Andrew Hallam is the index investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Some mutual funds perform like penguins in pigeon races. If you're stuck with a frosty portfolio, it may not be your adviser's fault. Nor is it necessarily the fault of those running your mutual funds. So whom can we blame? High hidden fees are the usual suspects.
Many of Trimark's fund managers have done a stellar job. For example, the firm's Government Plus Income Fund invests in short-term Canadian bonds. Over the past decade, these managers beat the short-term Canadian bond index.
Managers of Trimark's Canadian Opportunity Class Series A also beat the market. Over the past decade, they outperformed the S&P/TSX index of Canadian stocks. Trimark's U.S. Companies Series A beat the S&P 500. And the firm's International Companies Fund managers beat the MSCI EAFE index of international stocks.
In fact, when looking at Trimark's funds with 10-year returns, more than half of their managers beat their index benchmarks. So should you rush into Trimark's funds? Not so fast.
Their results after fees don't look so good. Fund managers need to be paid. Fund companies need to advertise their products. And they need to satisfy shareholders seeking dividends in the company stock. Where does this money come from? It gets skimmed from the proceeds of Trimark's funds.
It's much the same for most actively managed fund companies. Even when fund managers outperform their benchmark indexes, investors in their funds rarely do. Trimark's Government Plus Income fund, for example, costs 1.44 per cent a year. Its clever managers earned a solid rate for a short-term bond fund: 3.8 per cent over 10 years. But after fees, its investors earned just 2.36 per cent.
This means Trimark's fees took roughly 50 per cent of the fund's profit. Investors would have done better with a short-term government bond index, such as the iShares Canadian Short Term Bond ETF. It cost 0.25 per cent. After fees, it averaged 2.63 per cent for the decade.
Trimark's Canadian Opportunity Class Fund managers also outperformed their benchmark index. It was the firm's top-performing broad Canadian fund for the decade, averaging 9.94 per cent before fees. But the fund costs 2.48 per cent. So investors earned just 7.46 per cent for the decade. Company fees cut 25 per cent of the annual profits.
Charles Ellis may have ended the myth that professional money managers can beat the market. In this summer's issue of the Financial Analysts Journal, he published The Rise and Fall of Performance Investing, pointing out that the era of great performance management is over. Armies of analysts are now so large, and their expertise so great, that none have a lasting edge. And if they do have an edge, their advantages evaporate after fees.
This is why low cost index funds make so much sense. TD's e-Series Canadian equity index averaged 8.16 per cent after fees. The iShares S&P/TSX 60 Index (XIU) averaged 8.55 per cent. And the iShares Core S&P/TSX 60 Capped Composite Index (XIC) earned 8.43 per cent. They cost 0.33 per cent, 0.17 per cent and 0.05 per cent respectively. After fees, they all outperformed Trimark's top, broad Canadian stock market funds.
Trimark's fund managers have done well. But after fees, their funds with 10-year track records underperformed index funds in all five comparable categories: Canadian bond, Short-term government bond, Canadian Equity, U.S. equity and International Equity.
Perhaps some managers are skilled enough to beat the market. But the story after fees is the only one that counts.