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Judging Performance of Fund Managers

Year end SPIVA numbers are in and paint the expected picture.

SPIVA is an acronym for Standard & Poors Index Versus Active. SPIVA is a study of active fund managers investment performance versus the performance of a relevant benchmark index. A Canadian equity manager is compared to a Canadian index. A U.S. equity manager in a Canadian asset management company is compared to the S&P 500 (CAD). (This index is the S&P 500 adjusted for changes in the CAD / USD exchange rate. For example, if the index or fund does nothing and the CAD falls 20% versus the USD, the value of the fund grows 20% when reported in Canadian dollars even though the manager added nothing). And, ditto of non-North American fund managers within Canadian asset management companies.

If managers are being paid to manage money, the expectation is that they should add value. Investors are capable of investing in the indices for a small cost. “Small” is under 10 basis points (1 basis point = 1/100 of a percentage point). If managers underperform, why pay them?

I've summarized data into 3 data sets. The data is damning for fund managers.

The first data set indicates that only 8.1% of fund managers managing Canadian equity funds outperformed the S&P/TSX Composite over the last 10 years ending December 31, 2017. Only 1.7% of US Equity funds offered by Canadian firms beat the S&P 500 index adjusted for changes in the Can vs. US dollar and only 6.1% of international funds managed by Canadian firms outperformed their index. Digest these numbers for some time.

The second set of data shows the degree of underperformance of the return to the average dollar managed actively compared to the index. The average dollar earned 3.86% per year over the last 10 years in an actively managed Canadian equity fund while the index earned 4.65%. The fund return was 16.99% lower per year than the index return. The average dollar earned 7.5% per year over the last 10 years in an actively managed US equity fund offered through a Canadian fund firm while the index earned 11.12%. The fund return was 32.55% lower per year than the index return. Non-North American funds offered by Canadian asset managers grew 55.77% slower per year than the index return.

The third set of data shows the consequence of the underperformance. The 10-year data is actual data to the end of 2017. A portfolio of $10,000 each into Canadian equity, US equity, and international equity grew to $47,618. The same portfolio invested in the indices grew to $60,917 over the same 10-year period. There is no cost-free investing, but this portfolio could cost under 10 basis points per year if BYOFA. Subtracting 10 basis points per year from the indices grows the portfolio to $60,353.

I extrapolate the return data to 20 and 40-year time periods to illustrate the consequence of underperformance. I have no idea what the future returns will be but am certain that the indices less 10 basis points will significantly outperform the average dollar managed actively. Cost matters! Extrapolating the actual 10-year data 40 years forward, the actively managed portfolio would underperform the portfolio of indices less 10 basis points by over $534,000. This is on a 1 time $30,000 investment. Imagine a lifetime of contributions. Learning to Be-Your-Own-Financial-Advisor is simply too profitable to ignore.

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