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SPIVA Update December 2022




A quick update on the average fund performance of mutual funds offered to Canadian investors. The SPIVA report data is as of year-end 2022. The theme does not change. Active investment management, the attempt to outperform an index, is detrimental to your financial health. Even through a pandemic and lockdown, active management continues to underwhelm. Aren't active managers supposed add value in turbulent times? The three year performance numbers indicate otherwise.


A two percentage point (200 basis points) return reduction doesn't sound like much, and in the short-term it isn't. In the long-term a two percentage point reduction has enormous consequences. $10,000 growing at an 8% average annual return grows to $469,016 in 50 years. It grows to only $184,201 at 6% in 50 years.


Let's look above at the longest term data the recent SPIVA report provides. The S&P/TSX Composite Index has returned an average of 7.7% per year since 2013. The average Canadian Equity actively managed mutual fund has returned 7.0% per year. This is a 70 basis point annual underperformance. More on this further down.


The S&P 500 CAD Index (converted back to Canadian dollars) returned an average of 16.1% per year since 2013. The average US Equity mutual fund offered to Canadian investors returned 12.2% per year. This is a 390 basis point annual underperformance. Yikes!


The S&P EPAC Large MidCap CAD Index (converted back to Canadian dollars) returned an average of 8.3% per year since 2013. The average International Equity fund offered to Canadian investors returned 6.8% per year. This is a 150 basis point annual underperformance. Again, yikes!


The S&P Developed LargeMidCap CAD Index (converted back to Canadian dollars) returned an average of 12.6% per year since 2013. The average Global Equity fund offered to Canadian investors returned 8.5% per year. This is a 410 basis point annual underperformance. Yikes on steroids!


Is active management's underperformance surprising? No. Performance is a positive sum game. We can all have more than our original investment. However, outperformance is a zero-sum game. We can't all outperform. This is pre-cost. Cost shifts the performance spectrum towards underperformance. The higher the cost the greater the likelihood and magnitude of underperformance.


A note on Canadian Equity mutual funds relatively decent performance with an only 70 basis point underperformance compared to the index over the most recent 10-year period. This is a result of faulty measurement. Most Canadian equity mutual funds have a portion of the portfolio invested outside of Canada. There are valid reasons for this. Many sectors are under or unrepresented in Canada. The pharmaceutical sector is an example. If the fund manager wants exposure to these sectors, they must invest in outside of Canada. If so, a pure Canadian equity benchmark isn't appropriate. The Canadian Focused Equity mutual fund category deals with this and shows a 330 basis point underperformance to a more appropriate benchmark.







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