Beating the S&P/TSX Composite Index has been a challenge for active managers for years, so it’s no surprise that that most Canadian mutual funds underperformed yet again.

According to the Standard & Poor’s Indices Versus Active Funds (SPIVA) report, only 8.2% of Canadian equity active managers outperformed the Composite Index. “Compared to previous reports, it’s lower than we’ve seen in the past,” says Jasmit Bhandal, a director at Standard & Poor’s.

Bhandal can’t say for sure if the recent market turmoil has anything to do with the poor performance numbers, but it’s likely there is some correlation.

“It’s related to what asset allocation is in an index,” she explains. “In the composite broad market index, there’s [a heavy] weighting in energy and materials which have done well, so perhaps actives are underweighted in those sectors.”

Still, most people tend to think active investing fares better in bear markets — at least compared to passive investing. But Bhnadal says the SPIVA report proves this isn’t true. “We do tend to hear that indexing or passive indexing doesn’t work as well in a bear market, but considering a lot of returns during Q1 2008 were quite negative, that idea is a myth. Active managers had a difficult, if not more difficult time in a bear market,” she reveals.

Another reason for the poor performance is that active managers charge higher fees, which tends to force returns below the benchmark. This is why, says Bhandal, “you see the same [negative] results over and over again.”

But it’s not all bad news for active managers. Canadian dividend and income equity funds beat the benchmark 92.6% in a one-year period, while 43.9% of active managers in the Canadian small-/mid-cap equity space outperformed the S&P/TSX Completion Index.

Bhandal explains that the more positive numbers show that some active managers can beat their benchmark; it’s just a matter of finding which ones and picking the right funds to be in. “It’s important for investors to do their homework,” she says. “Investors can’t just assume when picking an active manager that they can’t beat the benchmark.”

One area that fared somewhat better than the S&P/TSX Composite Index-focused funds was international and U.S. funds. In the past year, 37.4% of managers beat the S&P 500 Index. That number drops to 13.4% in the three-year range and 10.3% in the five-year span.

In the last 12 months, 18.2% of active managers dealing in the international equity space beat the S&P/Citigroup EPAC Index, while 17% and 13.1% of managers outperformed the benchmark in the three-year and five-year periods respectively.

Since the foreign content limits were removed, says Bhandal, the non-Canadian fund space has been an attractive area for active managers and their investors. “In the retail area, more and more people are trying to redeploy assets outside of Canada,” she explains. “You can see the numbers there are more advantageous to active fund managers, relative to other categories.”

Bhandal can’t predict how active managers will do in the coming months, but if there’s anything to take away from this SPIVA report, she says, it’s that “even in the turbulent market we had in Q1, it’s still very difficult, and even more difficult than normal, for active managers to beat the index.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/25/08)

Originally published on Advisor.ca