Are Big Banks Better At Canadian Funds?

wayfairercapital | Posted on July 31, 2023 |

^{This image was created with the assistance of DALL·E 2}

Last month I looked at the performance of the big bank balanced mutual funds, which was unsurprisingly underwhelming. This month I dig deeper by looking at the big banks’ biggest Canadian equity and fixed income funds. Do their performance results show they have a competitive advantage investing in their home markets given their knowledge and experience with Canada’s economy, businesses, and markets?

The Process

I screened the Canadian equity and Canadian fixed income mutual funds offered by BNS, BMO, CIBC, RBC and TD using Morningstar Canada premium. The funds had to have the following attributes: (1) the assets are primarily or exclusively Canadian stocks or bonds; (2) there is at least 10 years of history; (3) the funds offer a retail and wholesale fund series; and (4) they are the largest funds with attributes 1 to 3. The results for Canadian equities are shown in Table 1 and for fixed income in Table 2.

Table 1

¹ Only the series I has a ten-year history, so I have adjusted its historical returns to reflect the series A MER of 1.88%

Table 2

The monthly returns (up to June 2023) were exported from Morningstar and compared to an investable ETF. I used the iShares XIC for Canadian equity and the iShares XBB for Canadian fixed income. The average MER for the Canadian equity funds is 2.1% vs 0.06% for XIC. The average MER for the Canadian fixed income funds is 1.2% vs 0.1% for XBB. You can see there is a big hurdle to outperform after fees!

Canadian Equity Average Returns After Fees

Chart 1 shows the average of the 3, 5, and 10-year after fee annualized returns of the 5 mutual funds in Table 1 (black bars) vs the XIC ETF (green bars). The red bars show the underperformance of the average vs XIC. While it was not a shock to see that the average underperformed, I was pleasantly surprised to see that the amount of underperformance was less than the average fee of 2.1%. In Can you bank on big bank balanced funds? the underperformance was about the same as the fees charged, meaning the big banks did not add value to the comparison ETFs before fees. In this case, they did outperform the XIC ETF before fees by 0.8% over the last ten years, showing there was some active management.

Chart 1

Chart 2 looks at the average of the rolling 4 year returns for the big bank Canadian equity funds over the last 10 years. The red bars show that the return has consistently fallen short of the XIC ETF but mostly by less than the average fee of 2.1%.

Chart 2

Canadian Fixed Income Average Returns After Fees

Chart 3 shows the average after fee annualized returns of the 5 mutual funds in Table 2 (black bars) vs the XBB ETF (green bars). The red bars show the underperformance of the average vs XBB. We see a similar pattern to the Canadian equity returns. The average Canadian fixed income fund underperformed after fees, but by less than the average fee of 1.2%. The big banks outperformed the XBB ETF before fees by around 0.6% over the last ten years, a good result for fixed income investing.

Chart 3

Chart 4 shows the consistent underperformance of the big bank Canadian fixed income funds over the last 10 years, although by less than the average fee of 1.2%.

Chart 4

Pre Fee Returns vs Peers

Once again, I used the latest RBC Pooled Fund Survey for the quarter ended March 2023. In this analysis the big banks fared a little better than with their balanced funds. Over the latest 10 years the average return of the big bank Canadian equity funds ranked at the median return, compared to 3^rd quartile for the balanced funds. The average return of the big bank Canadian fixed income funds was a bit better, ranking in the second quartile.

Wealth Strategy Implications

It appears that the big banks do have some competitive advantage in managing their big Canadian equity and fixed income funds compared to their balanced funds, but only on a before fee basis. Over the last ten years the before fee average returns for the big bank Canadian equity and fixed income funds have performed better than their comparable low cost ETFs. This was not the case for the average return of the big bank balanced funds.

The bad news is that the after fee average returns for the big bank Canadian equity and fixed income funds still underperformed for the retail investor series of those funds. Once again, high fees made the difference. If the average fee for the funds was the same as a typical high net worth client fee of 1% the average return of the Canadian equity funds would have only slightly underperformed the XIC ETF and the average return of the Canadian fixed income funds would have outperformed the XBB ETF.

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.