At the end of February, 2013, investments in Canadian companies accounted for 58 per cent of all equity mutual fund money invested by Canadians, according to the Investment Funds Institute of Canada. U.S. equity funds accounted for 11 per cent.123render/Getty Images/iStockphoto
Mutual funds performed well against their benchmark indexes last year, but the longer term remains a challenge – underscoring how difficult it is to triumph with stock-picking, even among the pros.
According to Standard & Poor's year-end scorecard, released on Tuesday, two-thirds of actively managed Canadian equity mutual funds outperformed the S&P/TSX composite index in 2013, and by a pretty good margin.
The funds – based on an equal-weighted average – gained an average of 19.1 per cent after accounting for fees. That beat the 13 per cent return for the index, after factoring in dividends, by slightly more than 6 percentage points.
That sort of outperformance would grow into a huge difference over many years. But the longer-term track record is where mutual funds stumble.
"Generally, there are no consistent or useful trends to be found in annual active vs. index figures," S&P said in a release. "The only consistent data point we have observed over a five-year time horizon is that the majority of active equity managers in most categories lag comparable benchmark indices."
Over the past three years, the ratio of outperforming mutual funds slips below 40 per cent. After five years, just 22.2 per cent of mutual funds beat the index. (The S&P approach accounts for mutual fund fees and funds that merge or liquidate.)
But at least the difference is slight. Over five years, the average mutual fund delivered a return of 11.4 per cent, just shy of the 11.9 per cent return for the S&P/TSX composite index. In other words, fund managers can beat the index when fees are ignored.
Unfortunately, their track record against the S&P/TSX composite index is one of the few bright spots of mutual fund performance. Last year, just 35.7 per cent of funds beat the S&P 500 (in Canadian dollar terms). That number falls to a mere 13.9 per cent after five years.
Even worse, a mere 16.1 per cent of funds beat the benchmark for international equity (the S&P EPAC LargeMidCap Total Return) last year. The number of outperformers falls below 12 per cent after five years.
David Berman