In last week’s chart we learned that the fees an investor pays for active management of retirement savings can eventually surpass the savings balance, if those fees were allowed to accumulate with interest. One can shrug this off as long as the investment returns from active management beat the returns on the corresponding benchmark indexes. In the case of Canadian equity funds, for example, the benchmark index would be the S&P/TSX Composite Index.
As this week’s chart shows, however, almost no active fund manager consistently beat the benchmark, at least not over five-year periods. This is unexpected given that active fund managers can use their expertise and research to pick the winners and weed out the losers.
A major drag on the performance of actively managed funds is the significant management fees and other costs associated with active management. Many funds charge over 2 per cent a year for asset management compared with about one-10th of that for passive management though index funds.
Even more surprising is the extent of the underperformance. According to the SPIVA Canada Scorecard, the average annual return of Canadian equity funds over the five years ending in 2023 was 8.92 per cent versus 11.3 per cent for the S&P/TSX Composite Index. The difference between actively managed U.S. equity funds and the S&P 500 index was even greater.
The takeaway is that investors should know when their active fund managers underperform and those same fund managers should be expected to explain what they plan to do to rectify the situation. Some knowledgeable investors might want to consider passive management through benchmark ETF funds. Passive management, however, is not for everyone. Even this author prefers active management since it eliminates the hassle of overseeing his own investment portfolio.
Frederick Vettese is former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca)
Frederick Vettese