Archive for November, 2009

Returns of the Top 10 Canadian Equity Funds (by assets) of 2004

November 3, 2009


Note: Today’s post takes a look at the the performance of the top 10 Canadian mutual funds (by assets) of 2004 over the next five years. The results simply confirm yesterday’s conclusions about the performance of top 10 global equity funds over the next five years, so feel free to skim over the results.

In yesterday’s post, we saw Ted disheartened with his results when he invested $10,000 each in the top 10 global equity mutual funds (by assets) of 2004. It so happens that Ted had also invested $10,000 each in the top 10 Canadian Equity Mutual Funds (by assets) of 2004. He had read news reports on Mackenzie Financial’s research that showed seven out of 10 beating the index. Even more impressive, every one of those funds beat the iUnits S&P/TSX 60, as XIU was called then.

Fast forward five years and Ted is curious to find out how his picks have fared against the benchmark. He has a flicker of hope. Yes, yesterday’s investigations were a bit disappointing but surely the Canadian mutual funds would bring home the bacon. After all, the five year period between July 2004 and August 2009 was a good time to own Canadian stocks. A $10,000 investment in the TSX Composite would have grown into $14,600. Here’s how Ted’s funds fared:

Fund Fund Market Value Difference with Index New Top 10 Rank MER
Ivy Canadian $9,606 (34%) 9 2.4%
Trimark Select Canada Growth $11,034 (24%) 10 2.3%
RBC Canadian Equity $13,258 (9%) 5 2.4%
AIC Diversified Canada $9,779 (33%) NITT* 2.5%
Fidelity True North $14,217 (3%) NITT* 2.4%
Investors Retirement Growth $13,294 (9%) NITT 3.0%
CI Harbour $14,964 2% 2 2.3%
AGF Cdn Large Cap Div $13,585 (7%) 7 1.8%
Fidelity Cdn Growth Companies $11,349 (22%) NITT* 2.2%
AGF Canadian Stock $12,907 (12%) NITT* 2.4%

NITT = Not in Top Ten
Source: mutual fund database

Unfortuntely, Ted’s hopes are dashed once again. But, at least, he isn’t surprised any more with his findings:

  1. 9 out of 10 funds trailed the index.
  2. 5 out of 10 funds trailed by more than 10%.
  3. One fund beat the index by a measly 2%.
  4. None of the funds beat the index by more than 10% over five years.
  5. 5 out of 10 funds have dropped out of the top 10 Canadian Equity Funds (by assets) of 2009.
  6. If anything the data may understate the underperformance because the effect of sales loads is not considered.
  7. The equally-weighted investment in all the 10 funds underperformed the benchmark by a cumulative 15.1% or an annualized 3.22%.
  8. The average MER (not including any sales loads) of the funds is 2.4%.

Naturally, Ted wonders if he’d have done as well with an index fund. There were no ETFs that tracked the TSX Composite in July 2004 but the TD Canadian Equity Index e-Series fund was available back then. If Ted had invested his savings in the e-Series Fund, he’d have trailed the index by a cumulative 1.8% over the next five years, which just about equals the fund’s annual 0.31% MER. In other words, he’d still have better returns than 9 of his 10 picks.

Ted is now convinced that the funds on the list got there because of their outperformance, which (a) grew the assets already in the fund and (b) attracted a flood of new money due to the recent outperformance. Such lists are rife with survivorship bias and have no predictive ability whatsoever.

Mackenzie hits back at ETFs, Part 2

November 2, 2009


It turns out Mackenzie Financial has been “fighting back” against index funds for years. Check out this column titled “Exploding fund myths” in the Financial Post dated August 10, 2004. It features two tables listing the top-10 funds in the Global Equity and Canadian Equity category and shows 10 out 10 Global funds outperforming the MSCI World Index (in C$) and 7 out of 10 funds outperforming the TSX Composite index in the 5-year period to June 30, 2004.

Let’s imagine that an interpid mutual fund investor, Ted, comes across the column in the newspaper in 2004 and thinks to himself: “Gee! This is hot stuff. Every one of the 10 mutual fund managers have beaten the benchmark in the Global Equity category. You can’t really go wrong hiring these super smart guys to invest internationally for you.” With Ted, to think is to act, so he calls his financial advisor and asks to invest an even $10,000 in each of the top funds.

It’s now 2009 and a good 5 years have passed since Ted bought into Mackenzie’s logic and invested his hard earned money in its list of super duper funds. And — you know where I’m going with this — here’s what he finds:

Performance of Large Global Funds from July 2004 to August 2009

Fund Fund Market Value Index Market Value Difference Difference %
Templeton Growth $9,264 $9,917 ($653) (6.6%)
Trimark Select Growth $7,792 $9,917 ($2125) (21.4%)
AGF International $11,462 $11,258 $204 1.8%
MD Growth $9,917 $9,197 $720 7.8%
Fidelity International Portfolio $8,545 $9,917 ($1,372) (13.8%)
Trimark Fund $8,668 $9,917 ($1,249) (12.6%)
Ivy Foreign $10,657 $9,917 $740 7.5%
CI Global $8,377 $9,917 ($1,540) (15.5%)
Investors Global $12,291 $9,917 $2,374 23.9%
Cundill Value $10,374 $9,917 $457 4.6%
Total $97,347 $99,791 (2.4%)

Performance Data Source: Mutual Fund Database

Ted is surprised to find that over the next five years:

  1. His equal weighted investment in the ten largest funds trailed the index by a cumulative 2.4%.
  2. 5 out of 10 funds trailed their benchmark index.
  3. 4 out of 10 funds trailed their benchmark by more than 10%.
  4. 1 out of 10 funds beat the benchmark by more than 10%.
  5. Trimark Fund dropped out of the list. Fidelity International Portfolio changed its name to Fidelity Global Fund. AGF International was reclassified as International Equity. Investors Global handily beat the index but the Globe Fund database notes the inception date as 2002 and it is not clear if the fund is the same one as Investors Global – C whose returns are noted here.

Finding that the chances of picking a winning fund were no better than a coin toss, Ted figures the only way he can pick outperforming funds over the next five years is getting a peek at Mackenzie’s marketing brochure from 2014. Sadly, Mackenzie’s “research” department isn’t putting it out anytime soon.

Mackenzie hits back at ETFs, Part 1

November 2, 2009


Mackenzie Financial’s marketing brochure “I thought I wanted an ETF” purports to clear up some of the assertions surrounding Exchange-Traded Funds but instead turns out to be an easily-ridiculed piece of propaganda. The brochure clarifies the following assertions about ETFs:

Price: It is galling to hear a purveyor of pricey mutual funds point out that ETFs have “hidden” costs such as transaction fees and cost of advice. Pot calling a kettle black comes to mind. An example is trotted out showing how an investor buying $1,500 worth of a 0.70% MER ETF and paying $24 in trading commissions ends up paying a total cost of 2.30%. The implication is clear: “And you thought our 2.50% fee for doing some real work is too much!”

I’m amazed that Mackenzie didn’t come up with the example of a client buying $100 worth of ETFs every month and paying $24 in trading commissions. It would have allowed them to go for the see-how-reasonable-our-fees-are angle.

Let’s talk real numbers, not made up examples. I’m mostly invested in ETFs. The weighted average MER of the funds is 0.22%. Trading commissions cost another 0.10% to 0.20% every year. I don’t pay for investment advice but even if it costs another 1%, the total cost is still a full percentage point less than Mackenzie’s mutual funds.

Performance: Claiming active strategies provide investors an opportunity to outperform is a bit like saying lottery tickets provide players a chance to become millionaires. Of course, they do. The question is what are the odds? John Bogle estimates that the odds of an active fund outperforming its benchmark are 15% over 5 years, 9% over 10 years and 5% over 25 years. Better than lotteries would be a charitable way of characterizing those odds.

Interestingly, the brochure features a table showing 8 out of 10 global equity funds outperforming the index in the 10-year period to July 31, 2009. We’ve discussed this table at length in an earlier post on Active Management versus Index Shootout. I won’t rehash the arguments again but suffice it to say that such “evidence” should be treated with caution.

We’ll look at Transparency, Tax Efficiency and Diversification in future posts. You may be interested in Larry MacDonald’s and Jon Chevreau’s take on this subject.

You can find Part 2 of this post here.