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.

This article has 20 comments

  1. All marketing nonsense should be held accountable like this. Sadly, we always have to wait a few years before we can show the results as you’ve done here. Chalk up another victory for the buy-and-hold indexing strategy.

  2. I think that some of the winning funds were probably heavy with bonds or cash. What do you think of the Ned Goodman story in the Globe and Mail that because of a predicted flat-line trend the “time to own index funds is over”.
    I think I can predict what you would say. Sounds like self promotion to me.

  3. Ranger – the AGF International Stock fund is 100% equity. Ivy Foreign is 90-10 equity to cash (Cash is kept in the fund only for the purpose of making better buys when they come along) – Cundill Value is the same; fixed income and cash make up less than 10% of the fund value. Investors Global is almost 100% equity.

    I’m a believer in managed money, but the trap that the article writer (Jade Hemeon) fell into was making a value proposition of fund performance. Anyone making this proposition will get slain every time the market falls. If you’re investing to beat the market, then have fun. If you’re investing with long-term purpose, then 5-year fund returns hardly matter.

  4. Very nice. Maybe there needs to be an organized effort to give these people a scorecard based on how their previous suggestions panned out. Thinking of buying a mutual fund from company X? Go to and see how their previously marketed funds fared.

  5. Emerging markets performed the best in terms of international equity during this period. Even Jeremy Grantham recommended emerging markets in 2004. A simple investment strategy would be using EEM (iShares Emerging Markets) and 200 Simple Moving Average.

    If you entered EEM on July 2, 2004 with 10k CAD. The exchange rate at the time according to was 1 USD to 1.3248 CAD. EEM was at 53 USD a share. Using a brokerage exchange rate of 1 USD to 1.35 CAD, assume that 139 shares of EEM was bought using 7400 USD.

    EEM broke the SMA200 to the downside in January 2008. Using the strategy outlined by Mebane Faber, EEM is sold on Feb 1, 2008 at 139 USD a share. There is a capital gain of 11954 USD in total and cash of 19321 USD in the brokerage account.

    EEM broke the SMA200 to the upside in April 2009. On May 1, 2009, EEM was purchased at 29 USD a share for a total of 666 shares. On August 28, 2009, EEM was trading at 36 USD a share and the account would worth 23976 USD. The exchange rate was 1 USD to 1.0881 CAD and assume brokerage exchange rate was 1 USD to 1.06 CAD. The account is worth 25414.56 CAD.

    The total return for the period for EEM using SMA200 in USD is 224%. The total return for the period for EEM using SMA200 in CAD is 154%.

    The difference in returns is due to the appreciating Canadian dollar. I excluded dividend calculations. I did the calculation by hand and used Google Finance and for the information. The numbers are approximates rather exacts.

    The performance of these 10 Large Global Funds are quite poor in comparison with EEM using SMA200. I am not able to calculate volatility at this point but I believe EEM using SMA200 should win hands down in terms of Sharpe ratio.

    Any feedback is welcome.

  6. Canadian Capitalist

    @Michael: Studies have shown that past performance is not indicative of future returns. It is nice to see that confirmed with Mackenzie’s 2004 picks.

    @Ranger: I think you are referring to this story in today’s Globe:

    The table in today’s post is one more example of the fallacy of that statement. In the past five years, the MSCI World (C$) benchmark has been flat. How many funds out of 10 beat the index handily? The answer: 1. And how exactly does one pick that winning fund ahead of time?

  7. Canadian Capitalist

    @Henry: The SMA 200 does beat buy-and-hold. It would be interesting to see if this holds over the long-term after taking into account transaction costs and (if applicable) taxes.

    July 2, 2004:
    Amount Invested: $7,400 (USD) or $10,000 (CAD)
    # of shares of EEM = 418 (split-adjusted)

    August 28, 2009:
    Market value: $15,048 (USD) or $15,950 (CAD)

    Dividends are ignored.

  8. Good post. Please keep diligently bursting these marketing bubbles.

  9. CC, the solution is simple. Ted should have bought the Investors Global product 😉

    I’m curious to know if there is information about the frequency of funds closing down or being absorbed, or name changes. Since theses companies tout past performance, can they keep the managers in place, keep the same strategy and holdings, but simply change their name to wipe out their past poor performance from the record?

  10. @CC: I rounded down in my calculations and I believe the rounding would have covered the transaction costs of $50 each way. I believe the historic price factors in the bid and ask spreads.

    Another comparison for Canadian investors is using CIBC Emerging Market Index Fund. There is no transaction costs, everything is in CAD, and dividends are factored in with

    Using the same timing, entry on July 2004 with 10k CAD would result in 20915 CAD at the end of January 2008 (approximately the same as beginning of February 2008). That is a return of 109.15% in the first period. Reentry in May 2009 to August 2009 results in 15.66% return in second period. The combined return is 124.92% and the resulting amount is 22148.89 CAD.

    If you bought and hold CIBC Emerging Market Index Fund from July 2004 to August 2009, then 10k CAD would become 17966 CAD.

    It is a surprise that buy and hold CIBC Emerging Market Index Fund outperformed buy and hold EEM for Canadian investors by large amount: 12.64%.

    Using the SMA200 on EEM outperformed using SMA200 on CIBC Emerging Market Index Fund by: 14.74%. This can be explained by the 2nd entry point on May 1, 2009. The Canadian dollar was weak and it purchased less emerging market stocks than a stronger USD dollar. By the end of August 2009, the Canadian dollar was strong again and this resulted emerging market stocks valuing less in CAD.

    Regarding exchange rates, the logic is simple: buy CAD when USD is strong and buy USD when CAD is strong. The purchasing power of currency is positively correlated on the strength of its currency.

    As we can see, both SMA200 and exchange rates can impact returns significantly.

  11. There are some corrections to my previous post.

    CIBC Emerging Market Index Fund using SMA200:
    Return in Period 1 (July 2004 to the end of January 2008): 109.15%
    Return in Period 2 (May 2009 to the end of August 2009): 15.66%
    Combined Return in Period 1 & 2: 141.90%
    Final Amount: 24190.28 CAD

    Difference between using SMA200 on EEM and SMA200 on CIBC Emerging Market Index Fund is 5.06%. Smaller than the original calculation.

    CIBC Emerging Market Index Fund has a higher MER (1.37%) vs EEM (.72%). CIBC Emerging Market Index Fund distributed .49 CAD of capital gains and .80 CAD of interest income per share price of 20.41 in 2007 and .23 CAD of capital gains per share price of 12.21 in 2008. Using SMA200 could have avoided the capital gain distribution in 2008. Things become very more favorable if one has the CIBC index fund MER rebate of .64%, paid out monthly. Over a period of 5 years, 3.20% of NAV would be rebated on a monthly basis. With MER rebate, CIBC Emerging Market Index Fund has a MER of .73%, a mere 1 basis point above EEM, 9 basis points below XEM, 8 basis points above CWO, but 46 basis points above VWO.

  12. Correction:
    The MER rebate can add up over time. Over a period of 5 years, a total of 3.20% of NAV would be calculated daily and rebated on a monthly basis based on .64% MER rebate a year.

  13. Canadian Capitalist

    @Sampson: I’m not an expert in mutual funds but I believe mutual funds get merged out of existence. When they merge (usually with a more successful fund), they take the performance numbers of the better fund. But I don’t think they can wipe out past records by simply changing the manager or the name.

    @Henry: I’m not surprised. EEM uses sampling to track the emerging market index. Its tracking error is atrocious.

  14. CC: Taxes is a concern with SMA200. I believe the concern is a moderate. I will do some more calculations this evening and see how it may impact things.

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  16. The problem is not that the managers aren’t smart. They’re likely very above average investors. The problem is that the mutual fund model simply does not allow nor entice skilled managers to demonstrate that skill.

    Chiefly the problems are the requirement for daily liquidity / no lockups, inability to use derivatives or go short, and the ratio of base / outperformance fees (ie: its all base fees). Why would anyone want to take tracking error risk when they don’t really get paid for it when they win, yet when they lose a massive rush to the door will ensue?

    Mutual fund investor psychology is so asymmetric and the compensation system so broken that the rational thing for a manager to do, generally, is to just sit on the benchmark with very little tracking error and milk the base fee.

    Now, jacking up the performance fees does have its issues also, but zero performance fee is not the right incentive. Imho.

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