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Only third of fund managers beat index


Little more than one-third of Canadian equity fund managers beat the S&P/TSX composite index in the last quarter of 2006, data that once again heats up the sometimes bitter debate over active-versus-passive fund management.

Just 36.4 per cent of Canadian equity funds beat the benchmark index in the three months ended Dec. 31, while only 28.4 per cent of U.S. equity funds outperformed the S&P 500 index, reported Standard and Poor's yesterday. Over the last five fund ars, actively-managed Canadian equity funds reported an annual return that fell, on average, 3 percentage points below the index, the credit rating agency said. Since 2001-- the first year S&P in Toronto began collecting the data -- less than 11 per cent of actively managed Canadian equity funds have beaten the TSX index.

Small-cap fund managers fared much better than their large-cap counterparts. The study found 65.9 per cent of actively managed Canadian small-cap equity funds outpaced the S&P/TSX SmallCap index in the fourth quarter of last year. Over the last five years, 46.5 per cent of actively managed Canadian small-cap funds beat the corresponding index.

Steve Rive, S&P's vice-president of Canadian index services, stressed the firm is neither for nor against active or passive management, a confusing debate that has seen each side use selective data to make their point.

"There are active managers that beat the index," Mr. Rive said. "But it's a minority . . . probably the biggest lesson from this is you need to research your active management choice the same way you research a stock you are going to buy."

David Feather, president of Toronto's Mackenzie Financial Services Inc., was deeply critical of the S&P study. The data fails to take into account the cost of investment advice compared with ETF trading fees or the returns of widely-held global equity funds that historically beat their corresponding index, he said.

"It is so easy to put out a report like this when the market has been single-dimensionally upward and somewhat narrowly defined," Mr. Feather said. "The real-world client experience doesn't jibe with what they are saying."

Chris Reynolds, president of Investment Planning Counsel Inc., a Mississauga-based wealth management firm, agrees that "not all investment managers add value to the process of money management." Many IPC advisers use a mix of actively and passively managed funds, he said.

The study does not consider many intangibles, including the common problem of investors straying from their long-term financial goals.

"When markets tank as they are apt to do from time to time, will the average investor have the stomach to stick with the plan?" Mr. Reynolds said.

© 2007 The Globe and Mail. All rights reserved.

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