Rob Carrick wrote an article late last year that suggested four actively managed mutual funds which may be worth a look by open-minded DIY investors. All four funds had beaten the S&P/TSX Composite Index’s 8% return over the last 10 years (as of October 31, 2014). Three out of four of the funds had even crushed the index return since their inception.
Without more information, it would be difficult for DIYers to determine whether the outperformance was merely the result of tilting the portfolio towards known risk factors (such as the small cap or value factors), or if the managers had any skill that may resemble alpha. By running 3-factor regressions on the monthly returns for each fund since inception, we can better understand what factors are driving their returns.
Mawer Canadian Equity – A
Since July 1991, the fund has outperformed the index by +1.00%. After the fund returns are put through the ringer, we find that most of the excess returns are a result of the fund’s value tilt over the period (HML coefficient of 0.29). The true alpha of the fund drops from 1.00% to -1.17% (almost identical to the fund’s MER of 1.21%).
Performance: July 1991 to October 2014
| Fund / Index |
10-Year Annualized Return (%) |
20-Year Annualized Return (%) |
Annualized Return Since First Full Month (%) (07/1991-10/2014) |
| Mawer Canadian Equity – A |
10.60 |
10.66 |
9.87 |
| S&P/TSX Composite Index |
8.01 |
8.73 |
8.87 |
| Difference (%) |
2.59 |
1.93 |
1.00 |
Sources: Morningstar Direct, Dimensional Returns 2.0
Regression Results: July 1991 to October 2014
| Fund |
Adjusted R Square |
MKT |
SMB |
HML |
Alpha (annual) |
| Mawer Canadian Equity – A |
0.90 |
0.89 |
-0.13 |
0.29 |
-1.17 |
Sources: Morningstar Direct, Andrea Frazzini Data Library, Dimensional Returns 2.0
Leith Wheeler Canadian Equity – B
With annual outperformance relative to the index of +1.49% per year since May 1994, this fund would appear to be adding value for investors. Unfortunately, when we stress test the returns since inception, the alpha drops from +1.49% to -1.59% (once again, very close to the annual MER of 1.49%). Similar to the Mawer fund, most of Leith Wheeler’s excess returns came from its tilt towards the value factor (HML coefficient of 0.32).
Performance: May 1994 to October 2014
| Fund / Index |
10-Year Annualized Return (%) |
20-Year Annualized Return (%) |
Annualized Return Since First Full Month (%) (05/1994-10/2014) |
| Leith Wheeler Canadian Equity – B |
8.45 |
10.28 |
10.09 |
| S&P/TSX Composite Index |
8.01 |
8.73 |
8.60 |
| Difference (%) |
0.44 |
1.55 |
1.49 |
Sources: Morningstar Direct, Dimensional Returns 2.0
Regression Results: May 1994 to October 2014
| Fund |
Adjusted R Square |
MKT |
SMB |
HML |
Alpha (annual) |
| Leith Wheeler Canadian Equity – B |
0.90 |
0.95 |
-0.09 |
0.32 |
-1.59 |
Sources: Morningstar Direct, Andrea Frazzini Data Library, Dimensional Returns 2.0
Beutel Goodman Canadian Equity – D
This fund is already starting underwater with a negative alpha of -0.15% per year since inception. Although this doesn’t seem so bad (considering the fund has a cost of 1.38% per year), a 3-factor regression exposes the true alpha to be an even lower -2.20%. Once again, the value factor helped the fund achieve performance that was better than expected (with an HML coefficient of 0.33).
Performance: January 1991 to October 2014
| Fund / Index |
10-Year Annualized Return (%) |
20-Year Annualized Return (%) |
Annualized Return Since First Full Month (%) (01/1991-10/2014) |
| Beutel Goodman Canadian Equity – D |
8.68 |
9.10 |
8.90 |
| S&P/TSX Composite Index |
8.01 |
8.73 |
9.05 |
| Difference (%) |
0.67 |
0.37 |
-0.15 |
Sources: Morningstar Direct, Dimensional Returns 2.0
Regression Results: January 1991 to October 2014
| Fund |
Adjusted R Square |
MKT |
SMB |
HML |
Alpha (annual) |
| Beutel Goodman Canadian Equity – D |
0.89 |
0.88 |
-0.08 |
0.33 |
-2.20 |
Sources: Morningstar Direct, Andrea Frazzini Data Library, Dimensional Returns 2.0
Fidelity True North – B
This was the only fund that had a positive alpha before and after running the 3-factor regression. The +1.16% alpha dropped to +0.50% per year after the regression results were in (for those of you who are interested, I subsequently ran a 4-factor regression with the additional momentum factor, which dropped the alpha to -0.15% per year).
Performance: October 1996 to October 2014
| Fund / Index |
10-Year Annualized Return (%) |
20-Year Annualized Return (%) |
Annualized Return Since First Full Month (%) (10/1996-10/2014) |
| Fidelity True North – B |
8.22 |
N/A |
9.32 |
| S&P/TSX Composite Index |
8.01 |
8.73 |
8.16 |
| Difference (%) |
0.21 |
N/A |
1.16 |
Sources: Morningstar Direct, Dimensional Returns 2.0
Regression Results: October 1996 to October 2014
| Fund |
Adjusted R Square |
MKT |
SMB |
HML |
Alpha (annual) |
| Fidelity True North – B |
0.94 |
0.92 |
-0.05 |
0.04 |
0.50 |
Sources: Morningstar Direct, Andrea Frazzini Data Library, Dimensional Returns 2.0
Once the returns are put through a 3-factor analysis, most of the funds’ alpha disappears and even turns negative. Even though this analysis may seem somewhat sophisticated, it serves no useful purpose in determining which funds or risk factors will outperform in the future. It does suggest that if you are looking to add a value tilt to your portfolio (in order to increase your expected returns), there are probably cheaper ways to do this using low-cost ETFs, rather than paying for traditional active management.