, 50 per cent of investors are above the market, and 50 per cent are below, so once you account for fund fees, most actively managed funds will fall below the market.”
The fees also explain the still-worse performance over the longer horizons. “Those fees are going to add up over time, so that’s why we see even fewer funds beating the indexes over the long term,” Bhandal said.
The underwhelming performance means investors “really have to do their homework to find the managers who beat the index,” she said.
But there’s another hitch. S&P’s research on
In other words, a fund’s outperformance one year may not reflect a skilled manager so much as chance that won’t necessarily repeat the following year.
Similar research has yet to be done in
(As for the small- and mid-cap mutual funds, Bhandal said more of them may have beat the index because there “may be better opportunities to add value” in that space.)
Gavin Graham, chief investment officer at the Guardian Group of Funds, acknowledged that most actively managed Canadian mutual funds have underperformed their benchmarks. “Those are not particularly great numbers,” he said.
He blamed the lagging results on fees and the fact that it’s simply not easy to beat the markets, even for the pros. “It’s very rare to find people who can consistently trade well,” he said.
“It would appear there are not many who do this, but there do tend to be some who beat the market over time even after fees, while delivering less volatility.”
Graham said actively managed funds can in some cases offer less risk to investors because managers tend to reduce holdings of overvalued stocks. This can cause a fund to fall behind the market, but it may reduce an investor’s ulcer factor because the fund has less volatile swings.
Independent analysts blamed the weak mutual fund numbers on a combination of fund fees and mediocre investing decision-making.
“Most mutual fund managers focus on only one type of analysis—fundamental analysis. My opinion is they need more types of analysis, like seasonality and technical analysis,” said Don Vialoux, author of the DVTechTalk.com market website and a retired technical analyst who worked at RBC Investments.
(Fundamental analysts look at a company’s valuation measures like earnings and debt ratios, while technical analysis focuses on studying charts to spot price trends; seasonality looks at recurring market patterns that repeat at certain times of the year.)
Stephen Vita, a professional trader in Bradford Woods,
“Most people who are any good leave. In the mutual fund business, you can’t make market timing calls, you have to be fully invested all the time, and you go down with the market when there is a bear, like now. That’s all they know. It’s no great secret on the street,” he said.
Vita got a trial-by-fire start in the investing business when he went to work as a mutual-fund salesman just before the 1987 market crash.
He was selling investors front-end-load funds that charged a large upfront fee as a percentage of the initial investment, plus annual management fees later on.
“I didn’t realize what an absolute rip-off it was (for investors). I didn’t know any better,” he said.
Vita and Vialoux both suggested investors consider exchange-traded funds, which passively track an underlying index and charge much smaller fees than mutual funds.
For more info:
Standard & Poor's reports on actively managed funds
Regularly updated list of Canadian and U.S. exchange-traded funds at Don Vialoux's DVTechTalk.com
[TAGS: mutual funds, investing, ETFs, exchange-traded funds]
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