The majority of actively managed mutual funds in the Canadian equity category underperformed the S&P/TSX Composite Index benchmark in 2004, according to a report released today by Standard & Poor’s.

The results conflict with a report issued on Monday by Russell Investment Group, which said that active managers outperformed the S&P/TSX composite index in the fourth quarter.

Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA) for Canada, returns for 2004 show that only 23.6% of actively managed Canadian equity funds outperformed the TSX benchmark index.

Results were similar in the U.S. equity category, with 29.8% of U.S. equity funds outperforming the S&P 500 Index (measured in Canadian dollars).

However, actively managed Canadian SmallCap funds fared better in 2004, with 82.5% beating the S&P/TSX SmallCap Index.

The S&P report also shows that over the last five years 41.9% of actively managed Canadian mutual funds in the Canadian equity category have outperformed the index, 50% of actively managed mutual funds in the Canadian SmallCap category have outperformed their benchmark index, and 25% of actively managed mutual funds in the U.S. equity category have outperformed the S&P 500. Five-year average fund returns show active funds outperforming the S&P/TSX Composite Index on average and underperforming the S&P/TSX Capped Composite, both on an equal- and asset-weighted basis.

“SPIVA highlights for Canadians the degree of ‘active risk’ in their mutual fund investments. This is the risk that a given active manager will underperform the benchmark index,” said Steve Rive, vice president of Canadian Index Services at S&P. “SPIVA shows that in two key fund categories–Canadian and U.S. equities–Canadians had a less than even chance of picking a winning manager in 2004.”

S&P says the SPIVA methodology corrects for survivorship bias, which can significantly skew results as funds liquidate or merge. The five-year survivorship is 69.1%, 61.1%, and 68.2% for Canadian equity, U.S. equity, and Canadian SmallCap mutual fund categories, respectively. In other words, more than one in four funds in these three categories has been merged or liquidated in the past five years.