Fund investors get more good news

By Mark Noble | September 2, 2009 | Last updated on September 2, 2009
4 min read

Mutual fund fans got a torrent of good news on Tuesday. August was another month of stellar returns and a new report by Standard and Poor’s shows actively managed Canadian equity funds have outperformed index tracking products over the last year.

Forty of the 43 Morningstar mutual fund indices posted positive gains during the month of August, according to Morningstar Canada.

At the top of the heap was the Morningstar Real Estate Equity Fund Index — an index with only 21 names that posted an 8.4% gain.

“A string of positive housing data helped underpin strength in real estate equities for August. Results of new and existing U.S. home sales outpaced expectations as buyers took advantage of government tax credits and deep discounts in the foreclosure market to help pare existing inventory and create pricing pressure in the sector,” says Neal Brandon, fund analyst for Morningstar Canada.

Not too far behind in performance was the European Equity category, which is up 7.3% based on solid gains in the domestic stock markets of France, Germany and the United Kingdom. An additional 2.1% pullback of the Canadian dollar against the euro also helped increase returns.

“Unexpected reports of second-quarter GDP growth in Germany and France contributed to renewed optimism in the Eurozone, as the region’s two largest economies officially marked an end to the painful recession,” Brandon says.

The Morningstar U.S. Equity Fund posted a 4.7% return, thanks to a combination of market performance and currency effects. The S&P 500 Index gained 3.6%, while the U.S. dollar appreciated by 1.6% versus the loonie.

The strength of Europe and the United States also benefited broader equity fund categories: the Global Small/Mid Cap Equity, International Equity, and Global Equity fund indices gained 5.9%, 5.6% and 3.9%, respectively.

On the Canadian equities side, small-capitalization stocks significantly outperformed their large-cap counterparts. The Morningstar Canadian Small/Mid-Cap Equity Fund Index gained 4.8% for the month, ranking fifth among all fund indices, and the Morningstar Canadian Focused Small/Mid Cap Equity Fund Index was up 4.2%.

The Canadian Focused Equity and Canadian Equity fund indices eked out gains of 1.4% and 0.7%, respectively. Morningstar says after a highly volatile start to the year, the three largest sectors of the S&P/TSX Composite Index — financial services, energy, and material — all posted “subdued” returns last month.

Canadian equity managers beat the index on the year

According to Standard & Poor’s Index Versus Active (SPIVA) mid-year scorecard, active Canadian equity managers soundly beat the index even net of fees over the past 12-month periods, although the same category greatly underperformed the last six months.

On a one-year basis, 54.55% of active Canadian fund managers beat the S&P/TSX Composite Index. On average, the fund category as a whole outperformed the index by .46% after fees were taken out.

Usually, six and 12-month time periods would not be remarkable benchmarks for performance, but given the catastrophic downturn and impressive bounce-back during those periods, it’s a compelling ammunition for the argument active managers do add some value during bear markets.

S&P notes for the first half of 2009, only 34.5% of Canadian Equity active funds outperformed the S&P/TSX Composite Index. However, 62.0% of active funds in the Small/Mid Cap Equity category beat the S&P/TSX Completion Index.

In the Canadian Focused Equity category, 71.4% of active funds outperformed the blended benchmark of 50% S&P/TSX Composite + 25% S&P 500 + 25% S&P EPAC LargeMidCap Index.

Fees on mutual funds eat up a lot of this performance. That drag compounds over time, says Jasmit Bhandal, a director at Standard & Poor’s. Over three and five year time horizons, only 16.67% and 7.62% of Canadian equity managers outperform the index.

“Fees would be a big reason we see active management under perform over time,” Bhandal says. “The results for midyear 2009 continue to echo past results. Over shorter time periods, we see active funds adding value but over longer time periods active fund outperformance is a rare observance.”

She adds that “investors face the hurdle of finding this extraordinary fund, and then have to hope that it will continue to repeat this performance.”

However, S&P has also added a screen on this study that compares active mutual funds by asset weight versus the benchmark. These numbers show a slightly different outcome.

By asset weight, on a six-month basis you have Canadian equity managers beating the S&P/TSX Composite Index by more than 3% — easily warranting fees. On an annual basis that differential goes down slightly to 2.62%.

In each circumstance, the study highlights that a dollar invested in actively managed Canadian equity mandates greatly outperformed pure indexing strategies over these timeframes.


Mark Noble