Archive for March, 2009

Active Management versus Index Shootout, Part 1

March 31, 2009


Dan Bortolotti, a writer for MoneySense magazine, wrote in a recent issue about how he became a convert to passive investing and moved all his savings into a version of MoneySense’s Couch Potato Portfolios. He received a lot of feedback on his article, including a response from a reader who asked his advisor about passive investing and the advisor responded with two charts that showed a purported superiority of active management. The first table compared the performance of large mutual funds with a blended index:

Largest Canadian Equity Mutual Funds vs Index over 10-Years (January 31, 2009)

  • 9 of 10 Largest Canadian equity mutual funds outperform the blended index
  • 9 of 10 Largest Canadian equity mutual funds have lower volatility than the index. Ivy Canadian Fund is the least volatile fund
Fund Assets $Millions 10 Year Annualized Return % 10 Year Outperformance vs Index 10 Year Standard Deviation
70% S&P/TSX Capped Total Return / 30% MSCI World Index 3.3% 13.3
RBC Canadian Dividend $6,760 6.4% 3.1% 10.2
CI Harbour $4,084 6.9% 3.6% 11.6
CI Canadian Investment $3,520 6.2% 2.9% 11.1
BMO Dividend $3,385 7.0% 3.7% 10.3
RBC Cdn Equity $3,264 5.0% 1.7% 14.1
CI Signature Select Canadian $2,790 9.8% 6.5% 12.4
AGF Canadian Large Cap Div-Classic $2,054 3.8% 0.5% 12.7
TD Dividend Growth $2,021 6.5% 3.2% 11.2
Mackenzie Ivy Canadian $1,955 2.3% -1.0% 8.4
Trimark Select Canadian Growth $1,830 4.5% 1.2% 10.8

Source: Mackenzie Investments

I’ll post the second table that compared the performance of Global funds with the MSCI World Index in Canadian Dollars. In a subsequent post, I’ll discuss why these numbers should be treated with caution. Meanwhile, you may want to weigh in with your thoughts on the comparison.

Harmonization and mutual funds

March 30, 2009


One of the ironies of harmonization is the outcry from the mutual fund industry that a HST will be an additional strain on the savings of ordinary investors. CI Financial Corp. even issued a news release on the topic:

Harmonization of Ontario’s sales tax with the federal GST would lead to a massive tax on the savings of ordinary citizens, notes CI Financial Corp., which manages or administers approximately $75 billion on behalf of Canadian investors.

“A harmonized sales tax could drain over half a billion dollars a year from the investment accounts of Ontario residents,” said Stephen A. MacPhail, CI President. “Ontarians need to be aware of all of the implications of harmonizing the GST and the provincial sales tax. We urge the provincial government to avoid any new tax on savings, especially under the guise of a consumption tax.”

There is no doubt that harmonization will cost investors and it is legitimate to question if savings should be taxed. What is ironic, though, is the fund industry suddenly getting the religion on expenses and shedding crocodile tears on the plight of average investors. The average Canadian mutual fund costs investors about 2.5% per year in expenses; the HST will add 20 basis points to it. Is the MER or the HST a bigger burden on investors? How many investors in the iShares CDN LargeCap 60 (XIU) or the TD e-Series mutual funds are losing sleep over the couple of extra basis points they now have to shell out? Did the same fund industry pass along the savings to investors when the Federal Government cut the GST from 7 percent to 5 percent?

The debate over harmonization

March 29, 2009


Before I get pelted with angry comments, I should clarify that I’ve never been a big fan of Dalton McGuinty, though he represents our riding and is very popular here. I did not vote for the Ontario Liberals in the past two provincial elections and in fact, received some flak for posting that I don’t intend to. Though I’m not at all surprised at the angry backlash the proposal to harmonize the province’s sales tax with the federal GST is receiving in phone-in talk shows and online comments, I think Mr. McGuinty deserves credit for doing the right thing with this move.

Yes, it is true that the sales tax on many currently exempt items will be hiked. But, the government is recognizing the regressive nature of sales taxes and providing Ontario residents with low incomes with a significant enhancement to the sales tax and property tax credit. The budget also proposes a 1 percent cut to the Ontario tax applicable on the first $36,848 of income.

But, the most significant measure — and politically surprising in light of Mr. McGuinty’s past assertions that corporate tax cuts are a “non-starter” — in the budget is the deep cuts to corporate income taxes. Effective July 1, 2010, corporate taxes will be reduced by 2 percent from the current 14 percent and gradually drop to 10 percent over the next three years. All things being equal, corporate tax cuts will result in higher after-tax earnings and benefit investors. Note that taxes on eligible dividends are being increased. Experts also contend that many businesses will eventually pass along their savings on the sales tax on business input costs to consumers and the effect of harmonization on consumers should be quite modest. For instance, businesses will save an estimated $500 million in administrative costs alone — costs that are indirectly borne by consumers.

The transformation of the Mr. McGuinty’s government has been remarkable — cuts in personal income taxes, a simplified tax code, a business-friendly budget and even a reduction (albeit, modest) in the size of government. At least to me, Mr. McGuinty sounds like an attractive ballot choice in 2011.