It was a little disappointing to read Jon Cheavreau’s recent column in The Financial Post (See, Dynamic Funds leave index-hugging rivals behind, December 10, 2010). In the column, Mr. Chevreau praises Dynamic Funds for the many mutual funds that not only beat their peers but the index by a wide margin despite high MERs. Two of the funds in the list sport MERs higher than 4 percent. Performance fees are extra. Despite these sky-high fees, the funds handily beat the benchmarks. Take the Dynamic Dividend fund for instance. Over a 10-year period, the fund returned 7.7%. The TSX index returned 5.1%.
Mr. Chevreau who says he has imbibed the KoolAid of passive investing and exchange-traded funds asks if fellow index investors will eat crow along with him considering Dynamic’s past performance. My response would be that index investors have no reason to eat crow or any other bird. While index investing is based on the logic that investors as a group cannot beat the index, it doesn’t exclude the possibility that some mutual funds can beat the index some of the time, even over a period as long as 10 years.
If some funds can beat an index, why not pick those funds for your portfolio? The problem is picking the winning fund from among the thousands of mutual funds currently in existence before it starts posting market-beating returns. And the challenge doesn’t end there. You’ll also have to nimbly sell that fund before it turns cold (as most hot streaks are likely to, just ask Bill Miller) and buy another fund that is about to go on a hot streak. Needless to say, an investor’s chances of doing this consistently is pretty low.
Take the aforementioned Dynamic Dividend Fund. Yes, it has beaten the TSX composite over a ten-year period. But the fund was been in existence for more than 25 years. Extend the time period a little longer and the fund doesn’t appear so winning anymore. Over 15 years, it has returned 7.85 percent compared to 9.27 percent for the TSX. And over 20 years, the record reads 8.49 percent compared to 9.8 percent for the index. So, yes the Dividend Fund has beaten the index over 10 years but not over 15- and 20-years. To be honest, the performance over longer time frames is still respectable. But an investor considering Dynamic Funds back ten years ago might just as easily have picked a mutual fund from Trimark or AIC. Hindsight, as they say, is 20/20.