Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

The hunt for returns

Buy low, sell high; it would be an easy path to investing success if people knew how to control their own behaviour. Investors may know that they want to buy low, but there is no way to determine when low has happened. “I’ll get back in as soon as things start to turn around,” they might tell themselves. People will read this and think, “I don’t do that,” but this data from the Investment Company Fact Book, published by the Investment Company Institute shows that most people do. The green bars show the net cash flows to US equity mutual funds, and the brown line shows the total return of global equity markets.

Source: Data from the 2014 Investment Company Fact Book ( For the most up-to-date figures about the fund industry, please visit or
Copyright © 2014 by the Investment Company Institute. All rights reserved. No reproduction without permission from ICI.

When equity markets perform well, people are investing in equities. When equity markets perform poorly, people are pulling out. This is real data demonstrating real behaviour, and it shows that investors tend to buy high and sell low. If they know that what they are doing is wrong, why are they doing it? Equity mutual funds offer investors the opportunity to invest in countless different strategies implemented by just as many managers. Implementing a handful of different strategies in an attempt to beat the market plays directly into bad investor behaviour. Based on the data and investor behaviour, when a strategy doesn’t work, it’s time to sell (selling low), and when something does work, it’s time to buy more (buying high).

These poor decisions can be attributed to the lack of a sound investment philosophy. When a sound philosophy is guiding the construction of a portfolio, investment decisions are based on goals, risk tolerance, and time horizon rather than performance. A guiding philosophy instills confidence in the strategies being implemented, and down markets become opportunities to rebalance instead of reasons to jump ship.

With a sound philosophy guiding portfolio structure, the investor’s focus is shifted from chasing unpredictable short term returns to staying disciplined and following a long-term plan.

By: Ben Felix | 0 comments

The shift to F Class does not mean lower fees

Financial advisors throughout Canada are terrified. The Client Relationship Model (CRM2) is coming quickly, and it means that advisors will be obliged to disclose their fees and charges to clients. The non-disclosure of fees has been a quiet issue for years in the Canadian financial services industry. Most investors don’t even realize that when they buy a mutual fund, the cost of ongoing financial advice is built into the management expense ratio (MER). It’s bad enough that Canada has the highest average MER in the world at well over 2%, many Canadians are also paying for advice that they aren’t receiving.

Disclosure is terrifying to advisors because when clients start to see the dollar amount that they are paying for advice each year, they will want justification. With the popularity of low cost ETFs, and the development of algorithm-based advice in the US, there is downward fee pressure coming from all angles.

Financial advisors are not fools. There has been a big industry push over the last few years for commission based advisors to prepare for the impending disclosure requirements. Part of this preparation has been a shift toward F class mutual funds. F class funds separate the advisory fee from the management expense ratio; when an advisor uses an F class fund, the client pays them directly. This eliminates the conflicts of interest present when advisors are paid commission by a product, and it also forces the advisor and client to agree on a fee that is fair relative to the level of service being provided.

I can’t predict how commission based advisors will transition into the fee based world, but I would imagine that the standard 1% advisory fee will continue to be prevalent. With this in mind, I decided to look at Morningstar’s database of F class mutual funds domiciled in Canada. I found that the average MER across all F class funds (excluding money market funds) is 1.29%. This means that even if an advisor decides to discount the advisory fee to .75%, the client is still paying, on average, over 2% in fees. There are some mutual fund families that do offer low costs; DFA funds come in with the lowest MERs, followed closely by TD’s series of F class index funds.

Around 75% of financial advisors in Canada are only licensed to sell mutual funds, making it that much more difficult for investors to find unbiased advice at a reasonable price. IIROC’s CRM2 disclosure requirements are moving advisors away from commissions to a fee based model,  eliminating an inherent conflict of interest. It is a step in the right direction for financial advice, but unless investors demand a low-cost market-based approach from their advisors, it won’t stop Canadians from pouring money into expensive mutual funds.

By: Ben Felix | 0 comments

Benchmarking: Avoiding the blinders of positive accounting profits

To understand the importance of benchmarking, it is necessary to understand the concept of economic profit. Economic profit is found by subtracting opportunity costs from accounting profit. Imagine quitting your job and investing $200,000 to start a business. At the end of the first year your net business income is $250,000; you have earned $50,000 in accounting profit. If the job that you quit to start your business would have paid you $70,000 in that same year, you have incurred an economic loss of $20,000.

This same concept can be applied to evaluating the performance of an investment portfolio. In the context of financial markets, opportunity cost is the performance of a relevant benchmark. If your portfolio returned 18% net of fees last year, you achieved a seemingly attractive accounting profit of 18%. If the benchmark that your portfolio is evaluated against returned 38% in the same year, you have experienced a significant economic loss of 20%. Very simply, a positive economic profit occurs when a portfolio beats the benchmark index, and an economic loss occurs when the benchmark index beats the portfolio.

It is very easy for an investor to be blinded by positive accounting profits while enduring economic losses. This is particularly salient after a year like 2013 when many investors received positive returns reflective of the positive performance of markets. While an investor may be pleased with a 7% return on their Canadian equity portfolio, the S&P/TSX 60 was up over 13%. Assuming that the S&P/TSX 60 can be bought through an ETF for around .18%, there has been somewhere around 6% of return left on the table – a 6% economic loss.

This situation arises when a portfolio aims to beat its benchmark index. A portfolio that is trying to beat its benchmark index will hold a subset of the securities within the index that are predicted to perform better than the index itself. In a year like 2013 when the whole index is up, there is a good chance that the subset of the index held within the portfolio is also up. It is very important for investors to understand that even if their portfolio has been producing positive returns, if the benchmark is doing better than their portfolio, there is opportunity being lost.

By: Ben Felix | 0 comments