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Short Summary
Main recommendation: Canadian investors should avoid actively managed mutual funds in favor of low-cost index investing, because actively managed funds have consistently underperformed their benchmarks over the ten years ending December 2017. The video argues that most investors, especially average families saving for retirement, have little reason to take on the active risk given how remote the chance of a positive outcome is.
Key Points
- Canadians held 88.8% of mutual fund and ETF assets in actively managed products at the end of 2017, compared with 65% in the US.
- Only 8.14% of Canadian equity mutual funds beat the S&P/TSX Composite Index over ten years, and just 0.00% of Canadian dividend and income funds beat the S&P/TSX Dividend Aristocrats Index.
- The average equity mutual fund in Canada charges about 2.2% in fees, and in most categories the underperformance versus the index was substantially higher than the cost of owning index funds, though actual underperformance ranged from 0.21% to 3.62% depending on category.
- Survivorship bias explains why the poor record is hard to see: roughly half of funds existing in January 2008 had closed by December 2017, so investors mostly see the survivors.
- Past winners rarely keep winning: of 585 US top-quartile domestic equity funds existing in March 2013, only 2 (0.34%) stayed in the top quartile through December 2017, and the data show it's more likely for the best-performing funds to become the worst than vice versa.
- Mark Carhart's 1997 paper "On Persistence in Mutual Fund Performance" concluded the results "do not support the existence of skilled or informed mutual fund portfolio managers."
Details Worth Noting
- Concrete instructions: The video gives no step-by-step plan, but its actionable guidance is to compare active funds against their relevant index and fees before investing, to treat index funds as the default for typical savers, and to reserve active funds for investors who are financially independent with capital beyond their needs and accept the risk of underperformance. Also, consider the cost of advice: the speaker notes that even an index investor paying an additional 1% for fee-based advice from a firm like PWL Capital would still be better off than the average active fund investor by a wide margin.
- The SPIVA Canada report, published semi-annually by Standard and Poor's, is the data source; its 2017 year-end edition was the first to include ten years of data across all sections.
- Index fund investors also pay fees and so underperform the index slightly, but the gap should be small, whereas active funds underperformed by much more than their fees in most categories (for example, US equity funds trailed by 3.62% and Canadian dividend and income funds by 2.65%).
Bottom Line
Over the decade studied, the odds of a Canadian active fund beating its benchmark were low, and the costs and survivorship effects make that gap hard for ordinary investors to see, so the video's core message is that low-cost index investing is the sensible default for most people.
