TSX Index vs. Active

[Shakespeare]

I figured I'd let Bylo get his licks in with this:

S&P/TSX index outpaces managed funds

The performance of the S&P/TSX composite index in the first six months of this year beat a stunning 80 per cent of Canadian equity funds....

Over the past five years, only 43 per cent of Canadian equity fund managers beat the returns posted by the S&P/TSX index.

[Bylo Selhi]

Five years is inconclusive. Six months is noise.

[beaverlodge]

Is there a list of those who beat the index for all time frames?

And is there is list of those who did not beat the index for all time frames?

If there is let us have it.

If there is not it should be published.

[yielder]

Five years is inconclusive.

This isn't.

[scomac]

This isn't.

Interesting. Of particular note should be the Cdn. Div. category in which the outperformance of active management is substantial. (Only One fund failing to beat the benchmark during the time periods studied.)

When you look at the Cdn. equity categories, active managers have faired very well. There's more at work here than simply underweighting NT. It's also interesting that managers with a pure Cdn. equity mandate did much better than those who's mandate includes foreign equity investment. Not surprising I suppose considering the poor results generated by US equity managers.

The long term results quoted make a very compelling case for a blend of active and passive strategies choosing active managers in the asset classes where probability of success is highest.

Scott

[randomwalker]

re S&P/TSX index outpaces managed funds, Globe & Mail, Aug. 12/ 2005

According to Assante's Joe Canavan "A single prpoduct is a different game...To build a portfolio based on risk-reward objectives and tolerance, monitor it on an ongoing basis and having someone there to counsel you... that is something else."

I couldn't help wonder if Canavan's "counsel you" was a typo that should actually read "console you."

[Bylo Selhi]

A single prpoduct is a different game...To build a portfolio based on risk-reward objectives and tolerance, monitor it on an ongoing basis and having someone there to counsel you... that is something else.

"Something else" for Joe to read.

[Norbert Schlenker]

The detailed report is here. The five year numbers against the Capped Composite are sorry indeed. Most surprising to me are the raw survivorship numbers on page 9.

[NormR]

It is worth remembering that the performance calcs are before costs for the index and after costs for the funds. If you look at the before cost performance of the funds vs the index, I suspect that the numbers would become more favorable to the active managers. On the other hand, the more important after cost comparison is still likely to move the indexers way.

I also find it a little interesting that the capped index is given lots of weight whereas I suspect that the regular index was the focus of attention when Nortel was on a roll.

From the report ...

The S&P/TSX Capped Composite, since mutual funds are restricted from holding more than 10% of their portfolio in a single stock.

Isn't strictly true. Lots of funds could 'boast' of high (>10%) Nortel holdings at one point. I believe that the 10% restriction is based on book value but one can boost the % via appreciation of the stock (or depreciation of the rest of the portfolio).

Ah well, one shouldn't expect too much from a marketing piece.

[northbeach]

The link Yielder pointed to included bond funds.

http://www.dividendgrowth.0catch.com/Essays,Studies/MutualFundPerformance123104.pdf

Would not the percentages be more favourable to equity funds if the bond funds were omitted? Also what if one eliminated the 20% foreign stocks held in most Canadian mutual funds? How about cash positions held in the active funds?

I generally do not hold cash in my accounts because I realize that active funds will hold cash.

Along with my investment in an active dividend fund paying around 2% dividends I am invested in the index thru XIU. The dividend fund is 100% Canadian and has been outperforming the TSX 60.

[adrian2]

Interesting. Of particular note should be the Cdn. Div. category in which the outperformance of active management is substantial. (Only One fund failing to beat the benchmark during the time periods studied.)

Maybe because it's the wrong benchmark?

When you look at the Cdn. equity categories, active managers have faired very well. There's more at work here than simply underweighting NT.

Maybe because the results are not corrected for survivorship bias? A simple comparison is the 5 year's numbers for Canadian pure equity: Mike's link shows 71% of funds beating the benchmark, Norbert's link shows 39% or 8.7% (depending whether uncapped/capped)

It's also interesting that managers with a pure Cdn. equity mandate did much better than those who's mandate includes foreign equity investment. Not surprising I suppose considering the poor results generated by US equity managers.

Which is the exact opposite of what used to happen in the 90's.

The long term results quoted make a very compelling case for a blend of active and passive strategies choosing active managers in the asset classes where probability of success is highest.

Not to me: how do you know the active managers will be successful, on a relative basis, in the same asset classes? What's a theoretical justification - I'm sure you're heard of Sharpe's theorem, how do you reconcile it?

[randomwalker]

It seems to me that most managers of dividend funds are more or less closet indexers, which is more or less what I am, in that I'm a "buy and holder" with a dividend bent.

My quetion then is why pay an mer of say 1.9 to 2.5 percent when you can hold the same individual stocks yourself mer free?

[Bylo Selhi]

It is worth remembering that the performance calcs are before costs for the index and after costs for the funds.

Not so for "something else." All index returns are discounted by 50bp to reflect the MER. That's actually quite conservative now that ETFs are widely available, especially for larger portfolios. And since broad-based index funds generally have very low turnovers and hence higher tax efficiency, they have an even better advantage over active in taxable accounts.

[Springbok]

It seems to me that most managers of dividend funds are more or less closet indexers, which is more or less what I am, in that I'm a "buy and holder" with a dividend bent.

My quetion then is why pay an mer of say 1.9 to 2.5 percent when you can hold the same individual stocks yourself mer free?

In Canada, with so few stocks to invest in, you would think that a managed fund would be able to weed out the "dogs", more or less match the index and thereby beat the index.

I suspect that many of them, like PH&N's Div Income fund do beat the index before fees, but what kills them, is the MER. The PH&N fund which charges an MER of <1.2%, usually pays a dividend of about 0.8% - 1% less than XIU which is index based. So they start off 1% behind (and that's about where they end up on Total Yield).

The funds with MER's of 2.5% or more, start off ~2% behind - Considering the weight of banks and energy stocks in the index, it's hard to see how they could overcome this deficit by stock picking. So what do they do? Use leverage? Fine in good times, but not so good in a downturn.

A DIY portfolio using the top 10 or 15 stocks in any one of the top equity fund portfolios would probably beat the index and any of the funds. This is more or less what we are doing with the equity part of our portfolio, but we do still have some XIU and some PH&N which allows a comparison. I have been gradually selling off XIU and PH&N as I find better individual investments - mostly div paying or energy related.

[Raul]

A DIY portfolio using the top 10 or 15 stocks in any one of the top equity fund portfolios would probably beat the index and any of the funds.

That is what I have been trying to achieve for about a year. However, with about $70k-90k allotted to dividend income stocks, I haven't been able to come-up with diversification that I'm comfortable with. Also, I would prefer to purchase less than 10 stocks to minimize costs.

I was thinking of the sector breakdown as follows: 30% financial, 30% energy(oil, gas, electrical), 15% natural resources and 25% consumer and manufacturing. The problem is: which stocks? Say, for the financial I had chosen CIBC? That would have caused a significant drag on the return.

PS: I'm a conservative investor and already have my quota in an income trust -- EIT.UN.

[yielder]

I haven't been able to come-up with diversification that I'm comfortable with. Also, I would prefer to purchase less than 10 stocks to minimize costs.

Buying only when stocks are cheap sometimes leads to concentration in particular sectors for a while. However, you also don't want to have diversification at the cost of buying when a stock is expensive.

I think that Canadian Shareowner would be an excellent solution for you. You buy those stocks that you think are cheap immediately and dollar cost average the rest. You could obtain good diversification while keeping your cost down. For example, if you decided on 20 stocks that you wanted to own and bought them each quarter, you'd pay a grand total of $29 each quarter - 80 security purchases for a total of $116. And you can re-invest the dividends fully (fractional shares) at no cost.

The problem is: which stocks?

This becomes less of a problem when you're DCA'ing a diversified portfolio at very low cost.

Say, for the financial I had chosen CIBC? That would have caused a significant drag on the return.

If you think that the dividend is safe, it doesn't matter that CIBC has hit another one of its rocky patches. If you were DCA'ing, you'd be buying CIBC at the lowest price that it's been in a while.

[Springbok]

Say, for the financial I had chosen CIBC? That would have caused a significant drag on the return.

PS: I'm a conservative investor and already have my quota in an income trust -- EIT.UN.

I own CIBC and have not seen any drag on the return - Still paying it's dividend and trading midway beween it's 52 week hi and lo. I am sure the stock price will recover in time.

I think it is hard to chose just one stock from each sector. (especially the banks - I own them all). If you deal through a discount broker, trades are only $29.00 or less so better to have more than less stocks and these are buy and hold type investments.

If the amount invested is not sufficient for this, probably better to use either index or sector ETF,s or a low MER fund like those at PH&N.

I am sure others here can offer some better advice - I am just a retiree doing my own thing!

Good Luck!

[scomac]

Maybe because it's the wrong benchmark?

Then what is the "right" benchmark? Benchmarking has always been an issue when comparing the results of active vs. passive funds in the Cdn. equity category. ISTM that pro-indexers often site this as a means of rationalising away actual results that don't hold up the passive hypothosis.

Maybe because the results are not corrected for survivorship bias? A simple comparison is the 5 year's numbers for Canadian pure equity: Mike's link shows 71% of funds beating the benchmark, Norbert's link shows 39% or 8.7% (depending whether uncapped/capped)

The numbers aren't directly comparable due to the differring end points. Further the assumption seems to be made that survivorship automatically means that losing funds are discontinued. I think you will find that in more than just an inconsequential number of cases decent funds are rolled into other funds due to a lack of assets or (god forbid) higher MER funds. One that comes to mind immediately was the old CI Signature Div. Inc. that was closed and then about a year later rolled into the higher MER sibling CI Signature Dividend. The survivorship card is being over-emphasized due to the rationalization with the fund industry as a result of the various fund company M&As during the past few years.

Not to me: how do you know the active managers will be successful, on a relative basis, in the same asset classes?

Perhaps the first step is an analysis as to why active managers out-performed in a specific asset class on an historical basis. You may view this as random chance, I don't, not when dealing with statistically significant results. It maybe as simple as avoiding obvious trouble like NT in Canada....or underweighting Japan in the AFE....or avoiding obvious trainwrecks in the highyield bond market like Adelphia, Worldcom or Enron.

What's a theoretical justification - I'm sure you're heard of Sharpe's theorem, how do you reconcile it?

Volatility, dispersion of results within a bell curve. Sampling a subset of the market (ie. dividend funds and this applies on both sides of the border) that outperforms the broad market.

Regards,

Scott

[DanH]

Are new fund mergers biased? (30-May-2004)

[yielder]

Perhaps the first step is an analysis as to why active managers out-performed in a specific asset class on an historical basis. You may view this as random chance, I don't, not when dealing with statistically significant results. It maybe as simple as avoiding obvious trouble like NT in Canada....or underweighting Japan in the AFE....or avoiding obvious trainwrecks in the highyield bond market like Adelphia, Worldcom or Enron.

I agree. Part of the problem lies with investment objectives that are too broadly specified. This allows managers to chase performance. If value is hot, they'll roll the portfolio into value stocks. If growth is hot, they'll chase it. If the guidelines they the fund will invest primarily in "x", the manager can invest or nor invest in anything, ie, go to cash. Unfortunately, even the "good" funds like PH&N Div offer the manager a bit of room to move. Fortunately, they haven't taken advantage of it.

Whether a manager is a bottom-up or a top-down stock picker is a factor. If he's top-down, he has twice the problem. First he has to pick the sector/industry, then he has to pick the stock. This might explain why international funds do so poorly. The number of choices that have to be made before they pick a stock include region, country, & sector/industry. Lots of room to get it wrong.

I suspect that value managers as a group are bottom up oriented. Inherently, it makes more sense to go looking for dogs wherever they are. Growth managers, on the other hand, require momentum to be working in their favour so they are more likely to be top down.

[yielder]

Are new fund mergers biased? (30-May-2004)

Certainly the recent ING-to-AGF merger was. The old ING funds weren't particularly dogs but they never attracted much money and one - Canadian Dividend- was an emerging star. Fourteen funds representing $276 million in assets were closed - thirteen merged and one transferred. The largest, Canadian Dividend Income only earned $572K in fees after rebating operating expenses to the fund.

I think that there's a lot of consolidation going on because of costs. Only fundco's like Fidelity have the scale to offer chocolate ripple, double chocolate ripple, heavenly chocolate ripple, fat-free chocolate ripple, etc. etc.

[DanH]

Unfortunately, even the "good" funds like PH&N Div offer the manager a bit of room to move. Fortunately, they haven't taken advantage of it.

But at the same time you don't want to completely hand cuff a manager. So, by default, the parameters are very broadly defined - which also helps in the even of manager changes or M&A activity.

I suspect that value managers as a group are bottom up oriented.

I'd agree.

Growth managers, on the other hand, require momentum to be working in their favour so they are more likely to be top down.

Most growth managers are bottom up. Momentum guys (Picton, Driehaus) also tend to be bottom up because they're not looking at sectors. They're looking at company fundamentals - i.e. which companies are demonstrating the four key momentum factors (price, earnings, positive surprises, and upward revisions of estimates). I suppose there are different ways to do this but these traits are characteristic of most managers in these respective classes operate.

DanH wrote:
Are new fund mergers biased? (30-May-2004)

Yielder wrote:
Certainly the recent ING-to-AGF merger was.

Did you mean "was NOT"?

...and one - Canadian Dividend- was an emerging star.

See the September issue of Canadian MoneySaver as it's schedule to run a short article I wrote on this interesting fund - which is now called AGF Canadian Dividend Income.

[yielder]

But at the same time you don't want to completely hand cuff a manager. So, by default, the parameters are very broadly defined - which also helps in the even of manager changes or M&A activity.

I wasn't suggesting handcuffing. More like an electronic bracelet. If a fund bills itself as a Canadian dividend fund, it should contain no bonds, except convertibles, and no foreign securities. If some latititude is required, put a % limit on the bond and foreign content.

Most growth managers are bottom up.

Could have fooled be but your the expert. There's certainly more room for growth managers to be sector rotators.

Did you mean "was NOT"?

No, I meant was in response to "But today, mergers are happening - at least in part - for different reasons."

it's schedule to run a short article I wrote on this interesting fund - which is now called AGF Canadian Dividend Income.

Publicity. Arggghhhh. Fortunately, AGF carries this high cost personna and doesn't have the marketing clout of TD. Remember what happened to TD Monthly Income. Hopefully, your always astute words will be overlooked or ignored by readers. I look forward to reading it.

We've owned the fund since July/03 in Joyce's RRSP and my RRSP (both are too small to stock pick in) and have been pleased with Robitaille's performance regardless of whether the benchmark is this, this, this, or this.

[Shakespeare]

both are too small to stock pick in

[OT]If each of you has a non-reg account, does the RRSP itself need to be diversified if the individual's entire portfolio is adequately diversified?[/OT]

Added: I think that needs a separate thread. It's an interesting point.

[DanH]

But at the same time you don't want to completely hand cuff a manager. So, by default, the parameters are very broadly defined - which also helps in the even of manager changes or M&A activity.

I wasn't suggesting handcuffing. More like an electronic bracelet. If a fund bills itself as a Canadian dividend fund, it should contain no bonds, except convertibles, and no foreign securities. If some latititude is required, put a % limit on the bond and foreign content.

But what some funds do is use the higher pre-tax yield of bonds to pay management and operating expenses. So, if they see good value there, why not. It's what RBC has done for years - aside from a little tax saving strategy related to their bonds as well.

Most growth managers are bottom up.

Could have fooled be but your the expert. There's certainly more room for growth managers to be sector rotators.

Yes, there is more room for that and some are top down. But most that I've talked to tend to be more focussed on bottom up. Then again, it depends on how you define a growth manager