Do Canadian Equity Fund Managers Really Beat the TSX?
As you've probably gathered from my previous postings, we and PWL believe that asset class exposure and not active stock picking explains the vast majority of investment portfolio returns. This belief is based on academic research and is a main driver behind our overall investment philosophy.
Every quarter, Standard and Poor’s releases an update to their SPIVA report. The SPIVA report documents the performance of active mutual fund managers vs. their respective benchmark index.
I just finished reading this report, and, as in the past, our investment approach was further supported by the fact that the majority of active managers underperformed their benchmark in 2008. Of the eight fund categories that S&P tracks, only Canadian Dividend fund managers (89.66%) outperformed their index. While Canadian Dividend fund managers did have an exceptional 2008, over a longer five-year period only 3.23% of these same dividend managers outperformed their benchmark.
This morning the Globe and Mail published an article titled “Most Canadian Equity Funds Beat the TSX”. The article’s author arrived at this conclusion because 53.2% of active managers beat the S&P/TSX Composite index OVER THE LAST 3 MONTHS OF 2008.
However, when you look at 2008 as a whole, only 42% of Canadian equity funds beat the S&P/TSX Composite index. Similar to the Canadian Dividend fund managers above, over the past 5 years less than 12% outperformed the index. Also incredible is the fact that over the same 5 year period, 45% of Canadian Equity Funds ceased to exist altogether. This is primarily due to poor performing funds being either shut down or rolled into another better performing fund so that poor fund performance no longer needs to be reported by the parent fund company.
Many investors want to believe that active management really shines in down markets, and that during a financial crisis a good manager will earn his or her keep. I think this report paints a very different picture.
I encourage you to read this report, and to pass it on to your friends and colleagues. I have met a number of referrals lately, who were looking for a second opinion, and while not necessarily surprising, it is disappointing to me that none of them had any indexed exposure in their portfolio, only actively managed mutual funds, the majority of which were sold to them with high deferred sales charges.
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After Cameron’s interview Greg interviewed Jasmit Bhandal from Standard and Poors, to get her insights on this report card, and affirms what we have been saying all along, that most investors should seriously consider some indexed exposure in their portfolio, if they are going to hold stocks.
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