Canadian investors are slow to adopt evidence-based investing

It is becoming common knowledge that Canadians pay the highest mutual fund fees in the world, and are often receiving advice from commissioned sales people selling expensive actively managed mutual funds rather than fiduciary financial advisors acting in their best interest. Index funds and passive investing have gone mainstream on Canadian personal finance blogs and media outlets, giving the impression that we are becoming sensible investors. The data tells a different story.

In 2008, 6.9% of Canadian mutual fund and ETF assets were invested in passive vehicles, compared to 21% of U.S. assets. At the end of December, 2015, Canadians’ passive investment assets had increased to 12% , while passive assets in the U.S. had climbed to 32%. In the U.S., the market share of passive investment assets has been increasing each year by an average of 1.75%, while in Canada the passive market share has been flat since 2013, and increased by an average of only 0.65% per year since 2008.

Estimated Canada & U.S. Market Share of Passive and Active Funds 2008-2015

	PASSIVE		ACTIVE
	CANADA	U.S.	CANADA	U.S
2008	6.9%	20.8%	93.1%	79.2%
2009	9.0%	21.6%	91.0%	78.4%
2010	9.5%	23.1%	90.5%	76.9%
2011	9.5%	24.4%	90.5%	75.6%
2012	10.6%	25.8%	89.4%	74.2%
2013	11.7%	27.8%	88.3%	72.2%
2014	12.0%	30.1%	88.0%	69.9%
2015	12.1%	32.4%	87.9%	67.6%

Source : Morningstar Direct

Passive investment vehicles in Canada have seen positive net inflows each year since 2008, while flows into active funds have been much more volatile with negative flows in 5 of the last 8 years. The steady flows into passive funds, and the volatility of flows into active funds, support the idea that a passive, evidence-based investment philosophy fosters investment discipline while active management results in performance-chasing behaviour. In 2015, active funds in Canada attracted nearly $15B of assets, while passive funds attracted $8B. Like in Canada, the U.S. has seen consistent positive flows into passive funds, and volatility in active fund flows. In 2015, U.S. investors extracted -$207B from active funds, while pouring a near-record $414B into passive funds.

Estimated Canada & U.S. Net Fund Flows 2008-2015 ($ Billions)

	PASSIVE		ACTIVE
	CANADA	U.S.	CANADA	U.S
2008	5.73	216.87	15.85	(207.63)
2009	7.32	190.65	(27.83)	310.24
2010	3.53	194.26	(14.28)	197.00
2011	5.33	193.79	(2.32)	17.35
2012	8.85	273.65	(8.00)	184.46
2013	3.58	324.78	4.21	142.80
2014	4.68	421.49	(2.19)	64.37
2015	7.96	413.87	14.58	(207.29)

Source : Morningstar Direct

The overall trend is that while Canadians are adding assets to passive funds, they are doing so at a much slower pace than Americans. It is possible that this is due to the rise in the Registered Investment Advisor in the U.S.; an RIA is registered with the SEC, is fee-based, and has a fiduciary duty to clients. RIAs tend to use more passively managed investment vehicles. In Canada, the vast majority of investment fund assets are in mutual funds, and the vast majority of mutual fund assets are in commission-based actively managed funds. Most financial advisors in Canada are not legally obligated to act in the best interest of their clients, and their recommendations may be tainted by the need to earn commissions or meet sales targets. Index funds and other low-cost vehicles do not pay commissions.

Benjamin Felix
Portfolio Manager, Head of Research, MBA, CFA, CFP, CIM

Benjamin Felix is the Head of Research at PWL Capital, a Canadian wealth management firm known for its publicly available thought leadership. PWL creates resources for Canadian investors including white papers, model portfolios, and research content. Benjamin co-hosts a podcast, the Rational Reminder, and is the host of a YouTube channel which together reach hundreds of thousands of people in Canada and around the world. Benjamin joined PWL Capital in 2013 after completing a degree in mechanical engineering and an MBA in financial management. He is a CFA charterholder and a CFP professional.

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