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.

This article has 25 comments

  1. The first issue that comes to mind is that Mackenzie is comparing today’s largest funds with the performance of the past 10 years. Wouldn’t it make more sense to choose the 10 biggest finds 10 years ago?

    Also allocating only 70% of the Inex to Canada while some funds inest 100% in Canada isn’t exactly a fair comparison either.

  2. I agree with MCF’s point that Canadian equity funds should be compared with TSX Composite Index instead of a blended index.

    Another problematic comparison is between Global Asset Allocation Funds with MSCI World Index. It doesn’t sound problematic on the surface, but it is. MSCI World Index does not include emerging markets. Guess what those Global Asset Allocation Funds like to buy? Emerging Markets. Therefore, the appropriate index to use is MSCI All Country World Index, which does include Emerging Market. Before the 2008 crash, emerging market did much better than developed countries. As a result, a lot of Global Asset Allocation funds beat MSCI World Index marginally and gets a 4 star rating from morningstar. The reality is that those funds did not beat the correct index, which is MSCI ACWI. There is a lot of manipulation out there to get people to invest in managed funds. That was a lot off my chest.

  3. The key point is that the outperformance is only a few percent even with the staged comparison. So why are you paying 2% MER to gain 3% and only some of the time?

  4. Charles in Vancouver

    I like mcf’s point about picking the 10 largest funds of 10 years ago. This is also called survivorship bias.

    Let me also point out that the US dollar was worth about $1.50 Canadian 10 years ago and now it sits around $1.25. Against the Yen and Euro we’re roughly where we were 10 years ago. So if the blended index is denominated in Canadian dollars and contains a chunk of US equities, that chunk will have suffered a currency drop that Canadian Equity funds did not. I think that a Canadian index is the only appropriate comparison for a Canadian equity fund.

  5. What a bunch of bull… it’s totally apples-and-oranges. If it’s produced by Mackenzie, why did they cook the numbers to make their Mackenzie Ivy Canadian look so bad compared to the others?

  6. Yeah, this survivorship bias is REALLY bad. Higher performing mutual funds have large inflows of cash, so the actual returns by the average investor in those funds would be less. Being a large mutual fund might be in part because of large returns in the early part of the 10 year period when the fund was much smaller.

    Also, much of the money in those funds could be from discontinued, underperforming funds that were automatically merged into the higher performing ones, further skewing the results. (Does anyone have figures on how large and common these fund mergers are?)

  7. Leading Edge Boomer

    As for comparing these funds to the TSX only. Remember that many of these Canadian Equity funds actually have a mandate to invest 10-20 of the fund in US or other foreign investments.

    As an example RBC Canadian Equity currently holds 7.1% in Us Equity,1.7% in other foreign equity and 6% in cash.

    Can’t always go by a funds name. One has to look at what each fund actually holds.

  8. I thought that article by Bortolotti was one of the best I’ve ever read on why people should invest passively.

  9. Even without the survivorship question…it’s still cherry-picking. JUST 10 years to compare?!

  10. Aside from the other obvious problems in this comparison, like those mentioned above, the survivorship bias is probably the most important. I analyzed this issue at http://pharmadaddy.blogspot.com/2009/02/power-of-hindsight.html
    I looked at the Honor Roll Mutual Funds recommended by Suzanne Abboud in MoneySense. As my benchmark I used a passive portfolio made of TD E-series Funds (40% Bond, 30% CDN Equity, 20% Intl Equity, 10% DJIA Index) and did regular monthly purchases from March 1, 2002 to present. The annualized return was 1.4%. I then constructed a portfolio with similar weighting but using Ms. Abboud’s recommended funds. The return was a remarkable 7.2%. Of course it was. She recommended those funds based on past returns. If you go back to the MoneySense 2002 issue though, you get a different picture. Her fund recommendations were not at all the same as in 2009. And if you used them to construct a portfolio at that time and followed it through to present, your return would be -5.7%. Ahh, the power of hindsight.

    For fair comparison also, you’d want to compare the returns of an index fund or ETF, not just the index. For the sake of argument, if you compare all the active funds listed against some common index or ETF funds you find a less rosy picture for the active team. Only 2 of the funds listed beat the 5-year iShares CDN LargeCap 60 Index (Harbour & Signature Select) and only by 0.8% and 0.4% respectively.

    After years of getting rooked by the active fund industry, I think I’ll stick with my passive approach!

  11. What about taxation of active versus passive investments in a taxable account? What about annual management expenses of active vs passive funds?
    In some ways passive is better. If you are Buffett and everything you touch turns into gold, then go for active..

  12. This article would definitely fall under the “figures never lie but liars figure”!
    The sad part is that the majority of people (of which I was one not too long ago) will read this article and continue to throw their money at mutual funds.

  13. The comparison that MoneySense magazine published which I liked the most is a comparison of the blended average of a mutual fund manager’s funds versus the mutual fund company’s stock. For example, compare Investor’s Group’s blended average fund performance with IG’s stock performance, compare CI’s blended average fund performance with the performance of CIX, etc. If I recall correctly, in almost every case, the fund manager’s stock outperformed the funds managed by the company. I like to quote ING’s slogan: “Money doesn’t grow on fees”. The moral of the story, just like with casinos, it is better to bet on the “house” than to bet on a hand, or pull of a slot machine, or the spin of a roulette wheel.

  14. Some time ago, CC linked to an article that used grade 5 arithmetic to prove a point:

    1.) Over any time period, the market return is equal to the weighted average of the returns on passively managed money and actively managed money.

    2.) Since the ‘average’ return of passive money equals that of the market (+- miniscule tracking error), the ‘average’ return on active money is also equal to the market.

    3.) The investor receives the retrun on his/her funds, minus managing fees. No prizes for guessing what type of fund has the lowest MER, and what type of ‘average’ investor will come out ahead.

    Proponents of active management must believe that they are not ‘average’, but obviously, some of them (about 50%?) has to be that and worse….

  15. I have a non-related question.

    TD has a bunch of “market growth gic’s” which are tied to various indexes. They protect the capital and have capped returns. http://www.tdcanadatrust.com/GICs/GICTable.jsp (under “GIC plus” on the page)

    What is your opinion on these? I couldn’t find any information on any MER on their site.. but the only way out is either the term coming to an end, or DEATH (muahaha)… very puzzling.

    all the best,

  16. @mcf: Exactly! And in fact, I’m suspicious whether this list is even correct. For instance, the Investors Dividend Fund with $9 billion + in AUM is missing from the list presumably because it doesn’t have a 10-year history.


    Darryl: I think the two reasons you point out (a) poor performing funds being merged away and (b) better performing funds attracting lots of new money is the reason for these numbers (assuming it is correct, of course).

    LEB: It’s a huge problem figuring out an appropriate benchmark to compare. The current asset allocation of these funds are all over the map. Who knows what to compare these with!

    Dave: You probably missed the marketing spin on Ivy Canadian’s poor performance — it has the lowest volatility!

    Ioana: You may want to check out this article:


  17. ioana – I found a little more information on those. The possible return is capped at a maximum return – didn’t find the exact number used though. Also, dividends won’t be included when determining the final return, so if you purchased one of these GICs for the TSX right now – that would be the equivalent of a 3.5% MER. Add that with the capped return, and these things look great for TD, not so good for the consumer.

  18. Tony: Just went back and read your post about the power of hindsight, and it’s excellent. As you reveal so nicely, it is easy for advisers to present clients with a list of top-performing funds and say, “These beat the indexes over the last 10 years.” The proper response is, “Can I assume that you were recommending these funds 10 years ago?”

    Four Pillars: Many thanks for your kind words about my article in MoneySense!

  19. Thank you, that’s very helpful! Didn’t know about the dividents not being included, that makes sense, I guess “the miracle of compounding” will not work in my favour in this case…. didn’t know about the PF factor… though I don’t think in this case there is a PF factor… I think it would be a serious omission in their literature. (I actually think it says “100% of the returns up to the maximum).

    I actually purchased these back in dec. 07, by moving pretty much all my rrsp to GIC (4.10% at the time) and the market linked ones. I had zero knowledge about investment at the time.

    Since I timed the market just right, through sheer luck, it might not have been the worse idea in retrospect… but point learned!!

    Thanks again,

  20. After many years being charged by the “industry” I finally moved our RRSPs to Shareowners where I can invest in ETFs and some good individual stocks, sometimes referred to as the Core/Satellite method I believe. My timing was right as the market tanked and I was able to keep cash for a while. If I hadn’t, I would have paid 2.3% for someone else to lose 28-38 % of the portfolio, no thanks. Don’t get me going on Trailer fees! Too bad I can’t move an open account without major tax consequences.
    Reading William Bernstein will change any investors mind.

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