Benchmarks beat managers in 2007: SPIVA

The vast majority of Canadian mutual funds continue to underperform their benchmark, according to the latest results of Standard & Poor’s Indices Versus Active (SPIVA) Funds Scorecard.

In 2007, only 24.3% of Canadian equity funds beat the S&P/TSX Composite Index, while 37.0% of Canadian dividend and income funds beat the S&P/TSX Canadian Dividend Aristocrats Index.

Foreign equity funds fared even worse. Only 13.1% of the international funds beat the S&P/Citigroup EPAC Index. Among U.S. equity funds, only 14.9% were able to outperform the S&P 500 Index, while 17.1% of global equity funds were able to beat the S&P/Citigroup World Index. It should be noted that most global funds benchmark themselves against the MSCI World Index, and not the S&P product.

The majority of active managers were able to trump their benchmarks in two categories, though. Almost 52% of small/mid-cap equity funds outperformed the S&P/TSX Small Cap Index for the year, and 70.6% were able to outperform the benchmark in the last financial quarter.

A majority of funds (51.6%) in the Canadian-focused equity category — which includes funds with a predominantly Canadian allocation alongside large foreign holdings — were able to outperform the index over the one-year period. However, over a three-year period, only 40.5% were able to exceed the index return.

Time does diminish the ability to beat the benchmark, the SPIVA scorecard claims. Over the past three years, only 13.3% of actively managed Canadian equity funds outperformed the S&P/TSX Composite Index, while only 3.2% of active managers beat the S&P/TSX Canadian Dividend Aristocrats Index.

Data included in the SPIVA report card and other similar studies are commonly used to support an “if you can’t beat them, join them” attitude to investing, which champions the cheaper exchange-traded and index fund alternatives to actively managed mutual funds.

Indeed, S&P receives a licensing fee from ETFs that use its index, but Jasmit Bhandal, a director with S&P Canada who works in Canadian Index Services, says the SPIVA scorecard is not designed to be a case for passive investing.

“Our goal here isn’t to say indexing is better than active investing. Investors can assess whether active investing works for them,” she says. “There are people who can beat the index, but you have to do your homework to find those people.”

Peter Loach, vice-president and managing director of fund research at BMO Nesbitt Burns, agrees they can be found.

“It’s my opinion passive investing is somewhat of a regret strategy. You are making the assumption that no one can beat a benchmark,” he says. “Whereas over the years, as far as the core funds [categories] go, our analyst team have consistently selected managers that do.”

Bhandal emphasizes that finding people who consistently beat the benchmark is even more difficult. A similar study of the U.S. fund universe has looked at the persistency of managers to beat the benchmark. There are few managers, like Legg-Mason’s Bill Miller, who famously beat the S&P 500 Index for 15 consecutive years between 1991 and 2005.

While no persistency stats exist on Canadian managers from S&P, Bhandal says from anecdotal evidence, she knows the situation is similar in Canada.

“It is not the same people always outperforming the benchmark,” she says.

One new thing the SPIVA scorecard looked at in Canada was the survivorship of funds. It’s an interesting statistic because it shows that even if investors don’t pay attention to their funds’ beating the benchmark, providers certainly seem to. There has been a high level of attrition in fund categories that have a higher proportion of underperformance.

S&P found that survivorship over the five-year horizon is 61.9% for Canadian equity; 45.3%, U.S. equity; 60.7%, international equity; and 46.0%, global equity.

“A significant percentage of the funds in these four categories have been merged or liquidated over the past five years,” the study notes.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(02/29/08)

Mark Noble