How Did the Couch Potato Stack Up?

On Monday, I posted the 10-year performance record of the Global Couch Potato portfolio. From 2001 through 2010, if you invested in this extremely simple index portfolio using TD’s e-Series funds, and you rebalanced at the start of each year, you would have earned annualized returns between 3.19% and 4.03% — depending on whether you chose to hedge the currency risk in the US and international funds.

No one is jumping for joy over returns like that for a balanced portfolio of 40% bonds and 60% stocks. But as everyone knows, it was a dismal decade for the markets as whole. Here are the index returns for the 10 years ending in 2010, using the benchmarks tracked by the TD e-Series funds:

Canadian equities S&P/TSX Composite 6.57%
US equities S&P 500 ($Cdn) -2.66%
S&P 500 ($US) 1.41%
International equities MSCI EAFE ($Cdn) -0.25%
MSCI EAFE (Local) -2.18%
Canadian bonds DEX Universe Bond 6.33%

The low-hanging fruit

To put the Global Couch Potato’s performance in context, let’s look at how the strategy held up against the alternatives. Maybe I’m setting the bar low here, but we’ll start by comparing it to the balanced mutual funds offered by the banks, which together hold more than $12 billion in assets.

The hedged version of the Couch Potato handily beat all four of the bank-managed balanced funds. (This is the correct comparison, because the bank funds use currency-hedged benchmarks.) That’s no surprise, given that the MERs on these funds range from 1.95% to 2.40%. Here are their annualized returns for the period 2001–10:

Scotia Canadian Balanced 2.74%
CIBC Balanced 2.70%
RBC Balanced 3.70%
TD Balanced Growth 3.40%

Facing off against the rest

Now let’s look at how the individual TD e-Series funds did against other funds in the same category. These data are from Morningstar for the 10 years ending April 18, 2011:

10-year Versus Quartile
return category rank
TD Canadian Index 7.57% 1.10% 1
TD US Index -2.93% -0.21% 2
TD US Index (hedged) 0.94% 2.53% 1
TD International Index -0.84% -0.47% 1
TD International Index (hedged) -0.40% -0.03% 2
TD Canadian Bond Index 5.64% 0.63% 1

Four out of the six e-Series funds were in the top quartile, which means they beat at least 75% of their peer group. The hedged (currency neutral) version of the US Index Fund was in the eighth percentile in the US equity category, while the Canadian Index Fund was in the 13th percentile, outperforming 92% and 87% of their peers, respectively.

Need proof of how bad a decade it was for global investors? The unhedged version of the TD International Index lost 84 basis points a year and still finished in the first quartile and got a four-star rating from Morningstar.

The championship bout

Now let’s take a look at the least expensive and most prudently managed global balanced funds in the country — the ones often recommended as leaders in the category. The five funds below have MERs in the neighbourhood of 1%, much lower than average.

Each of these funds measures itself against a custom benchmark that ranged from 4.3% to 4.9% for the 10 years. Here’s how they fared:

Mawer Canadian Balanced 5.93%
Beutel Goodman Balanced D 5.63%
Leith Wheeler Balanced 5.41%
McLean Budden Balanced Growth D 4.26%
Phillips, Hager & North Balanced D 3.54%

These low-cost balanced funds fared much better against the Global Couch Potato. While actively managed funds have a hard time overcoming their costs, clearly they can do quite well if they keep their fees low. Investors could do a lot worse than simply buying and holding a well-managed balanced fund that charges 1% or so. Well played, Mawer.

However, at least some of the outperformance is explained by these funds’ much higher strategic allocation to Canadian stocks. While the Global Couch Potato equally splits Canadian, US and international equities, all five of the above funds have targets of 45% to 58% to Canada.

In the end, the Global Couch Potato did pretty much what was expected. It beat the high-cost funds offered by the big banks, and the individual funds fared better than the majority of their peers in every asset class, with four top-quartile and two second-quartile ranks. The index portfolio was outperformed by a small number of low-cost actively managed funds.

I would expect the results to be similar over the 10 years. But hopefully during the next decade the markets will give all of us more to work with.

25 Responses to How Did the Couch Potato Stack Up?

  1. Steve in Oakville April 20, 2011 at 9:04 am #

    Great post – it’s nice to see further proof that couch potato investing is the most straightforward way to capture market returns and it really does go to show that, of all the things to consider, low fees seem to be the biggest factor in investment performance.

    Well played Couch Potato.

  2. Paul G April 20, 2011 at 10:36 am #

    Great post, as always. Very reassuring as well for those of us going the couch-potato route.

  3. Canadian Couch Potato April 20, 2011 at 10:51 am #

    @Paul and Steve: Thanks for your comments. Funny how a 4% return can seem pretty good when you consider the alternatives. Remember, too, that this is what you would have got if you hung on for the whole decade without panicking during two crashes or becoming euphoric during the good years.

  4. Eric April 20, 2011 at 11:45 am #

    Mawer Canadian Balanced RSP is a very well run fund, although it is actively managed. Proof that diversification works ! The fund has investments in small caps and emerging markets.

    I use this fund as a personal benchmark.

  5. Jason Grew April 20, 2011 at 12:17 pm #

    Those are good returns and it is very reassuring.

    Your reccent posts on currency hedging had me working on the basis that it wouldn’t help that much but these returns show it made a big difference for that particular time period, do you think that is just becuase the Canadian Dollar rose in value to the US and others at the end of the time period? Or are there too many factors to consider?

    Also has there been any comentary on how big ETF’s can actually get? If everyone is buying into the market itself is there a point at which they will not actually be able to purchase the assessts in the index as they are no longer available?

  6. Sean April 20, 2011 at 1:31 pm #

    Very good analysis, CCP.

    I have always held a grudge against the “E” in EAFE. Initially, European countries maintained their lifestyles by exploiting their colonies (esp. S. America and Africa), then by taxing their citizens and corporations heavily. More recently in the EU, the Irish wanted the same living standards as the Germans, so they borrowed heavily to fund their programs. Well, we know where that ended.

    Great social programs, though! I’m glad I didn’t put my money in “E”!

  7. Brian April 20, 2011 at 2:43 pm #

    As you pointed out the active funds have a larger allocation to Canadian stocks, and some even have less than 40% in bonds. I’m not so sure that 10 years ago you would have been able to pick these funds out of the group. I’m guessing the next 10 years we’ll see a new set of low cost active funds out performing their benchmarks.

  8. Canadian Couch Potato April 20, 2011 at 2:50 pm #

    @Eric and Brian: I think you’re right – an actively managed fund with broad diversification, low turnover and a 1% fee stands a good chance of doing as well or better than the Global Couch Potato. Even as a committed indexer, I would never try to talk anyone out of using a fund like Mawer’s.

    The other benefit of a balanced fund is that you never see the performance of the individual asset classes – all you see is the bottom-line return. This is a good thing because it makes you less likely to get nervous when one asset class is outperforming another. That will always happen in a diversified portfoli0 – indeed, that’s the point – yet it causes a lot of people to second-guess the strategy.

  9. Greg April 20, 2011 at 5:27 pm #

    For years I was being suckered into high MER DSC funds. Once I realized the amounts I was paying in fees was ridiculous, I moved to low cost alternatives. This meant primarily index funds but I don’t object to low fee actively managed funds. I recently purchased some Mawer Diversified Investment Fund for my kids’ RESP (essentially the non RSP version of the Mawer Balanced Fund and has a MER of only 0.97). It keeps the RESP simple and well diversified.

  10. Albert April 22, 2011 at 5:59 pm #

    Great post….

    I do have some money in “Mawer Canadian Diversified Investment – MAW105”, what is the major difference with the Mawer Canadian Balance one you mention

  11. Canadian Couch Potato April 23, 2011 at 10:58 am #

    @Albert: The two Mawer funds seem to have essentially the same asset mix. I believe that the one you have is managed to keep taxes to a minimum, while the Canadian Balanced Retirement Savings Fund is designed for RRSPs, where taxes aren’t an issue.

  12. Darren April 27, 2011 at 11:51 am #

    Why do you always leave off the best mutual funds and best managers??

    Why not compare to Dynamic as they clearly have the best managers, best long term performance and best value (even after fees) for investors.

    For the 10 year period you are referring to above the Dynamic Value Balanced Fund would have returned a compounded return of 8.36%. The Dynamic Power Balanced Fund would have returned a compounded annual return of 8.55%. Mixing these two fund together also provides you with two completely different bond teams and a fantastic mix of one of the best Value and best Growth managers likely in the world. And the return by mixing them would have been in the 8.46% range.

    Even their ultra conservative Dynamic Focus Plus Balanced Fund returned an annual compounded return of 7.29% over this same time period.

    No, their fees may not be 1% but I think focusing on fees is completely incorrect. You only want to focus on one thing. Returns in your pocket after fees. Dynamic may charge more but even after that they have continually returned far more to their investors than almost anybody else.

    They certainly leave your index portfolios (with their low fees) in their dust. Personally I would rather pay Dynamic a little more and have double the returns you were able to achieve.

    Paying a low fee for poor performance is still a suckers game.

  13. Canadian Couch Potato April 27, 2011 at 12:34 pm #

    @Darren: Thanks for the comment. I agree completely that returns are the ultimate goal, not low fees. But the fact is that low fees are the best predictor of fund performance. Even Morningstar admits that.

    Of course there were many funds that outperformed over the last decade — there always will be. The problem is that they cannot be identified in advance. Can you you show me a marketing piece, or a client newsletter, or something else that would indicate what funds your firm was recommending in 2001? Have your clients held these funds through think and thin during the last 10 years? If so, then I will happily concede that the you have an excellent ability to pick winners in advance. If not, then who is really playing the sucker’s game?

  14. Darren April 27, 2011 at 12:48 pm #

    We have been recommending Dynamic Funds and managers for about 10 years now and they form the core holdings for the vast majority of our clients.

    I am only speaking for our specific office and the funds and managers we choose to be the main components of our clients holdings. However, if people do their research and find a good advisor who is also willing to do theirs and goes out of their way to identify and use the managers who have proven (and continue to) that they in fact do beat their peers and the indexes over the long run and many times do so with less volatility, it is amazing the type of returns that can be achieved, even over one of the worst decades on record.

    I would say our clients are very happy with the fund, managers and products we use and even after the fees the funds and we may charge are way better off than if we had used index or ETF strategies for them. In fact, if we had done so I would go so far as to say we would have far fewer clients and assets under management at this point.

    Plus, with a good advisor and with good managers running the core of a clients portfolio, the chance of them sticking with it through thick and thin is greatly increased. The main reason people underperform is that they buy and sell at the wrong times and let emotions rule their decisions. I would be amazed and surprised that many people at all would have held on to their equity index funds or ETF’s after they fell 50% in the downturn. I would be even more amazed if they actually invested more money into them during that time.

    This is a huge part of the value we provide. Not just picking better investment options, but ensuring that clients don’t ‘blow themselves up’ as so many do it yourselfers (and others) do.

    It has been proven that investors working with advisors have significantly higher returns than those that do not and I would suggest that a small part of that is the actual investment selection and most of it is simply providing good and solid advice and stopping clients from making very bad decisions, whether they be at the top or the bottom of markets.

    This is where we really add value and let our clients outperform most others. Well, that and our investments have actually done better than the indexes.

  15. Canadian Couch Potato April 27, 2011 at 1:01 pm #

    @Darren: I agree with about 95% of your comment. I think a good advisor can add enormous value for investors. I just don’t think that value comes from identifying money managers who can beat the indexes, because this is an unrealistic long-term goal. An advisor’s value comes from all the other services they can provide: planning, risk management, tax management, control of emotions.

    You might be interested to read my article in Monday’s Toronto Star:
    http://www.moneyville.ca/article/977647–what-should-you-expect-from-your-advisor

    Cheers.

  16. Darren April 28, 2011 at 1:25 pm #

    Agreed.

    It then just comes down to whether you feel it better for your clients to be using an index based approach (passive management) or an active management approach. Our feeling is that active management reduces volatility in comparison to the passive or full indexing approach and also increases diversification (many indexes are horribly scewed to a small number of stocks, ie Nortel being 33% of the Cdn index when nobody should have owned it at all!). Plus, the bonus is that we have been able to search out and find active management that not only does this for our clients but has also given them better performance to boot! A win, win, win for our clients.

    But I totally agree that the vast majority of value we add for our clients is in our retirement and estate planning services, our taxation advice and planning and ensuring our clients have well rounded financial plans (not just investment plans) that include investments, debts, insurance, long and short term goals, their ability to handle volatility and so on. Getting them to follow and adhere to a well thought out and implemented long term plan ensures they get to their goals quicker and with far less stress and worry than would otherwise be the case.

  17. Canadian Couch Potato April 28, 2011 at 1:57 pm #

    @Darren: It’s funny how much we agree on once we get past the active v. passive debate. As you know, personal finance is about a lot more than investment strategy.

    I’ll just make two points here. First, it’s extremely easy to build a properly diversified index portfolio. The problem you bring up is simply about putting too much in Canada, which is absolutely a valid concerned. The TSX is hopelessly undiversified, which is why my model portfolios allocate one-third to Canada, one-third to the US, and one-third to international equities. In fact, I think one of an advisor’s important roles is to make this argument to Canadians who think the investment universe is banks and energy stocks. (The Nortel example is a red herring — the TSX index was capped at 10% per company years ago.)

    The second point is my biggest discomfort with the financial industry. If, as you acknowledge, advice and planning is “the vast majority of value we add for our clients,” why is compensation tied to investment products? For the client, it makes more sense to use low-cost index products and then pay for advice and planning directly. This removes the conflict of interest and still allows advisors to earn a good living.

  18. Darren April 28, 2011 at 5:43 pm #

    I think the biggest problem is simply that most Canadians will not pay a direct fee for service to an advisor. They want or like the idea of embedded fees better.

    We have the vast majority of our clients set up in fee based accounts where we charge a percentage based on assets, but this is not affected by the products or solutions we employ. Therefore, our advice can be unbiased in terms of what we are suggesting. In fact, we believe this puts us on the same side of the table as our clients. If their accounts do better, so do we. If their accounts do worse, so do we. We do not make our money on commissions for selling the products.

  19. Rick December 3, 2013 at 9:07 am #

    This is all interesting conversation. I am looking to change my RRSPs locations and searching for the best routes.When a fee based adviser is hired is that fee the only fee involved or does he skim a percentage off the returns.Can the adviser be considered the broker too.??

  20. Canadian Couch Potato December 3, 2013 at 9:18 am #

    @Rick: A fee-based advisor charges a percentage of assets under management. So as the portfolio grows, so does the fee in dollar terms. But there is no “incentive pay,” such as a higher percentage in years where returns are higher—except perhaps with some hedge funds.

    The term “broker” usually just refers to the person or firm authorized to make trades in the account. An advisor who is licensed to sell securities might be considered a broker, though most fee-based advisors would probably cringe at the term, which has connotations of old-school stockbrokers.

  21. Shishir April 27, 2014 at 7:42 pm #

    Hi CCP,

    What are your thoughts on Mawer funds in general? They are slightly expensive to get into ($5000 min investment for the most part), but seem strong and well-managed, with good returns over the years. I am thinking of the Mawer Balanced Fund Class A – MAW104.
    http://www.mawer.com/mutual-funds/fund-profiles/mawer-balanced-fund/
    Any thoughts?

  22. Canadian Couch Potato April 27, 2014 at 8:16 pm #

    @Shishir: As actively managed funds it’s hard to say too much against something like the Mawer Balanced Fund, which is has a low fee, low turnover and seems prudently managed.

  23. Shishir April 27, 2014 at 8:25 pm #

    That’s what I was thinking. Their numbers don’t lie, low MER, above-average and consistent returns. Not bad at all.

  24. Jas September 28, 2014 at 7:50 am #

    @CCP:
    It would be great to see an update of this article comparing the latest 10-year performance record of the Global Couch Potato portfolio with active management balanced mutual funds in Canada.

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