PETER DOLEZAL: Active versus passive fund performance in 2014

Why do so many investors continue to hold mutual funds, despite long-term evidence of their consistent underperformance?

Why do so many investors continue to hold mutual funds, despite long-term evidence of their consistent underperformance?

Once again, Standard & Poor’s Indexes Versus Active Scorecard (SPIVA) has released its findings for Canadian funds for the year ended Dec. 31, 2014. While the entire report can be accessed online, the following is a brief summary:

 

• In 2014, only 26.47% of Canadian active equity fund managers outperformed the S&P/TSX Index. Over the past five years the rate of outperformance dropped to 20%.

 

• Among active managers in the Canadian Dividend & Income Equity sector only 6.67% beat the comparable Canadian Dividend Aristocrats Index in 2014. Zero percent of the active managers beat the Index over the past five years.

 

• In the U.S. Equity sector, only 11.1% of active funds beat the S&P 500 Index. Over five years the rate of outperformance declined to 2.90%.

 

• In the International Equity sector, 30% of active funds beat the Index in 2014;  only 13.16% did so over five years.

 

While the specific performance numbers vary each year, the historical trend-line remains unchanged. Every year, in every major market sector, the average mutual fund underperforms its comparable Index. The poor average performance in any single year deteriorates further when compared over five years.

Many investors remain unaware of both the significant fees they currently pay on their portfolios, and the high-likelihood of their mutual funds significantly underperforming their index benchmarks.

The mutual fund industry’s dismal track record continues to be accepted by millions of Canadians. The real beneficiaries of this strategy continue to be primarily the fund providers, and the investment advisers selling mutual funds to a generally under-informed public.

Yes, mutual funds are a convenient vehicle for achieving broad diversification. And yes, it is convenient to rely on an investment house to hold the investments and provide periodic reports to the investor. But, is this convenience worth the high annual fees and consistently poor performance?

Ten or 15 years ago, investors wishing to achieve broad diversification in their investments had little choice but to choose mutual funds and to accept their high fees.

Today however, several major options exist. Very low-cost Exchange Traded Funds (ETFs) and Index Funds are available, often at less than one fifth the cost of mutual funds. Neither of these options strive to beat the chosen Index — rather, they simply track it, usually with minimal tracking error.

The significance of a 2% reduction in annual holding costs is dramatic. It is equivalent to improving portfolio performance by 2%.

With the average annual total return of Canadian equity markets over the last ten years averaging approximately 8%, a comparable mutual fund would have needed to outperform the market by roughly 25% annually, in order for the investor to simply break even with the Index.

As the SPIVA reports have repeatedly demonstrated, beating the market by this margin, on a consistent basis, is almost impossible.

A partial solution to this problem will be welcome after July 1, 2016 when fee structures must become more transparent.

New regulations will require full and clear disclosure by mutual fund salespersons, of all fees embedded in each fund, and of his/her personal benefit from the fees charged. The disclosures will come as a shock to many investors, likely accelerating the already-emerging shift to less expensive options.

Saving for investment is a long and challenging exercise for most of us.

Before investing those savings for our long-term future, it makes sense to thoroughly understand the pros and cons of any investment, and to make a fully-informed decision.

Based on all available evidence to-date, mutual funds would be at the bottom of my personal investment choices.

 

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 most recent, The SMART CANADIAN WEALTH-BUILDER.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

North Saanich Municipal Hall. The District released its annual report last week. (Peninsula News Review)
Pig shelter at Sandown Agricultural Lands comes down

North Saanich warned centre of stop-work order and possible fine

The Greater Victoria Women’s Transition House Society provides an essential service and has only seen an uptick in need since the start of the COVID-19 pandemic. (Pixabay)
Greater Victoria women’s shelter adds second safe harbour

Costs soar as need does for Greater Victoria Women’s Transition House Society

The family of Iris McNeil, shown here with members of her family, has launched a petition to deny parole for the man who murdered McNeil in 1997. (Family photo)
Family fights killer’s release from Metchosin institution

Shortreed serving an indeterminate sentence at William Head Institution

A driver stopped by Saanich police following a road rage incident on April 15 was found to be impaired, in violation of a license restriction and in a damaged vehicle. They received a 90-day driving prohibition and a 30-day vehicle impound. (Saanich Police Traffic Safety Unit/Twitter)
Driver stopped on Pat Bay Highway after road rage reports fails breathalyzer test: police

Several witnesses reported driver to Saanich police, school officer intercepted

Rainbow trouts thrashing with life as they’re about to be transferred to the largest lake of their lives, even though it’s pretty small. These rainbows have a blue tinge because they matched the blue of their hatchery pen, but soon they’ll take on the green-browns of their new home at Lookout Lake. (Zoe Ducklow/News Staff)
VIDEO: Lookout Lake stocked with hatchery trout to delight of a seniors fishing club

The Cherish Trout Scouts made plans to come back fishing soon

Eight-year-old Piper and her family were raising money to help Guinevere, the bearded dragon, get a gynecological surgery. Sadly, the reptile didn’t survive the procedure. (Jackee Sullivan/Special to Langley Advance Times)
Lizard fails to survive surgery, GoFundMe dollars help Langley family offset medical bills

Guinevere, a pet bearded dragon, underwent an ovariectomy on Tuesday

B.C. Premier John Horgan wears a protective face mask to help prevent the spread of COVID-19. THE CANADIAN PRESS/Jonathan Hayward
B.C. Premier John Horgan booked to get AstraZeneca shot Friday

‘Let’s show all British Columbians that the best vaccine is the one that’s available to you now,’ he said

Doses of the Moderna COVID‑19 vaccine in a freezer trailer, to be transported to Canada during the COVID-19 pandemic. THE CANADIAN PRESS/Nathan Denette
Pfizer to increase vaccine deliveries in Canada as Moderna supply slashed

Moderna plans to ship 650,000 doses of its vaccine to Canada by the end of the month, instead of the expected 1.2 million

Dr. Bonnie Henry speaks about the province’s COVID-19 vaccine plans during a news conference at the legislature in Victoria. THE CANADIAN PRESS/Chad Hipolito
P.1 variant likely highest in B.C. due to more testing for it: Dr. Henry

Overall, just under 60% of new daily cases in the province involve variants

(Black Press Media file photo)
POLL: Do you have a plan in place in the event of a tsunami?

Tsunamis have claimed the lives of more than 250,000 people between 1998… Continue reading

Anyone with information on any of these individuals is asked to call 1-800-222-TIPS (8477) or visit the website victoriacrimestoppers.ca for more information.
Greater Victoria Crime Stoppers wanted list for the week of April 13

Greater Victoria Crime Stoppers is seeking the public’s help in locating the… Continue reading

An armed officer walks outside Cerwydden Care on Cowichan Lake Road near Skinner Road Wednesday, April 14 around 5:30 p.m. (Kevin Rothbauer/Citizen)
Police standoff at Duncan apartment ends peacefully

Officers surround building as homeowner held in apartment for nearly four hours by adult son

Hwy. 4 was shut down in both directions for 10 hours on March 23 as a rock bluff was blasted as part of Kennedy Hill’s ongoing construction. Commuters can expect five more 10 hour closures on five consecutive Wednesdays beginning April 28. (Photo courtesy of Ministry of Transportation and Infrastructure)
Five 10-hour Pacific Rim highway closures planned in the next 6 weeks

Closures needed for rock blasting as part of the Kennedy Hill Safety Improvement project.

Most Read