Rob Carrick, personal finance columnist for The Globe and Mail, analyzed the long-term performance of a popular mutual fund (Mackenzie Ivy Canadian) with the index returns of the TSX and found that the 10-year returns of both were even. But, the Ivy Canadian was less volatile, beating the index in down markets and lagging it in up markets. This is not surprising as the fund manager has a history of having large cash positions.

While the Ivy Canadian is a darn good mutual fund, there are some fundamental problems with active funds that make them unattractive:

  1. How do you classify the Ivy Canadian fund? The fund currently holds 64% Canadian equities, 19% US equities, 4% UK equities and 12% cash. The fund manager has complete discretion in tweaking the cash position (as high as 30% during the bear market). With index funds, an investor would be able to achieve precise asset allocation that would reduce portfolio volatility.

  2. The Ivy Canadian has a good record in making minimal distributions. Most mutual funds make large annual distributions that result in tax-inefficient investments. Index funds, on the other hand, tend to be very tax efficient.