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moneysense.ca, 3/02/09
Bear Market Outperformance, eh?
When you find a column headlined “Most Canadian equity funds beat TSX” in the Globe and Mail, it is impossible to let it slide. The article refers to the S&P Index versus Active report for 4Q 2008, which found that (are you ready for this? are you sitting down?) 53.23 percent of active funds beat the TSX Composite Index over the last quarter of 2008. In a brutal quarter in which the TSX lost about 23 percent, the best that could be said for active funds is that slightly more than one in two funds managed to beat the market. The longer the time period, the sorrier the report card becomes. Over 3 years, 21.05 percent of funds managed to beat the market and 11.22 percent managed to do so over 5 years. The mortality rate of mutual funds is also astonishing: in just five years, 45 out of 107 mutual funds ceased to exist.
The fourth quarter results are consistent with that of the preceding quarter in which 60 percent of funds managed to beat the market. Active management enthusiasts claim that fund managers perform better than the index in down markets. The recent record suggests that the claim can now be officially filed under fiction rather than fact.
moneysense.ca, 3/02/09
Hey all,
Although I agree, for the most part, with the results, the S&P report in question is so flawed it is difficult to used it for any real conclusions. Although numerous, the dominant problem (and so easy to fix) with their methodology is that they bias the report by not taking a reasonable cost off of the index. Since you can’t invest in the index, you need to use an index fund, ETF, etc. you need to factor in a cost. The simplest method would be to simply compare fund returns to the appropriate ETF – since that really is the alternative (not even worrying about the cost to buy the ETF since over time it’s insignificant). When your conclusions are a simple, what percent beat, this information is important. For example, if every manager underperformed the index by .15%, then 100% of active managers did not beat the index. However, if the index MER was .25%, then 100% of the active managers DID beat the index. Since passive investing with still show to be the winner in most time periods, why reduce the reports credibility by not comparing apples-to-apples?
Just MHO.
All the best
[...] Capitalist just recently discussed the latest SPIVA Q4 Scorecard (which stands for Standard and Poor’s Index Versus Active scorecard) – the report indicated [...]
DG, I agree, these SPIVA reports always bug me because they don’t compare with actual index ETFs.
Did an active management individual or group pay The Canadian Press and the Globe and Mail to do this?
I guess great minds think alike — I wrote about this report as well: link.
While I agree that it would make sense to compare mutual funds to an ETF, this would only make a small difference. The comparison I would really like to see is active mutual funds compared to a portfolio consisting of 5-10% cash and the rest index ETF. This would account for the cash holdings of mutual funds and would reduce the slightly improved mutual fund performance during down markets.
Doug, Dave: I agree this isn’t a strictly apples-to-apples comparison. But as Michael James points out, index fund fees are minuscule over a 3-month period. Also, mutual funds already have an advantage in bear markets — they hold some cash and cash is king in down markets. Still, I don’t know why S&P doesn’t compare results by assuming a reasonable MER. I’m pretty sure, even if they did, the superiority of passive management will still be valid.
Doug: My understanding of the newspaper business is they have headline writers, who do write inappropriate headlines. It was interesting to see Financial Post titling the same story — “Actively-managed Canadian equity funds get leg up on index in Q4″.
Michael: Active management enthusiasts like to make a virtue out of necessity of holding cash but I doubt they’ll spin these numbers. They can see that the results were a statistical tie.
Even if active managers outperformed the markets in 2009, the possibility of missing even 1% of the upside for the year will have a detrimental effect on long-term performance.
Funny, I thought of you this morning when I read that headline.
…nothing like taking one quarter’s performance in which only slightly than half the mangers beat the index and declaring victory!
Well, the mutual fund industry just paid the Globe for a RSP supplment last week. It doesn’t take much to put two and two together.
A newspaper’s business model is to sell advertising not to report the news. The news is just window dressing to the glossy ads.
@Thicken My Wallet: I wouldn’t jump to conspiracy theories so quickly. I suspect it was simply an inept headline writer who drew the wrong conclusions. As a former journalist who knows several people who work at major newspapers, most reputable papers have a pretty robust firewall between the marketing side and the reporting side. We all hear about the cases in which editors were pressured to spin a story to placate an advertiser, but it is the exception rather than the rule. Whether the Globe and Mail counts as a “reputable” paper I don’t know, but I seriously doubt they’d spin a headline to benefit the mutual fund industry.
Brad: I’ll go along with the ineptness theory for headline writers. About once a week I see a headline that shows that the headline writer completely missed the point of the article. For each of these there are a few more with nonsensical headlines. There is rarely any plausible conspiracy theory. I heard a quote once that goes something like this: “Never assume malice for that which can be explained by stupidity.”
Fron Canada’s “National Newspaper” and an important source of information for Canadian investors, I would expect more.
I agree, it’s best to chalk something up as a mistake sometimes – though as Winston Churchill said “Once is a coincidence, twice is happenstance, and thrice is enemy action.”
P.S. Doug I found it amusing that you’re belittling a journalist in the same sentence in which you typed “From” incorrectly (hee hee).
Novice: I don’t think we’re agreeing completely. There is a difference between a mistake and ineptness. These “mistakes” happen so often that it is clear that some headline writers are consistently overworked, careless, or incompetent. It’s also clear that those in charge of running newspapers simply don’t care enough to fix the problem. This is probably the right call. I doubt that there would be enough financial payback to compensate for the cost of doing a better job on headline writing.
Tht journalis may hav cos Candian investrs tans of thousnds of dollyrs
Michael – my point was that I’m more likely to believe it’s a mistake or ineptitude versus an attempt at deliberately misleading the public because of a conspiracy of FI’s and their advertising budget. I called it a mistake but ineptitude is a better word.
Doug – nice to see a guy with a sense of humour. I find it hilarious when people get upset over anonymous postings on a website (Jay and Silent Bob Strike Back, anyone?)
Here’s the same story from the National Post:
http://network.nationalpost.com/np/blogs/tradingdesk/archive/2009/02/03/actively-managed-canadian-equity-funds-get-leg-up-on-index-in-q4.aspx
It added this little tidbit:
…53.2% of actively-managed Canadian equity funds outperformed S&P/TSX Composite Index, with an average return of – 21.6% versus – 22.71 for the benchmark.
So basically, the actively-managed funds “beat” the index by .93%. Too bad there’s no mention of how fees destroy that advantage.
Mutual fund performance numbers are always reported after fees have been taken out Patch….
There is no conspiracry people….the numbers are the numbers let the MFs enjoy there quarter of outperformance….you don’t need to worry…. all your index funds will be fine over the long term….guaranteeing you underperform the market by 0.15% or whatever the tiny MER of the ETF you are investing in…..
I agree that there is no conspiracy. However, there is a conflict of interest. In some ways it reminds me of the conflict of interest found in some financial firms between investment banking and stock analysis.
The best part is that in the first quarter it will probably be the other 47% that do better while everyone chases the “top quality” funds
[...] Capitalist talks about bear market outperformance of active mutual funds. I think it’s safe to say that he’s not a big fan of active [...]
Hi DG,
I agree with you that none of the stats really tell the story. The stats that show mutual funds make less than the index include all the index funds. “Active managers” in all the stats include all index funds! Of course, 100% of index funds don’t beat the index.
Many mutual funds, especially many bank and insurance funds, are closet indexers and just try to stay close to the index. These funds almost always make less than the index, as well. They usually don’t even try to beat the index. These fund managers are just salaried employees trying to keep his job by having a portfolio similar to the index.
It would be interesting to see stats comparing the index to active managers, and exclude index funds and closet indexers.
Ed