Andrew Hallam is the index investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
It takes chutzpah to challenge index funds if you're an actively managed mutual fund company. Indexes are cheap. As such, their long-term performances outrun most active funds. IA Clarington Investments Inc. suggest their funds are different.
In a recent advertisement, they claim market-beating performance for three of their funds. They compared their Strategic Income Fund, Strategic Equity Income and their Strategic Corporate Bond Fund to a Canadian stock index. By doing so, however, they compared toasters to microwaves. None of IA Clarington's advertised market-beating funds hold significant amounts of Canadian stocks. So why compare them to a Canadian stock index? Investors should be wary of advertorial sleight of hand.
The advertisement states, "At IA Clarington we believe that truly active managers, ones who apply skill, conviction and opportunity, can and do consistently outperform [indexes] over the long term." But the funds in the advertisement are less than three years old.
The firm's website claims active managers can be identified in advance, they can beat the market after fees and they can sustain successful outperformance. But when measuring equal asset classes – toasters to toasters, microwaves to microwaves – has IA Clarington been able to do so?
I examined each of their funds with 10-year track records in six separate categories: Canadian Equity, Balanced, U.S. Equity, International Equity, Canadian Bond and Canadian Short Term Government Bond. Over the decade, IA Clarington's fund performances fell 22.5 per cent short. They're also the only firm I've compared in this series so far to underperform retail indexes in all six categories.
The past decade was the ultimate testing ground. It spanned one of history's scariest market drops (2008-09) and a rising market (2009-14). But despite IA Clarington's managers applying skill, conviction and opportunity, they couldn't overcome their fees. Active fund expenses I compared ranged from 1.04 per cent to 2.95 per cent. In contrast, TD's indexes and iShares ETFs cost between 0.05 per cent and 0.89 per cent. Investors paying high fees don't get what they pay for.
IA Clarington has three funds with decade track records in the Canadian Equity category. They include their Canadian Equity Fund, Canadian Dividend Fund and Canadian Small Cap Fund, which earned 7 per cent, 5.5 per cent and 10.5 per cent respectively. Their average decade return was 7.66 per cent.
IA Clarington's strongly performing Canadian small-cap fund should have been the company's category ace. But the ace wasn't enough. Indexes still triumphed. TD's eSeries Canadian index averaged 7.6 per cent. The iShares S&P/TSX 60 Index ETF (XIU) averaged 8.1 per cent; iShares S&P/TSX Capped Composite Index (XIC) averaged 8.12 per cent; and iShares S&P/TSX Completion Index (XMD) earned 8 per cent.
The balanced fund category didn't get any easier for active management. IA Clarington's Canadian Balanced Fund earned 4.9 per cent for the decade. TD's Balanced Index earned 5.34 per cent.
The U.S. Equity category compounded investors' actively managed pain. IA Clarington U.S. Dividend Growth is the firm's only American fund with a 10-year track record. It struggled, averaging just 2.1 per cent. TD's and iShares' U.S. equity indexes all did better. TD's e-Series U.S. index earned 4.79 per cent; TD's e-Series Dow Jones Industrials Index averaged 4.7 per cent; TD's e-Series Nasdaq Index gained 8.73 per cent; and iShares S&P 500 Index ETF averaged 4.71 per cent.
IA Clarington probably hoped to save face with its International Equity funds. But it wasn't to be. Their Global Opportunities Fund averaged 3 per cent, with their Global Value Fund dragging in a paltry 1.5 per cent. The lower cost TD e-Series International Equity Index averaged 4.38 per cent; the iShares MSCI EAFE Index averaged 2.68 per cent.
In the broad Canadian bond category, IA Clarington's managers stumbled again. The IA Clarington Bond Fund earned 3.5 per cent, trailing TD's e-Series Canadian Bond Index, which averaged 4.54 per cent.
Short-term government bonds unplugged hopes for a single, actively managed winning category. IA Clarington's Short Term Income Class fund lost to inflation, gaining just 1.2 per cent. The iShares Canadian Short Term Bond Index tripled the actively managed fund's return, gaining 3.71 per cent.
Those investing $10,000 equally into the above active and index fund categories would have dramatically different results after a decade. With IA Clarington's funds, the money would have grown to $14,242.87. With indexes, it would be worth $16,491.75.
Globe app users please click here for table of IA Clarington funds versus the market
Editor's Note: An earlier online version of this article incorrectly said that small caps outperformed larger companies for the decade in question, when, in fact, they did not. This version has been corrected.
Andrew Hallam