Opinion

PETER DOLEZAL: Beware the performance claims

We have all seen mutual fund advertisements. Many claim great performance compared to market Indexes. Some are indeed fair claims. Others are not.

It is a fact that among roughly 3,500 Canadian mutual funds, some 20 per cent will beat the market in any given year — the other 80 per cent will not. The odds of an investor holding a winner in any given year is about one in five — slot machines in Vegas provide much better odds.

It is understandable the industry will choose to advertise the winners, as opposed to the laggards. Unfortunately, one year’s winning fund is often another year’s underperformer. Although selective advertising by the industry is to be expected, there are times when its ads are grossly misleading.

A dramatic example was highlighted by Andrew Hallam of the Strategy Lab, in his April 30, 2014 Globe & Mail article. He took a major, and popular, mutual fund provider, IA Clarington Investments Inc., to task for their advertised claims.

Clarington had boasted that three of their funds had delivered market-beating performances compared to Canadian Indexes. Unfortunately, none of the three funds held significant quantities of Canadian stocks — thus totally invalidating the comparison. The Clarington ad also claimed index-beating performance over the long term, however none of the advertised funds had existed for more than three years.

Hallam not only exposed Clarington’s disingenuous advertising, but went on to demonstrate the inferior performance of other Clarington funds which did, in fact, compare to Canadian, U.S. and international indexes. In virtually every fund he analyzed, Hallam demonstrated the Clarington fund had lagged the performance of the relevant index. He further demonstrated that had an investor held those Clarington funds for the previous decade, his holdings would have underperformed those of investors who had invested simply in the indexes — by a total 13.64 per cent.

This proven underperformance by mutual funds is to be expected. No matter how smart the mutual fund manager, it is extremely difficult to consistently beat an index by enough to counter the effect of the mutual fund’s fee premium, which annually, can total two per cent more than the fees charged by an Exchange Trade Fund (ETF) or an Index Fund.

Yes, buyers should always beware all advertised claims no matter what the product. Unfortunately, there are many who do not. With mutual funds, many take the ads at face value, continuing to accept the advice of advisors who promote and sell such funds, without acknowledging or offering much lower-cost alternatives.

Much more strict regulation of the mutual fund industry is long overdue in Canada.

 

A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books, including his recent Second Edition of The Smart Canadian Wealth-Builder.

Contact Panorama Rec Centre to register for Peter’s Elder College Fall session – Financial & Investment Planning for Retirees & Near-Retirees

(Thursdays, September 18 to October 16).

 

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