For the 12-month period that ended June 30, most active Canadian mutual fund portfolio managers failed to outperform their benchmarks, according to the Canada Mid-Year 2014 Standard and Poor’s Indices Versus Active Funds (SPIVA) scorecard.
According to the SPIVA report, just 20.5% of Canadian equity mutual funds outperformed the S&P/TSX composite index. And, over the same period, only 20% of portfolio managers in the Canadian focused equity fund category generated better returns than the blended index.
There was good news for some fund portfolio managers, however: 72% of actively managed funds in the Canadian small- and mid-cap equity categories and 63.64% of actively managed funds in the Canadian dividend and income category outperformed their respective benchmarks.
The SPIVA findings echo the results of earlier surveys, which found chronic underperformance in most actively managed funds.
“Over the longer term, such as the five-year investment horizon, the results are unequivocal across all domestic equity categories,” the SPIVA report says. “The data show the losing pattern repeating across all the categories, as the majority of active managers underperformed their benchmarks.”
Says Yves Rebetez, managing director of Toronto-based ETF Insight Inc. and editor of www.etfinsight.ca: “The financial services [sector] is very entrenched and likes to say that all is well and there is nothing to worry about.
“But, to me,” he continues, “these kinds of things point to the fact that investors mistakenly assume that when it comes to investing, the brighter the people you have at the steering wheel and the more fees that you pay them, the better the outcome you should have. That is what you expect in medicine; in finance, it doesn’t work that way.”
The results of the SPIVA scorecard lend support to the advocates of passive portfolio management in the ongoing debate over the merits of active vs passive management strategies, particularly firms marketing exchange-traded funds (ETFs).
Som Seif, president and CEO of ETF provider Purpose Investments Inc. of Toronto, argues that the SPIVA results are further evidence that changes are overdue in the investment fund industry, particularly in regard to fees.
“This industry doesn’t get it,” Seif says. “Ultimately, this is all to do with the gap between gross and net returns. It is hard enough for active money managers to add value on a short-term basis, gross of fees. The real studies show you that 55% or 60% of [portfolio] managers beat markets, gross of fees. But when you factor in fees, it is a huge headwind that, on a short-term basis, brings down that average dramatically and just compounds over the long term.
“Most people in the active space overcharge for their value,” adds Seif, whose firm – after one year in operation – now has about $750 million in assets under management held in 10 ETFs.
“This is about [portfolio] managers properly pricing their value,” Seif says. “They will not do it until the market – being advisors and investors – demands it by virtue of giving money to the right investment managers.”
Seif foresees that happening as investors move more toward products that employ indexing and other low-cost strategies.
“Right now, people give money to everybody,” says Seif. “You have this embedded complacency about fees – and [that] won’t change until people start to flow money to [portfolio] managers who are charging a fair amount for their value proposition.”
Dan Hallett, vice president and principal with Oakville, Ont.-based HighView Financial Group in Windsor, Ont., suggests that the SPIVA reports are useful to a point, but he would like to see reports that track the performance of fund portfolio managers in a “peak to peak” time frame.
This type of report, Hallett explains, would cover fund performance in both “up” markets (during which portfolio managers are expected to have trouble outperforming their benchmarks) and “down” markets (when, it is argued, they deliver the most value to fund unitholders).
The SPIVA report also found that foreign-equity fund portfolio managers fared poorly over the 12 months ended June 30:
– Just 21.21% of international equity portfolio managers beat their benchmarks.
– Only 12.77% of global equity portfolio managers had returns higher than their benchmarks.
Over the five-year period ended June 30, only 10% of active international equity funds, 5.26% of active global equity funds and 5.13% of active U.S. equity funds outpaced their benchmarks – the S&P EPAC LargeMidCap, the S&P Developed LargeMidCap and the S&P 500 indices, respectively.
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