Canadian active fund managers are falling flat this year when it comes to beating their benchmark for investors.
Fluctuating conditions in the equity market proved to be difficult for active managers to overcome this year, with just 39.62 per cent of actively managed Canadian equity funds outperforming the S&P/TSX Composite over a one-year period (ending June 30, 2015), according to the mid-year 2015 SPIVA Canada Scorecard released Thursday.
Even more disappointing is that number drops to nearly 23 per cent when looking over a five-year period.
Similarly, the report shows dismal results in the Canadian-focused equity category, with only 9.84 per cent outperforming the blended index, which allocates 50 per cent of its weight to the S&P/TSX Composite, 25 per cent to the S&P 500 and 25 per cent to the S&P EPAC LargeMidCap.
The SPIVA Canada Scorecard is an annual report that compares the performance of actively managed Canadian mutual funds with S&P Dow Jones Indices in their respective categories over one-, three- and five-year periods.
Looking beyond the Canadian border doesn't get better, as only 37.84 per cent of international equity managers beat the S&P EPAC LargeMidCap over the past 12 months ending June 30, and 17.54 per cent of global equity managers had higher returns than the benchmark during the same period. Over the five-year period, numbers for managers outperforming benchmarks dropped considerably to 4.44 per cent for active international equity funds. At the same time, 4.20 per cent for active global equity funds and 3.16 per cent for active U.S. equity funds have outpaced the S&P Developed LargeMidCap and the S&P 500, respectively.
"Investors need to be looking at the longer-term numbers of active management – say five to seven years – to see a true indication of what is really happening," said Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc. in Vancouver who advises clients not to exclude any sectors while investing and to look at the broader market for investment opportunities.
"Chances of a manager being consistent are extremely difficult and an investor has no control over what that manager's decisions will be."
The outcome is much more favourable for active managers when looking at the Canadian Small/Mid-Cap equity category – with more than 72 per cent outperforming the the S&P/TSX Completion when looking at the one-year data and almost 43 per cent over a five-year period.
Regardless of the fund category, the debate between active versus passive indexes is one that has been going on for decades in the financial community.
Dan Hallett, principal with Oakville, Ont.-based HighView Financial Group, which includes active managers in clients' investment portfolios, said a strong majority of active managers have outperformed indexes over time before deducting fees and expenses.
"Money managers are generally skilled and have outperformed before deducting fees and expenses. But most fail to match benchmarks net of retail mutual fund costs. There is a lot of skill to be had but that there is a limit to what it's worth," Mr. Hallett said.
"And while fast-forwarding to the cheapest stock funds won't guarantee success, investors need to be aware of what investments cost and what competing options are available that meet their needs. Being cost-conscious is important and is critical to making sure fees incurred are reasonable."
Investors and advisers should not be debating "active versus passive," said Darren Coleman, senior vice-president and portfolio manager with Raymond James Ltd., but rather "when to use passive" and "when to use active" in terms of portfolio construction.
"Great portfolios intelligently and thoughtfully blend both," said Mr. Coleman, who manages $115-million in assets under management. "Active strategies work best when they focus on a particular market or strategy and in less-efficient markets, while passive strategies work well in highly efficient markets."