Actively Managed Funds In Canada Are Still Terrible

TL;DR

Actively managed mutual funds in Canada have consistently underperformed their relevant benchmarks over the past ten years, with only a small percentage beating the index.

Transcript

As at the end of 2017, Canadians still  had 88.8% of their mutual fund and ETF   assets invested in actively  managed products. In the US,   65% of mutual fund and ETF assets are  invested in actively managed products. This would all be fine if actively managed  funds were delivering any semblance of decent   performance. Unfortunately, the perform... Read More

Key Insights

• 🔬 Canadian investors continue to heavily invest in actively managed mutual funds, despite their consistent underperformance.
• 🤱 The average fee of equity mutual funds in Canada is around 2.2%, making the underperformance even more significant.
• 🎭 Survivorship bias contributes to the perception that actively managed funds perform better than they actually do, as poorly performing funds disappear from view.
• 🎭 Persistence studies in the US also show that top-performing funds are more likely to become the worst-performing funds, highlighting the lack of skilled or informed mutual fund portfolio managers.
• ✋ Actively managed funds may be suitable for financially independent individuals with a high risk tolerance but offer little benefit for average families saving for retirement.

Questions & Answers

Q: What percentage of Canadian equity mutual funds outperformed the S&P/TSX composite index over the past ten years?

Only 8.14% of Canadian equity mutual funds outperformed the S&P/TSX composite index.

Q: What is survivorship bias and why does it make it difficult for consumers to believe the consistent underperformance of actively managed funds?

Survivorship bias occurs when poorly performing funds disappear and only the successful ones remain, creating a skewed perspective for consumers. This makes it hard for investors to believe that actively managed funds consistently underperform.

Q: What percentage of Canadian equity funds that existed in January 2008 still existed at the end of December 2017?

Only 37.21% of Canadian equity funds that existed in January 2008 still existed at the end of December 2017.

Q: How many top quartile performer domestic equity funds in the US were able to stay in the top quartile between March 2013 and December 2017?

Out of the 585 top quartile performer domestic equity funds in the US that existed in March 2013, only two funds (0.34%) were able to stay in the top quartile through December 2017.

Summary & Key Takeaways

• As of the end of 2017, 88.8% of Canadians' mutual fund and ETF assets were invested in actively managed products.

• However, the performance of these actively managed funds has been dismal, with only a small fraction outperforming their benchmarks.

• The average equity mutual fund in Canada has a fee of around 2.2%, and over the same 10-year period, these funds underperformed the index, on average, by 0.79%.