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.

This article has 12 comments

  1. I chuckled all the way through your post. Good work, again. It would be nice to be able to short some of these mutual funds and buy an index with the resulting cash.

  2. Lets try to help out the poor mutual fund industry. How would Ted have done if every year he had sold his worst performing fund, and bought into a new ‘winner’ (the top performing large fund in the class)?
    The question here is, can you effectively chase returns in mutual funds, or does this strategy just compound the losses? This idea is somewhat attractive as there tend to be no transaction costs for this strategy, and fund performance cycles seem to last for several years.

  3. The 2004 list is also very biased. If you notice, PH&N and other mutual fund companies that do not have trailer fees are excluded. PH&N and Saxon have very good Canadian equity funds.

    Don’t get me started on SMA200 again.

  4. Shorting mutual funds, now that’s a winning idea!

  5. Canadian Capitalist

    @Andy: I don’t have access to Top 10 funds of 2005, 2006 etc. If someone has them, I’d be happy to take a look. It would be interesting to see the turnover in the list.

    @Henry: The list contains the largest mutual funds based on assets under management. According to Globefund PH&N Canadian Equity has $860 million which won’t put it in the top 10. Of course, investors would be better off looking at these smaller but low-fee funds.

  6. Call me naive, but I do not buy 10 mutual funds. I’ve been investing in CI Harbour for the last 10 or 11 years and this is the only Canadian large cap that I own. I do believe that the best and the most consistent money managers can beat the index over the long run. And I do not like my index fund loosing 40% when the underlying index does so, but I am OK with making “only” 20% when the index does 30%. Just my 2 cents.

    • Canadian Capitalist

      @Jerry: Fair enough. I have no problems accepting that some managers are able to beat the index. But it is hard to tell luck and skill apart. Many managers who appear to be skilled turn out to be merely lucky. I’m a passive investor and I control volatility by diversifying. The TSX did lose > 30% last year but my portfolio was down a lot less even though I’m mostly in stocks. The reason is bonds did well, US stocks weren’t down that much etc.

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  8. Ouch…checked out some of those MERs

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  10. Jerry said:.”I’ve been investing in CI Harbour for the last 10 or 11 years and this is the only Canadian large cap that I own.”………this fund lost more then 20% last year………Jerry said:” And I do not like my index fund loosing 40% when the underlying index does so, but I am OK with making “only” 20% when the index does 30%”…………….so you pay a CFP to do what?

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