Canadian mutual funds have performed poorly over the last ten years, according to a new report from Standard and Poor’s. The data shows that most equity funds in Canada have failed to match the performance of their benchmark index. In 2015, Canada was found to have the highest mutual fund fees in the world. It should come as no surprise, then, that more Canadian funds have trailed their benchmarks than comparable funds in other developed countries. Domestic Equity and US Equity funds in Canada fared far worse than funds in those same categories in the U.K., Japan, Australia, and the U.S.
Data source: 2016 SPIVA Canada Year-End Report, 2016 SPIVA Europe Year-End Report, 2016 SPIVA Japan Year-End Report, 2016 SPIVA Australia Year-End Report, 2016 SPIVA U.S. Year-End Report
Mutual funds fees and sales practices have been the subject of numerous CBC Go Public stories recently, anecdotally documenting the effects of high fees and conflicts of interest on Canadian investors. One of the reasons that Canadian fund fees have remained so high is that they contain a built-in commission that goes toward compensating the advisor. A 2015 report found that funds that contain embedded commission attract new assets even if their performance has not been good.
Despite large amounts of data supporting the low-cost approach of index investing, Canadian investors have been slow adopters. Index funds do not generally pay commissions to financial advisors.
A staggering majority of Canadian mutual funds have underperformed the index over the past decade. This data comes at a time when U.S. investors are pulling billions of dollars out of active funds managed by stock pickers, instead favouring low-cost passive index funds. Canadians are not following this trend, adding roughly equal amounts to both active and passive funds in 2016.
In the ten years ending December 2016, 91.11% of Canadian Equity mutual funds trailed their benchmark index according to the SPIVA Canada 2016 Year-End report. For the first time since it has been produced, the report shows ten years of Canadian data. Similar U.S. data for U.S. Equity funds shows that only 82.87% were outperformed by their benchmarks. As of 2015, Canadian mutual funds had the highest fees in the world, while the U.S. had some of the lowest. Fees are known to be one of the best predictors of future performance.
The idea that active managers are not able to consistently beat the market after fees is not new – it has been demonstrated in academic research papers consistently over the last 40 years. Recently, many investors and advisors have arrived at the same view.
The SPIVA Canada report showed ten year data for four fund categories, none of which posted impressive results. Against their benchmarks, 91.11% of Canadian Equity funds underperformed, 75.44% of Canadian Small/Mid Cap Equity funds underperformed, 100% of Canadian Dividend & Income funds underperformed, and 98.28% of U.S. Equity funds underperformed.
Despite the poor performance, Canadian investors continue giving their money to active managers. In 2016, U.S. investors pulled $326 billion from active funds and added $490 billion to passive funds while Canadian investors added $10 billion to active funds and 10.9 billion to passive funds.