Specialist David Vadala, right, works at his post on the floor of the New York Stock Exchange, before the close Wednesday, Oct. 22, 2014. Stocks fell in late afternoon trading on Wednesday, a day after the Standard & Poor's 500 index had its biggest gain of the year.Richard Drew/The Associated Press
As an investment foundation for your portfolio, the S&P/TSX composite index leaves a lot to be desired. The only thing worse is the work of many portfolio managers.
Based on the rotten performance of the TSX these days, you're bound to hear a lot of chatter about the defects of index investing. Here's how the argument goes: The Toronto market is heavily weighted to energy stocks, which are a disaster zone right now. A smart manager would have pared down his or her exposure to energy and thereby protected clients from the worst of the recent market pullback.
The problem with this argument is that it's only temporarily true. Never equate a portfolio manager's decision to deke around a temporary trouble spot in the market for the ability to outperform over the long term. Globeinvestor.com's database shows 63 fund variations with a track record going back 15 years. The number that managed to outperform the S&P/TSX composite over that period was 22, or just about one in three. Note: That's an after-fee return for the TSX, obtained by taking the actual index return and reducing it by the fees charged to people who invest in the cheapest of the exchange-traded funds that track the Canadian market.
The 15-year view was picked for a reason – it includes the effect that the crash of Nortel Networks had on the Canadian market. I've been in this business long enough to recall how dismissive some portfolio managers were about indexing back then. Any manager who avoided or minimized exposure to Nortel was able to outperform the index. And yet, the 15-year numbers show only a minority of managers delivered long-term outperformance.
Let's be clear – some portfolio managers working directly with clients or managing mutual funds will beat the index over long periods of time. Among the outperforming mutual funds over the past 15 years are Mawer Canadian Equity, Leith Wheeler Canadian Equity and Beutel Goodman Canadian Equity. All are low-cost, easily accessible mutual funds with a proven record of avoiding risky bets and delivering consistently good returns. There's zero certainty they'll continue to beat the index, but that would not be a surprising outcome.
But as the results of the last 15 years show, most managers do worse than the index. Remember that if you hear someone trashing index investing because energy's been ugly this December.
Rob Carrick