Just how well are mutual fund investors faring in Canada? That question isn’t as straightforward as it may seem.
The Standard & Poor’s Indices Versus Active (SPIVA) reports are useful for determining the percentage of active funds that beat their benchmarks. The most recent one, for example, found that just 2.5% of actively managed Canadian equity funds outperformed the S&P/TSX Composite Index during the five years ending in 2010.
But the SPIVA reports have some limitations: most importantly, they don’t tell you the degree of that underperformance. Indeed, as critics have pointed out, virtually all ETFs lag their benchmarks, too, so they would all appear on the SPIVA report’s list of losers. The key point, of course, is that the iShares S&P/TSX Capped Composite (XIC) lagged its benchmark by just 22 basis points last year, while the Investors Canadian Equity Fund—to pick on just one high-priced alternative—trailed it by 4.54%. Clearly that’s a crucial distinction.
Wishing upon a Morningstar
Justin Bender, portfolio manager at PWL Capital in Toronto, recently supplied me with some more useful data about fund performance. The Morningstar Fund Indices bill themselves as “the best available representation of the performance of aggregate dollars actually invested, currently and historically, in Canadian mutual funds and segregated funds.”
These Morningstar indexes asset-weighted, which means that larger funds have more influence than smaller funds. This, too, is a more meaningful comparison than a simple average of all funds. In the Canadian Equity category, for example, we find that Canadian fund investors earned an aggregate return of –10.42% in 2011, compared with the index return of –8.71%. That’s an underperformance of 1.71%, which is very close to the 10-year average.
Taking on the Couch Potato
To get an idea of how a diversified portfolio of active funds would have performed last year, I created a composite using the Morningstar indexes that correspond to the asset allocation in the Complete Couch Potato. The table below shows the composite MERs of these funds and the returns earned by investors in 2011:
|Morningstar Canadian Equity
|Morningstar US Equity
|Morningstar International Equity
|Morningstar Emerging Markets Equity
|Morningstar Real Estate Equity
|Morningstar Cdn Inflation-Protected Fixed Income
|Morningstar Canadian Fixed Income
Now let’s pit this performance against the ETFs in the Complete Couch Potato in 2011: