Could You Have Picked the Winning Funds?

Last month I put together the Global Couch Potato’s 10-year report card. I calculated the returns of this simple index portfolio using data from TD’s e-Series index funds, including annual rebalancing. The annualized return of the portfolio from 2001 through 2010 was 4.03%.

In a subsequent post I looked at how the Couch Potato stacked up against other globally balanced mutual funds. But at that time, the only 10-year performance data I could get was what I looked up myself in annual reports. So even though it appeared that the Couch Potato did well during a turbulent decade, it was hard to say much more than that.

While researching my column for the June issue of MoneySense, however, I collected much more complete data. I called Morningstar and asked them to provide me with the 10-year returns for all Canadian mutual funds in two categories: Global Equity Balanced and Global Neutral Equity. These categories most closely resemble the Global Couch Potato, with its 40% bond allocation and its equity holdings spread across Canada, the US and international markets.

How many of these outperformed a portfolio of humble index funds? And could you have identified these winners in advance?

This could get ugly

Warning: the following paragraphs include mutual fund data that may be disturbing to active managers. Reader discretion is advised.

Let’s begin in the Global Equity Balanced category, where Morningstar had 54 funds with a 10-year track record. The average return of the funds in this category was just 1.76%, and only five (9%) outperformed the portfolio of index funds over that period.

In the Global Neutral Equity category, the news was slightly less dreadful. Among the 53 funds in the category, the average return was 2.98%. In this case, a whopping 10 of the 53 funds (19%) beat the Global Couch Potato’s performance over the last decade.

Overall, then, 86% of 107 comparable mutual funds in Canada — about six out of every seven — were unable to outperform an index portfolio during one of history’s worst decades for equities. (Who was it that said that indexing only works in bull markets?) Remember, too, that we’re not talking about a hypothetical index benchmarks here: the Couch Potato’s returns were calculated using the real-world performance of actual funds.

It must also be noted that Morningstar’s mutual funds returns do not account for the front-end loads that are tacked on to many of these funds. Many investors in the outperforming funds would not have achieved these returns because of these additional costs.

The Couch Potato Challenge

Proponents of actively managed mutual funds like to argue that they can identify good mangers and outperforming funds in advance. To find out if this true, I’ll issue a challenge. If any advisor can produce a verifiable document from 2001 (such as client newsletter or a list of recommend funds) that contains one of the 15 outperforming funds, and they can demonstrate that at least one of their clients held that fund for 10 years, I will buy him or her a steak dinner. I’ll even throw in a potato.

Here’s the list of all 107 funds and their annualized returns from 2001 through 2010:

Global Equity Balanced Funds Return
Vertex Managed Value Portfolio A 6.34
Mawer Canadian Diversified Investment 5.51
Leith Wheeler Balanced 5.48
CI Portfolio Series Balanced Class F 4.95
Mac Cundill Global Balanced Series C 4.23
Global Couch Potato 4.03
Trimark Global Balanced 3.91
CI Portfolio Series Balanced 3.81
National Bank Growth Portfolio 3.37
Primerica Moderate Growth 3.21
Primerica Growth 3.15
Keystone Investment Maximum Long-Term Gr 2.75
Investors Growth Plus Portfolio C 2.70
CIBC Very Aggressive Portfolio Non-RSP 2.64
RBC Select Growth Portfolio 2.47
CIBC Growth Portfolio Non-RSP 2.45
CIBC Very Aggressive Index Port Non-RSP 2.44
Northwest Growth and Income 2.31
Mac Ivy Global Balanced Series F 2.31
CIBC Very Aggressive Index Portfolio RSP 2.27
Keystone Investment Long-Term Growth 2.25
BMO MatchMaker Strategic Growth Port 2.23
Mac STAR Canadian Maximum Long-Term Gr 2.09
Caldwell Balanced 2.07
Keystone Maximum Long-Term Growth 1.92
Mac STAR Investment Max Long-Term Growth 1.74
Russell LifePoints LT Growth Port Sr B 1.69
CIBC PRS Growth Non-RSP Portfolio 1.49
CIBC IPRS Growth Non-RSP Portfolio 1.47
National Bank Growth Diversified 1.38
Mac Ivy Global Balanced 1.23
TD Mgd Idx Agrsv Growth Pt – e 1.21
CIBC APRS Growth Non-RSP Portfolio 1.12
RBC Select Choices Growth Portfolio 1.03
CIBC IPRS Growth RSP Portfolio 1.00
TD Mgd Aggressive Growth Port I 0.94
TD Mgd Idx Agrsv Growth Pt – I 0.90
Investors Tactical Asset Allocation C 0.86
CIBC IPRS Agrsv Growth Non-RSP Portfolio 0.82
CIBC APRS Agrsv Growth Non-RSP Portfolio 0.79
CIBC PRS Growth RSP Portfolio 0.78
Fidelity Global Asset Allocation Sr F 0.63
Mac STAR Foreign Maximum Long-Term Gr 0.62
CIBC PRS Agrsv Growth Non-RSP Portfolio 0.59
National Bank Protected Growth Balanced 0.51
Mac STAR Maximum Long-Term Growth 0.42
CIBC IPRS Agrsv Growth RSP Portfolio 0.39
TD FundSmart Mgd Aggressive Growth I 0.37
CIBC APRS Growth RSP Portfolio 0.25
CIBC APRS Agrsv Growth RSP Portfolio 0.09
CIBC PRS Agrsv Growth RSP Portfolio -0.11
Fidelity Global Asset Allocation Sr B -0.50
Fidelity Global Asset Allocation Sr A -0.63
Acuity Pooled Global Balanced -1.27
CI International Balanced -1.62
Category average 1.76%

Source: Morningstar

Global Neutral Equity Funds
Return
CI Signature High Income 10.44
CI Signature Income & Growth Class F 8.35
Dynamic Value Balanced 8.34
CI Signature Income & Growth 7.36
Mawer Canadian Balanced RSP 5.91
Mac Cundill Canadian Balanced Series C 5.77
CI Portfolio Series Conservative Class F 5.68
Dynamic Strategic Growth Portfolio 5.31
CI Portfolio Series Conservative 4.54
McLean Budden Balanced Growth 4.26
Global Couch Potato 4.03
RBC Select Conservative Portfolio 3.87
RBC Select Balanced Portfolio 3.21
RBC Balanced Growth 3.14
Keystone Long-Term Growth 3.03
TD Mgd Idx Inc & Mod Growth Port – e 2.73
CIBC PRS Balanced Non-RSP Portfolio 2.68
BMO MatchMaker Strategic Balanced Port 2.67
Mac STAR Investment Bal Growth & Income 2.64
Keystone Investment Cons Income & Growth 2.59
CIBC IPRS Balanced Non-RSP Portfolio 2.54
Mac STAR Canadian Balanced Growth & Inc 2.49
TD Mgd Inc & Mod Growth Port I 2.43
TD Mgd Idx Inc & Mod Growth Port – I 2.42
Mac STAR Inv Conservative Income & Gr 2.42
Keystone Conservative Income & Growth 2.25
Mac STAR Conservative Income & Growth 2.24
RBC Select Choices Balanced Portfolio 2.23
CIBC IPRS Balanced RSP Portfolio 2.21
Mac STAR Canadian Long-Term Growth 2.18
Russell LifePoints Bal Growth Port Sr B 2.15
CIBC IPRS Bal Growth Non-RSP Portfolio 2.14
TD FundSmart Mgd Inc & Mod Growth Port I 2.13
TD Mgd Idx Bal Growth Port – e 2.10
Mac STAR Balanced Growth & Income 2.08
CIBC APRS Bal Growth Non-RSP Portfolio 2.04
CIBC PRS Balanced RSP Portfolio 2.02
CIBC APRS Balanced RSP Portfolio 2.01
Keystone Balanced Growth & Income 2.00
Keystone Investment Balanced Gr & Inc 2.00
CIBC PRS Bal Growth Non-RSP Portfolio 1.94
TD Mgd Balanced Growth Port I 1.85
TD Mgd Idx Bal Growth Port – I 1.78
CIBC IPRS Bal Growth RSP Portfolio 1.75
National Bank Balanced Diversified 1.71
CIBC APRS Bal Growth RSP Portfolio 1.49
TD FundSmart Mgd Balanced Growth I 1.49
CIBC APRS Balanced Non-RSP Portfolio 1.46
Mac STAR Long-Term Growth 1.38
Mac STAR Investment Long-Term Growth 1.31
CIBC PRS Bal Growth RSP Portfolio 1.28
National Bank Protected Retirement Bal 0.61
Mac STAR Foreign Balanced Gr & Inc 0.48
Category average 2.98%


Source: Morningstar

41 Responses to Could You Have Picked the Winning Funds?

  1. Ernie May 13, 2011 at 8:07 am #

    To be truly complete this list should include those funds that didn’t survive or were merged, i.e., all funds that were available in 2001.

  2. Canadian Couch Potato May 13, 2011 at 8:26 am #

    @Ernie: Agreed — and that of course would have made the fund industry look even worse. Unfortunately, I wasn’t able to get that data.

    Survivorship bias is huge. Some fund companies that look like they did well here (such as Dynamic and CI) have dozens and dozens of funds, and it’s fairly easy for them to make the losers quietly disappear while trumpeting the winners:
    http://canadiancouchpotato.com/2010/12/14/why-dynamics-success-proves-nothing/

  3. Mike Holman May 13, 2011 at 10:05 am #

    Mmmmm…steak.

    Nice work Dan. The results are exactly what you’d expect.

    Survivorship bias has turned into a marketing tool. Put out as many funds as you can – market the hell out of the winners and ignore/shut down the losers.

  4. Andrew Hallam May 13, 2011 at 10:28 am #

    Nice work, as usual Dan!

    When researching my book, I found (based on a number of selected time periods) that 15% of actively managed funds disappear/merge within a 10 year period. And of course, the ones with strong track records don’t go out of their way to change their names or fold. They leave that to the poor performers.

    Another thought:

    People who are really keen to build wealth will quickly use up room in their tax deferred accounts–requiring that they invest outside of RRSPs. Sums invested in taxable accounts are far less efficient when they’re actively managed.

    Those who buy actively managed funds rarely understand their comparative odds of success, relative to passive strategies.

    Keep doing your part to educate Dan. Ultimately, the industry might strike back and eventually lower their fees significantly, to counter the outflow of money from managed funds. Then the underperformance won’t be as significant. We can hope, right?

  5. Chrsitian May 13, 2011 at 11:51 am #

    Interesting data. My funds are, or at least my adviser says, shooting for an 8% return long term. Say the average MER is 2.2%, from my left ear but I have heard higher and lower, that means pre MER returns would need to be over 10% avg. annually. Which would be a good return, not Warren Buffet good but good nonetheless. I wonder how you would have fared by simply investing or laddering GICs?

  6. Canadian Capitalist May 13, 2011 at 11:55 am #

    For me the funniest (or saddest) part of the list is how many similar names are on the list. For example, CIBC has

    CIBC Very Aggressive Portfolio Non-RSP
    CIBC Growth Portfolio Non-RSP 2.45
    CIBC Very Aggressive Index Port Non-RSP 2.44
    CIBC Very Aggressive Index Portfolio RSP 2.27

    … and that’s just scratching the surface. How the heck does an investor tell them apart?

  7. J from Ottawa May 13, 2011 at 12:24 pm #

    I’m already tracking the portfolio my advisor had settup when I closed my accounts and adopted the couch potato…..we’ll see where we are in another 10 years!

  8. Sean May 13, 2011 at 12:50 pm #

    Many MF companies have so many funds with slightly different objectives that just by chance a fund might outperform.

    It would be interesting to see how much in annual assets these few outperforming funds had during the decade compared to the total amount in all funds. I guess that too will be biased by mergers.

    Good job as always, Dan!

  9. Michel May 13, 2011 at 1:37 pm #

    Chances that a portfolio advisor kept someone in the same active mutual fund for 10 years are very slim. My former advisor was calling me evry year with an excuse to switch to another similar fund, hum….I wonder why? How about a steak to an advisor who has kept a poor soul in the same fund for 10 years 🙂

  10. Shawn May 13, 2011 at 3:39 pm #

    Thanks for a great job, Dan. I must say I have been fortunate to have selected Dynamic Value Balanced about six years ago, as it has been one of the handful funds who have performed better than Couch Potato.

    Besides the outrageous fees, the biggest problem I find with most actively managed funds is that their performance is so manager-dependent. The past performance is of no value if the manager leaves the firm for any reason. Many of the bank funds are supposedly managed by a team, but their performance is hardly spectacular.

  11. gibor May 13, 2011 at 4:29 pm #

    Looking at those returns, looks like two 5 years laddered GIC (total 10 years) would be the best choice

  12. Chris May 13, 2011 at 4:30 pm #

    For a fairly good discussion (and quantification) of the huge impact of survivorship bias and its cousin, backfill bias, this is worth a read:
    http://www.researchaffiliates.com/ideas/pdf/fundamentals/Fundamentals_Mar_2010_The_Folly_of_Peer_Group_Analysis.pdf

  13. gibor May 13, 2011 at 6:23 pm #

    @Andrew; “15% of actively managed funds disappear/merge within a 10 year period” – and what about ETFs? Were some that disappear/merge ?

  14. DRM May 13, 2011 at 6:56 pm #

    Very interesting article, Dan, Keep up the good work.

  15. My Own Advisor May 13, 2011 at 9:17 pm #

    Very, very good article Dan. You continue to pile onto the overwhelming evidence of passive indexing over actively managed mutual funds. I won’t say what the mutual funds are a pile of. This is PG-rated blog meant for all to learn from 😉

  16. Paul N May 14, 2011 at 8:40 am #

    Correct me if I am wrong but wouldn’t simply picking any of the no load monthly income funds from most any of the big banks over the last 10 years beat all of these funds? Td 9% return for example. Do you see any reason why that would not continue? For me personally it’s such a simple way to invest.

  17. Canadian Couch Potato May 14, 2011 at 9:43 am #

    @Paul N: You raise an important point. Whenever you compare funds you need to make sure their profiles are similar. Most monthly income funds are all-Canadian and so any outperformance during this period would be almost entirely due to the lack of global exposure — something that isn’t likely to continue unless you believe that Canada will always outperform the rest of the world. A more appropriate benchmark for these funds would be a portfolio of 60% Canadian equity index fund and and 40% Canadian bond index fund.

    For the record, according to Globefund, the TD Monthly Income Fund has returned 4.86% annually since its inception in November 2002.

  18. Paul N May 14, 2011 at 12:16 pm #

    Thanks for the fast post back.

    Good points about the fund being very Canadian and the implications of that.

    As for the return of the fund I get different numbers. There are 4 TD monthly income funds. TDB622 I series is the one I refer to. If I run that code at globeadvisor.com I clearly get a return of 9.45% over 10 years. Since inception 8.56%. You may have picked the H series which focuses on a higher monthly distribution per share (.0624 cents). That series has returned closer to your return finding of 5%. Retiree’s could use this type of fund for a nice monthly income stream once you load up with a lot of units.

    Have I missed something that you may have discovered?

  19. Chris May 14, 2011 at 2:35 pm #

    Paul N, TDB622 is a combo of the two best-performing asset classes of the last 10 years (bonds and dividend stocks/preferred shares). As such, you were lucky enough to be in the “perfect” mix for the last decade. This mix isn’t quite the same asset class mix as the bond/broader market balanced mix that the Potato is comparing for this article.

    Going forward, I’m doubtful the bond component will outperform the market as it has done in the past 10 years, but that will drag down all balanced funds equally. I personally think dividend stocks will continue to outperform, given market conditions, but the Potato seems to take a different view based on previous posts.

  20. Dave May 14, 2011 at 7:37 pm #

    Some of the performance variance could simply be attributed to asset allocation. I believe some of the funds that under performed the Couch Potato portfolio were bank mutual funds comprised of index funds, ie .CIBC Very Aggressive Index Port Non-RSP, TD Mgd Idx Agrsv Growth Pt – e.

  21. Canadian Couch Potato May 15, 2011 at 6:43 pm #

    @PaulN: Sorry, I was looking at the Class A version of the TD fund, which has a shorter track record. TDB622 has an excellent 10-year performance record, but again, it simply comes down to whether you could have identified it as a winner in advance. According to Globefund, its peers averaged less than 5% during a period when Canadian stocks and bonds both delivered about 6%.

  22. Jeff Ivany May 16, 2011 at 9:37 am #

    Did you use a tool to calculate the returns of the Global Couch Potato or did you do them manually? I’m curious because I recently switched the kids RESPs to TD eFunds but I was considering a different balance than the “normal” couch potato. For example, what would the performance have been with 30% bond 30% Canadian equity?

  23. Canadian Couch Potato May 16, 2011 at 9:50 am #

    @Jeff: I calculated the returns manually with a spreadsheet to take into account the annual rebalancing. You suggested portfolio would have been very close, since Canadian bonds and equities performed quite similarly over the last 10 years (both approximately 6%).

  24. Dan May 21, 2011 at 7:32 pm #

    Good post.

    Just so you know, most of the funds that did beat your 10-year number are not really “global” funds. And, like the Cundil series, a few on the list are almost by mandate currency hedged. Over the last 10-years, simply being curency hedged would have tacked on around 1-2% a year in added return (depending on the amount of non-Canadian holdings). So stock picking ability was not the reason for most of the “outpeformers” doing better. Currency hedged index funds would have lead them also. Next time you’re talking to an advisor, ask them “of the funds you were reocmmending 10-years” are you still recommending the same ones”. Virtually all will so no (disclaimer, I am an advisor – fee-based for the last seven years).

  25. Canadian Couch Potato May 23, 2011 at 8:57 pm #

    @Dan: Many thanks for stopping by, and for the comment. I should be clear that the Global Couch Potato portfolio I compared here did use currency hedging. This is the original portfolio recommended by MoneySense since its launch. In my own version of the portfolio, I recommend not using hedging. It is interesting that hedging increased the annual returns by only about 1%, even though the Canadian dollar gained about 35% during the period 2001-2010.

    Thanks for confirming that advisors almost never recommend the same funds for 10 years. The steak dinner has still gone unclaimed. 🙂

  26. Dan May 24, 2011 at 7:31 am #

    Thanks for the clarification on the hedging issue. Over the next ten years your unhedged version probably wins out. As for the 35% currency change only affecting the portfolio about 1% year, I think it probably worked out roughly like this: 40% foreign content (20% U.S., 20% Intl.) x 35% currency change = (40%*35%)/10 = 1.4%/year.

    Cheers.

  27. Andrew May 25, 2011 at 12:38 am #

    Great post, you make a strong argument in favour of passive investing. Would you consider releasing your spreadsheet that takes into account the annual rebalancing? It might be fun to play with, at least for those of us who consider spreadsheets to be sources of entertainment…

  28. Dale October 10, 2011 at 8:49 am #

    If you go to pure Canadian Equity, there’s the only mutual fund that I hold… Sprott Canadian Equity. That’s a misnomer, it is gold and silver, plus energy and mining small caps. Over 15 years it has 20.5% annualized returns. Off the charts volatility and returns. After netting me 60% in 2010 I took most off the table. I’m looking to add to it again as things unravel.

    Not a bad idea to sprinkle your portfolio with Canada’s best stock pickers (and readers of economic cycles).

  29. Dale October 10, 2011 at 9:03 am #

    TD Monthly income has a 270% return since its inception in 1998. I hold a small amount in investment accounts where i have some small income/divvy’s. you can add to income TDMI (and get the 3% drip action) . the lower mer beats paying $10 per trade when reinvesting.

    Since January 2000 TDMI has returned 250%. In the land of mutual funds this one is a rare gem.

  30. Paul N October 10, 2011 at 9:02 pm #

    Hey Dale,

    Nice to see someone else who likes that fund as well. Also take a look at it’s cousin tdb298. Look at the monthly yield. The unit price has been beaten down with the recent downturn. IMO a gem at the moment. I love seeing that payout every month. I dream of the day when my tfsa has a lot more room in it and this type/style of fund can create a tax free monthly income stream.

  31. Shawn February 28, 2012 at 9:14 am #

    TD Balance Growth Fund

    With a MER of 2.23% and a 5 year perfromance of -0.3% and a 10 year of 3.3%

    Did you know that this fund invest in approximately 12 other TD funds. All of which have MER of 1 to 2.3%

    Does this mean that the hidden MER could be upwards of +20%? Does this even make sense.

    Anyways pulled out of this one morning.

  32. Canadian Couch Potato February 28, 2012 at 9:42 am #

    @Shawn: No, the underlying MERs should not be added: they should be multiplied by their weight in the portfolio and then added. For example, if half the portfolio is in a fund with an MER of 2% and half in a fund with an MER of 1%, the overall MER is 1.5%:

    (2% x 50%) + (1% x 50%) = 1.5%

  33. Andrew D February 28, 2012 at 10:37 am #

    Dan, would that hypothetical 1.5% be on TOP of the fund’s stated MER, even if the funds are within the same company? In other words, you pay TD twice to own the underlying stocks?

    Hey Shawn, not to pick on this one fund too much, but did you notice the top holding? According to morningstar, it’s iShares S&P/TSX 60 Index! That’s a heck of an expensive way to buy index funds…

  34. Canadian Couch Potato February 28, 2012 at 10:44 am #

    @Andrew D: My understanding is that it is against mutual fund regulation for a fund-of-funds to double charge MERs, so if a TD fund holds another TD fund, then it cannot double-up. So if a TD fund says its MER is 2.5%, that includes the MER of any underlying TD funds.
    http://www.theglobeandmail.com/globe-investor/investment-ideas/john-heinzl/is-my-etf-double-dipping-on-fund-fees/article2224765/

    However, if the TD fund holds an iShares ETF, as you say, that’s different, because they are two different fund providers. The MER of the iShares ETF would not be included in the TD fund’s stated MER.

  35. Aziz June 16, 2015 at 11:32 pm #

    Is this a fair comparison when an active advisor will be switching (ie getting in and out of market/mutual fund) throughout the ten year period? I find it hard to believe that an advisor would keep a clients money in the same fund for ten years based on some analysis the advisor did ten years ago. No one is good at making 10 year predictions. However people can be good at predicting ie 1year intervals. Wouldn’t a fair comparison be to see how many funds out performed the index in short intervals than 10 years. — mutuals funds have mandates that they can’t be 100% out of market but discretionary advisors can be. I feel a that a good advisor can beat the index. Your thoughts:)

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