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If stock market volatility is an ideal environment for nimble stock pickers to pounce on mispriced shares, 2020 should have been a boon for professional money managers.

It wasn’t.

According to S&P Dow Jones Indices, 88 per cent of Canadian equity mutual funds underperformed their benchmark last year, which was one of the most volatile periods for stocks in more than a decade.

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Any investor who blindly followed the S&P/TSX Composite Index down sharply last February and March, during the start of the pandemic lockdown, and then rode the rebound through the end of the year, scored a higher overall return than most professional money managers.

While the index delivered a return of 5.6 per cent for the year, the average Canadian equity fund lagged with a gain of just 0.8 per cent.

Last year wasn’t unusual in this regard, though. S&P pointed out that 84 per cent of funds lagged their benchmark over the past 10-year period.

Nor is Canada an unusual market. In a separate report on U.S. funds, S&P found that 60 per cent of U.S. large cap funds underperformed the S&P 500 in 2020, in U.S.-dollar terms, marking the 11th consecutive year of underperformance.

Part of the challenge for U.S. stock pickers was sticking with a few notable hot stocks.

Apple Inc. rose 81 per cent last year and Amazon.com Inc. rose 76 per cent, as investors piled into stocks that could ride out the pandemic and emerge stronger. If a professional money manager missed these opportunities, they would have a hard time matching, or beating, their benchmark.

In Canada, Shopify Inc. played a similar role. Shopify, which helps individuals and companies sell their products online, benefited tremendously as stores were shuttered for most of the year. The stock gained 178 per cent in 2020, eclipsing Royal Bank of Canada as the country’s most valuable company based on the value of outstanding shares.

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Any money manager who avoided Shopify’s stock – perhaps because of its sky-high valuation – would have a harder time outperforming the TSX. However, S&P said that even when Shopify is excluded from the index, it gained 1.6 per cent in 2020. That means that the average fund still lagged the benchmark, if only slightly, when a top performer was removed.

Stock pickers did have some success with the stocks of smaller companies though. According to S&P, just 22 per cent of Canadian small-cap and mid-cap equity funds underperformed their benchmark, the S&P/TSX Completion Index. That marks a notable switch, given that 91 per cent of funds in this category have underperformed the benchmark over the past five years. (The S&P/TSX Completion Index excludes the 60 biggest stocks from the S&P/TSX Composite).

These funds delivered an average gain of 14.3 per cent in 2020, or well above the 6-per-cent gain for the benchmark.

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