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The fact that mutual fund managers have not been able to beat their underlying indexes is not new news. However, there is recent news stating these managers are still having difficulty beating the indexes. In an article from GlobeInvestor.com, the evidence has suggested that, “…Fewer than 20 per cent of large-capitalization Canadian institutional fund managers beat the index in the first quarter, according to a survey by Russell Investments Canada. That’s down from 41 per cent in the fourth quarter and the lowest reading since Russell started monitoring the data in 1999.” Performance has actually worsened in the most recent quarter.
Now, I am not one to put too much stock into such short term performance tracking. One quarter of poor performance should not matter to a dividend investor. However, what is more telling in the article is the discussion that occurs later on who has managed to more closely match that of the market. The highest percentage achieved of those who were able to beat the market was only 27%. A whole 73% of the mutual fund managers in Canada did not match performance. That is not a very promising story, and is especially bad when you consider that in Canada we have the highest mutual fund fees in the world then the story gets even more grim.
Now, I don’t want to be vindictive and totally slag on the mutual fund companies and their managers. These are people too who are tying to do their best. In fact, I can be accused of being an active manager as I buy individual stocks in my own personal dividend portfolio. However, I receive solace from the fact that I am making these choices on my own and not paying someone to underperform the market (I am currently performing better than the market). Paying for poor performance just does not make sense! So please, if I can request anything of my readers, please be sure to understand what you are paying in fees and always check the performance of your funds over a long (1+ years) period of time. If your funds are not at least meeting the market, then do something about it.
(Photo Credit: Steve Knight)
Another advantage you have is your small size – any good buying opportunity could probably take you moving your whole portfolio into it without making a dent. A manager at a large fund has to find a lot more good stocks, which means the average will be lower. If the manager doesn’t know when the fund has to be closed to new money any outperformance will litteraly be beaten down by performance-chasers.
That said, with a good long-term fund I would be prepared for periods of 2-3 years where it underperforms the market; I would even hope for it when there’s another bubble. If you double the market returns when they’re already much higher than they should be, you’re probably setting yourself up!
All the more reason for you to take charge of your money and your future. Most things tend toward the mean (or below).
Best Wishes,
D4L
One of the main reasons that it is so hard for Canadian fund managers has to do with capitalization and liquidity.
If you have a large Canadian equity fund, there are only a handful of stocks on the TSX that you can buy in large quantities. Those large companies are what make up the S&P TSX Index. In essence, a large equity fund becomes an index fund.
Slap on you high fees and it becomes virtually impossible to beat the index becuase you are the index.
Patience is a virtue. Short term results may fluctuate one way or another but the overall quality of money managers should be judged based on their performance in the long run. Still, one should be very careful with the fees.
There are a HUGE number of mutual funds out there. So many in fact, that they mirror the market as a whole, on average. When you subtract and MER from that average performance, voila! You’ve got yourself returns that can’t possibly beat the market (once again, on average).
So picking a winning mutual fund is as hard as picking a winning stock. Go for the stocks, and save yourself the MER.
Hi,
Once again after crash Nifty has started going up. Now we suggest all rises should be used as an opportunity to exit old long positions.
This bull run will continue for few more days. Overall market is in bearish mood as in medium term its just a small rally due to short covering
and result season.
Happy Trading,
ShareGyan