Standard & Poor’s has just released its 2009/Q1 scorecard for Canadian mutual-fund performance. Known as SPIVA, it shows how many actively managed mutual funds beat their benchmark indexes over various time intervals. Rather than throw out a bunch of numbers, which could get confusing, Ill just copy SPIVAs chart summarizing their findings. You can check it out below.
In the first quarter of 2009, the chart shows that the majority of mutual funds beat their indexes, except for two categories: Canadian Equity and Canadian Dividend & Income Equity. But that outperformance doesnt hold up over the longer run: less than 15% of mutual funds beat their index over the past five years — with the exception being the Canadian Focused Equity category (54% funds ahead).
I have always wondered how mutual funds seem to be able to thrive in the face of mounting evidence that investors would be better off owning index funds and exchange-traded funds simply tracking the market at much lower cost. Are adherents of passive investing missing something or is it just a matter of time until mutual funds become a small rump of the investment-fund space?
This topic has indeed come up at monthly meetings with local finance bloggers (beside myself, attendees include Michael James on Money, Canadian Capitalist, and Canadian Personal Finance). As I recall, one conclusion was that mutual fund companies are very good at marketing.
Of note, one tactic they use is to hire people with a lot of friends, acquaintances, and relatives (preferably wealthy) and get them to make pitches to them. Of course, when a friend or relative asks you to buy something, you are more likely to agree.
Another possibility, which I raised last year in a column ( Are mutual funds a rip-off?) and blog post is that mutual funds often come with a bundle of ancillary financial services.
The financial advisors who sell mutual funds typically package them with financial advice on taxes, estate planning, RRSPs, RESPs, portfolio diversification, and a host of other aspects related to personal finances. Ostensibly, this advice is offered for free but payment occurs indirectly through mutual-fund fees rebated back to the advisor (i.e. sales commissions and/or trailer fees), I wrote. So, in short, mutual fund investors may get value added in other ways other than the net investment return.
One other consideration may be the impression generated by comparisons such as the SPIVA scorecard. What might be more accurate is if the mutual funds are compared not to costless indexes but their real-world alternative, i.e. index funds and ETFs — which come with their own costs such as commissions to buy/sell and annual management fees. Norm Rothery of the Stingy Investorwebsite would also include the fees of advisors who assist investors with constructing passive portfolios (to make an apples-t0-apples comparisonsince mutual fund investorsare also getting advice on constructing balanced portfolios).