Blogs & Comment

Active mutual funds vs. index funds

Standard & Poor’s released today the Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard for Canada. It shows how Canadian mutual funds fared against market indexes in 2009 and for the last three and five years.
A main finding was that only 12.5% of actively-managed Canadian equity funds outperformed the S&P/TSX Composite Index over the last three years. And only 7.45% outperformed over the last five. SPIVA again highlights how passive investing provides a cost efficient way to access capital markets, to quote the news release.
There might be a few quibbles over measurement issues, though.
For example, a fairer comparison might be between equity mutual funds and the practical alternative of index funds or exchange-traded funds (ETFs) tracking the S&P/TSX Composite Index. This could affect the results somewhat since the latter funds have annual fees and tracking errors.
But the costs and tracking error of broad-based index funds and ETFs are quite low and its unlikely the percentage of mutual funds beating their index-fund or ETF counterpart would be much higher than those beating the indexes. That’s my guess, anyway, until I see some actual comparisons.
Mutual-fund companies argue SPIVA comparisons are unfair because the cost of most mutual funds containsfinancial advice (i.e. trailer fees paid to financial advisors). So comparing indexesto mutual funds is comparing apples to oranges, they say.
However, as noted in an Oct. 19 post, a number of academics have found that financial advisors dont add value to the selection of mutual funds. In fact, some of the analysts find that value is subtracted in the selection of funds.
A grey area is the provision of ancillary services like tax and estate planning. These services may be bundled in with the mutual funds as part of a total financial planning package. So trailer fees could be seen as the price for the mutual fund plus a bundle of other services.
Im not aware of any studies that have tried to estimate how much value is added by these ancillary services and whether or not it would make a difference in comparisons between mutual funds and the indexes or ETFs. Maybe somebody should do such a study some day.