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%|
|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:
|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.