Active Management II: Proceed With Caution

Back in 2020 I looked at the returns of active Canadian funds versus low cost ETFs. I thought it was time to revisit the relative performance of Canadian funds after going through the market gyrations of the last four years. Would the results show that high net worth investors still need to proceed with caution when trying to find funds that can outperform ETFs?

Background

The analysis is from the perspective of investments in a RRSP or RRIF with a 1% fee. If I was looking from the viewpoint of a taxable account the results would have been better as investment management fees are usually tax deductible. I used the RBC Investor & Treasury Services Pooled Fund Survey as of March 2024[1].

Looking At The Signal

Table 1 shows, for each category, the ETF used for comparison and the percentage of actively managed funds that outperformed the return of the ETF after fees over the last five and ten years.

Table 1

Unfortunately, the results for equites are generally worse than in 2020 while those for bonds improved. The green highlights show that there were only four times when 50% or more of actively managed funds in a category outperformed the ETF. The orange highlights show when only 25-49% of the funds outperformed, and the red when less than 25% outperformed.

Overall, the historical performance of actively managed funds remained poor after fees. On a pre-fee basis (not shown) well in excess of 50% of funds outperformed the ETFs over 5 and 10 years in all of the categories except U.S. equity. Fees really matter!

Picking Your Lane

Let’s assume that your due diligence process would have enabled you to pick the funds with a return at the top quartile break (25%) in each category. Chart 1 below shows, by category, whether the first quartile fund’s after fee return was higher or lower than the return on the comparable ETF.

Chart 1

The only three fund categories that offered a meaningful after fee additional return vs ETFs were international equities, emerging market equities and Canadian corporate bonds. Canadian equities offered a modest extra return, Canadian bonds a mixed result, and U.S. equities a big return reduction.

Driving Ahead

The results in Table 1 and Chart 1 show that, more than ever, you need to proceed with caution when selecting an investment fund. The after fee returns of U.S. equity funds still had the worst record of performance vs a low cost ETF. International equities, emerging market equities, and Canadian corporate bond funds were able to add extra return. Fees are critical in terms of getting extra return versus a low cost ETF. For those paying 1% or more, you must decide if the value of the advice and service you get is worth the potential reduction in returns. If not, you should switch advisors, look at an online advisor with lower fees, or do it yourself with low cost ETFs.

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.

[1] The survey covers the performance of actively managed funds for categories such as Canadian Equity, U.S. Equity, Non-North American (International) Equity, Emerging Market Equity, Canadian Bonds (Government and Corporate), and Canadian Corporate Bonds.