Equity funds underperforming benchmark, says S&P

(February 2, 2005) Only about one-quarter of actively-managed Canadian equity funds outperformed the S&P/TSX Composite Index in 2004, according to Standard & Poor’s latest Indices Versus Active Funds Scorecard (SPIVA).

The results for last year show 23.6% of actively-managed Canadian equity funds outperformed the TSX, similar to the U.S., where 29.8% of U.S. equity funds outperformed the S&P 500 (measured in Canadian dollars).

However, Canadian small-cap equity funds fared much better, with 82.5% beating the S&P/TSX Small Cap Index.

“SPIVA highlights for Canadians the degree of ‘active risk’ in their mutual funds investments,” says S&P vice-president Steve Rive. “This is a risk that that a given manager will outperform the benchmark index. SPIVA shows that in two key fund categories — Canadian and U.S. equities — Canadians had a less than even chance of picking a winning manager in 2004.”

Over the last five years, SPIVA has shown that 42% of actively managed Canadian equity funds have outperformed the TSX, while 50% of small cap funds have beaten the TSX’s small-cap index.

SPIVA’s methodology corrects for survivorship basis, which Rive says can significantly skew results as funds liquidate or merge. More than one in four funds in the Canadian, U.S. and Small Cap equity categories have been merged or liquidated in the past five years.

Although the results seem to suggest that passive investing consistently beats active in the equity fund category, Rive stressed in an interview last month with Advisor.ca when SPIVA was launched in Canada that Standard & Poor’s is not taking sides in the controversial active versus passive debate.

“We lay out the methodology; it’s open for other people to interpret,” he said. “We’re not trying to take a side or a view here on active versus indexing. We’re just trying to get the facts on the table so people can debate.”

In fact, ‘active risk’ may lead to better returns as successful fund managers beat the benchmark. “Where you’ve identified active value, then go for it,” said Rive. “Where you’re not sure about it, then you probably want to use the index.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com