Podcast 9: Finding Common Ground

Does the whole “active versus passive” debate miss a key point about what leads to successful investing? Why do investors focus on “mutual funds versus ETFs” when neither structure is inherently superior? These are some of the topics I discuss with Tom Bradley in my latest podcast:

Tom is the co-founder and president of Steadyhand Investment Funds, based in Vancouver. Steadyhand believes strongly in active management: they even call themselves “undex funds,” because their goal is to look like nothing like the benchmarks. But if you spend any time reading Tom’s articles in the Globe and Mail, MoneySense, and on the Steadyhand blog, you’ll notice there a surprising amount of overlap in our messages. I noted this some six years ago when Tom released the first edition of his book, It’s Not Rocket Science.

Tom and I both understand that, whatever your specific strategy happens to be, the fundamental ingredients of a successful plan are low cost, broad diversification and a disciplined strategy you will adhere to over the long term. This message can get lost in the debate about indexing versus active strategies, and especially in the discussions about the relative merits of ETFs versus mutual funds.

Later in our conversation, we discuss the SPIVA scorecards, created by S&P Dow Jones to compare the performance of actively managed mutual funds to popular index benchmarks. The SPIVA results are often quoted in the media as evidence of the failings of active funds: for example, the 2016 report for Canada found that fewer than 9% of broad-market Canadian equity funds beat their benchmark over 10 years, while for U.S. equity funds that number was a big fat zero.

Tom explained some of the potential flaws in the SPIVA methodology: most significant is that they ignore currency hedging in foreign equity funds, which can distort the results dramatically.

The Couch Potato goes to work

In the Ask the Spud segment, I answer a question from a reader named Phil, who is being offered an employer matching program in his group RRSP. If he contributes 5% of his salary, the company will add another 5%. “I’m concerned I’m going to be stuck with a bunch of high-cost mutual fund options or actively managed portfolios,” he writes. “I assume I’ll be still be further ahead if take the advantage of the 5% match, but how do I make the best out of the less-than-ideal options I have?”

I’m a big fan of using employer-sponsored retirement plans—including defined contribution pensions as well as group RRSPs—because they encourage disciplined savings and hands-off investing. Unfortunately, group plans tend to be sponsored by large mutual fund or insurance companies and some offer only active funds, often with relatively high fees compared with an ETF portfolio.

But if you get a significant company match in your employer-sponsored plan, I suggest taking full advantage. Even if the funds have relatively high fees—say 1.5% or even more—the employer’s contribution will usually more than make up for the added costs.

In my answer to Phil’s question on the podcast, I suggest the following steps to get the most out of your group RRSP:

See if there are index fund options. It’s actually common for group RRSPs and defined contribution pension plans have index funds on the menu—at least for some of the asset classes. If that’s the case, you can assemble your portfolio using whatever index fund options are available. For example, if you plan to use a traditional balanced portfolio of 60% stocks and 40% bonds, you can instruct your plan provider to allocate 20% each to the Canadian, US and international equity index funds and 40% to the bond index fund.

Look for focused, well-diversified active funds. If you don’t have an index fund option for a particular asset class, look for an active fund that most closely resembles one. For example, if there is no index fund for US equities, there’s probably one that holds 50 or 60 blue-chip companies with all of the sectors represented. A fund like that is likely to be highly correlated with an index fund that tracks the S&P 500.

Contrast that with other funds that might be offered by your plan: maybe there’s a healthcare fund, or a technology fund, or a “global opportunities” fund, whatever that means. None of these are likely to behave anything like an index fund, so they are not appropriate.

Consider target date funds. Created specifically for group plans, target date funds are balanced portfolios of stocks and bonds in various proportions, from aggressive to conservative. The funds get gradually more conservative as the target retirement date approaches. If you plan to retire in 20 years, for example, you might choose a fund with a target date of 2035. Today it might hold 70% or 75% equities, but by 2035 it will be primarily in bonds and cash.

Many group RRSPs and pension plans include target date options from Fidelity’s ClearPath or BlackRock’s LifePath family. These can be an excellent option—especially the BlackRock options, which  are made up of underlying index funds.

Transfer the money to a self-directed RRSP occasionally. Many group plans allow you to enroll in an employer matching RRSP and then then transfer the funds to an external account. Sometimes they charge a fee for this, but in many cases you can do it for free once or twice a year.

I feel this makes sense only if your group plan has exceptionally high fees or terrible fund options, or if your RRSP savings are very large. Otherwise making regular transfers might be more hassle than its worth.


18 Responses to Podcast 9: Finding Common Ground

  1. Justin June 17, 2017 at 1:42 pm #

    Another great podcast! Regarding lack of options within group RRSPs, if you consider all of your accounts as one large portfolio, you don’t necessarily have to hold all asset classes in the group RRSP.

    For example, if your group RRSP offers Canadian and US equity index funds but not a bond or international equity index fund, you could hold only Canadian and US equities in the group RRSP. You would then adjust your holdings in other accounts so that your overall portfolio is aligned with your overall target asset allocation. I think this is a better strategy than choosing a closet indexer in the group RRSP, but I suppose not everyone has savings outside of their employer-sponsored accounts.

  2. Dan June 18, 2017 at 12:53 am #

    Great Podcast. I have thoroughly enjoyed the series.

  3. Tristan June 18, 2017 at 5:29 pm #

    CCP: Thanks for another very interesting podcast. I find it interesting that Tom acknowledges the importance of low cost, yet uses an active strategy, which must be more expensive due to the extra work and manpower required, costs which must be passed on to their clients. If Steadyhand instead used low cost ETFs for portfolio management, in which case they could lower their fees still further, wouldn’t they provide still better outcomes for their clients?

    I would take issue with Tom’s claim that 20 stocks provide adequate diversification. That used to be thought to be true, but more recent evidence indicates the number is closer to 100, especially for US and international markets, as discussed here.


  4. Canadian Couch Potato June 19, 2017 at 7:35 am #

    @Justin: Thanks for the comment. It’s true that you can hold only one or two asset classes in a group plan and compensate with the others in self-directed RRSP. But this can make things challenging when it comes to rebalancing because most group plans only allow you to set a target percentage for each asset class. In my experience it is easier for investors to simply hold all of the asset classes in their group plans so they don’t have to worry about rebalancing.

  5. Duchess June 19, 2017 at 5:20 pm #

    Long time commenter, first time listener. Great podcast as usual. I have a question for the next episode: My bank keeps calling to tell me I have an outstanding balance, but they sound angry about it. I don’t understand.

  6. Canadian Couch Potato June 19, 2017 at 7:38 pm #

    @Duchess: Perhaps your credit rating has slid into the DANGER ZONE.

  7. rgz June 21, 2017 at 2:05 pm #

    Will you concede that for some people, funds such as SIF125 and MAW104 might be more suitable than the model ETF portfolios you have on your website?

  8. Canadian Couch Potato June 21, 2017 at 2:14 pm #

    @rgz: I think the comments I made in the blog post and in the podcast make it clear that a prudent, low-cost active strategy is more appropriate for anyone who does not feel confident in an indexing approach. If you don’t have confidence in your strategy, you will never stick to it during the difficult times. I just stop well short of naming specific active funds as alternatives.

  9. vslcar June 21, 2017 at 11:30 pm #

    Hi Dan,

    You said that Cash has lower yields than Bonds. I would argue that this is not necessarily true as there are several CDIC insured Canadian banks that offer high interest savings accounts. EQ bank is currently offering 2.3% interest indefinitely and I have been able to get 3%+ with Tangerine bank for the last year thanks to their recurring 3 month targeted promo rates. Great podcast. Cheers!

  10. Caleb June 23, 2017 at 10:01 am #

    Hi Dan,

    Great podcast as always. Besides the hassle of moving funds over from a matching employer plan to a self-directed potato portfolio, are the any other downsides?

    I have 1 free transfer annually and $25 otherwise through Manulife (with options such as Clearpath 2055 with IMF of 1.425%). If no other downside and one is okay with the hassle, what might be a good way fund strategy in the interim until the annual transfer? Mine for example currently sits in a Manulife MFS Long Term Fixed Income Fund at 1.00% waiting until January 1 to be transferred to my self-directed potato.


  11. Canadian Couch Potato June 24, 2017 at 1:21 pm #

    @Caleb: I might suggest looking for a single fund in your RRSP that matches your overall asset target as closely as possible. That way you keep some consistently in the portfolio while you wait to make those annual transfers.

  12. Devin June 24, 2017 at 4:34 pm #

    @Tristan: If an investor used a mix of the Steadyhand Funds or used the Founders fund they will have just a little over 100 equities. The argument they would make is that if you stuff your portfolio with too many equities you would be better off indexing as your chances of outperforming the index are low if you basically just own the index.

    As for fees I know that Tom has mentioned elsewhere that the average client directly with Steadyhand (not through discount brokerage) is paying slightly under 1%. That is lower than the Tangerine funds and not much different from a robo-advisor while also giving behavioral support.

    With all that said I think that the most difficult thing with using an active strategy is that you have to have confidence in what you are doing. There are always going to be times, and sometimes long times, when your strategy is under-performing the indexes and if you do not have the fortitude to stick with your strategy you will only hurt yourself. Companies that give good support to their investors are helpful, but I really do think it takes even more fortitude and long term perspective to follow an active strategy than an index strategy.

    By the way my favorite moment was: “how did you get past the guards!”

  13. Tristan June 25, 2017 at 5:10 pm #

    @Devin, I think the evidence shows that you are better off indexing no matter how many stocks you have in your portfolio. With a smaller number of stocks you may have the hope of beating the index, but the reality is you almost certainly will not – which is why Charley Ellis calls trying to do so a loser’s game.

  14. Alex June 26, 2017 at 10:55 am #


    If you went with an actively managed fund, the reality is you wouldn’t need to beat the index – not that you “almost certainly will not”. I think that was the entire point Tom made in the pod cast – Indexed investors do not get the indexed return, they get slightly lower return than the indexed due to fees, and the comparisons do not take that into account.

    In a simple comparison, if you are comparing an indexed investor who wants a “hands off” approach (Robo advisor or Tangerine investments) and an active fund with fees similar to Steadyhand, as Devin mentioned in his comment above, over a long term period they should have close to a 50% chance of beating the hands off indexed investor due to similar fees. (Note: not a 50% change of beating index itself).

    So I disagree with you when you say “the reality is you almost certainly will not” beat the index. But as the fees get smaller you do have a good chance of beating the index. In 10 year periods, approximately only 15% of actively managed funds beat their index, and I would not consider that “almost certain to not beat the index”, but more importantly indexed investors also lag the index so the comparison is unfair. If you believe in active management, and want a hands off approach, the odds of beating indexed investors over a long term with comparable fees should be close to 50%. If you use indexed ETFs, the fees are less comparable and the ETF investor should come out ahead most of the time, and will likely lag the index by less than MOST actively managed funds.

  15. Tristan June 28, 2017 at 9:37 am #

    @Alex, I agree that if a company offering an actively managed portfolio does so with the same fees as one offering an indexed portfolio, the results would be expected to be similar. However this is not usually the case as there is more more work involved with active management, so the fees tend to be higher. Besides, I would rather have the certainty of market returns (less fees) rather than the possibility of outperformance or underperformance, both the direction and extent of which is unknowable in advance.

    If you strip out the advisory fee (DIY investors), index funds will almost always be much less expensive than actively managed funds, the main reason why the SPIVA reports show that over a 15 year period more than 90% of actively managed funds underperform their index. As the time horizon lengthens, the underperforms tends to increase, so that at 20-30 years the underperformance is thought to be up to 97-98%. True index investors get slightly less than the index, but the cost of index funds is small, so that will not make much difference to the percentage of active funds that will underperform index funds.

    With regard to your comment on believing in active management, I think investing should be done based on the evidence, otherwise it is really faith based investing. We rely on evidence in many aspects of our lives. Why not rely on it for investing?

  16. jill June 30, 2017 at 12:24 pm #

    hi cpp, new to website and posting comments, wondering if you can offer some wisdom, currently i have my TFSA invested in XBB and ZAG and a teeny tiny bit of VSC … as part of my fixed income portion of stuff, just saw a comment from many moons ago about overlaps and such

    i am new to understanding this, do you see any overlaps in the above 3? i want to say no .. but i’m not sure, i suppose VSC is more aggressive with growth because of its short term corporate bond dominance?

    i also have in my taxed account investments in XIC, XAW and teeny tiny bit of VXC … i did not think about the “overlapping” and “complimentary” issues of ETFs until after the purchase, im thinking here there are overlaps?

    not sure, but wanted wisdom on what you think will compliment the above xic, xaw and vxc … specifically looking for some global (hopefully china) exposure without high mers ..

  17. Canadian Couch Potato June 30, 2017 at 12:36 pm #

    @Jill: Thanks for the comment, and welcome.

    XBB and ZAG are virtually interchangeable. There is no reason to hold both: just choose one or the other. The same is true of VXC and XAW: the composition is essentially the same, so absolutely no benefit in holding both.

    The underlying holdings of all ETFS are published on their web pages, so it should be relatively easy to compare and spot any overlap.

  18. SB McManus July 4, 2017 at 2:53 pm #

    It is certainly advisable to attract the maximum possible match within an employer plan, even if the available funds have relatively high fees. In addition to the comment above about being able to transfer funds out periodically to self directed accounts while you are a plan participant, even where you cannot do that keep in mind that you may only work at a company for a few years, and you will certainly be able to roll over amounts to a self directed account on termination of employment. So you may not get stuck with those high fees for decades, even if you contribute to the plan in your 30s.

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