Once again, the SPIVA CANADA SCORECARD report is out, this time comparing the 2017 performance of Canadian mutual funds to that of their index benchmarks. The conclusion? For the past calendar year, the performance of managed funds investing in Canadian equities was among the worst ever recorded.
Only 6.78% of Canadian equity mutual funds managed to outperform the broad S&P TSX Composite Index. The 5 and 10 year performance was only slightly less dismal.
Canadian mutual fund managers invested in U.S. and International equities performed better than those invested in CDN equities only, but still underperformed Indexes by a significant margin. A mere 30.59% of CDN managers invested in the U.S. category outperformed the S&P 500 Index in 2017.
Canadian managers invested in International Equity and Global Equity in 2017 outperformed their benchmarks in only 26.92% and 20.97% of respective cases.
Mutual funds investing in U.S., International, and Global equity products over the past 5 and 10-year periods fared much worse than their 2017 single-year performance. For example, those invested in U.S. Equities over the past 5 and 10 years, outperformed the S&P 500 Index in only 2.2% and 1.67% respectively.
These independently-derived conclusions can only be described as shocking for the average Canadian mutual fund investor. Yet, many still ignore the facts, continuing to buy into the industry’s sales pitch that mutual funds, despite high holding costs (averaging 2.3% annually), are likely to deliver superior performance.
Mutual fund managers are usually highly-experienced and capable individuals. However, no matter how smart the manager, it is difficult to outperform a comparable index by more than their high annual fee. Having to consistently beat an Index by some 2% annually is extremely difficult and, as the results prove, only rarely possible.
Unless the mutual fund industry greatly moderates its MERs (Management Expense Ratios), it will continue losing business resulting from the accelerating migration of investors to ETFs (Exchange Traded Funds) and other index-based products. These alternative products offer fees at one-fifth, or less, of mutual funds. Consequently, they routinely tend to deliver better performance.
It is no coincidence that U.S.-based mutual fund managers outperform those of Canadian managers. The difference is largely accounted for by the fact that the average U.S. mutual fund charges its investors, on average, approximately 1% less than that of their Canadian counterparts. Although on average, these managers still underperform comparable Indexes, they do so by a substantially smaller percentage than Canadian fund managers.
The single-most important investment risk totally within the control of an investor is a laser-like focus on minimizing annual holding costs. Over a 10-year period for example, an extra 2% annual holding cost will create a cumulative 22.1% drag on portfolio value, regardless of market performance. Controlling ongoing holding costs is considered to be at least as important as the actual choice of investment products.
Readers can Google “2017 SPIVA CANADA SCORECARD” to access the detailed report on the relative performance of Canadian mutual funds.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (dolezalconsultants.ca), Dolezal is the author of three books, including his most recent, the Third Edition of The SMART CANADIAN WEALTH-BUILDER.