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Actively managed funds lose shine to high-flying energy, materials stocks

Actively managed mutual funds considerably underperformed Canadian stock indexes in the first quarter, leading index provider Standard & Poor's said yesterday, as the vast majority of fund managers failed to keep pace with Canada's resource-fuelled equity benchmarks.

S&P reported that diversified Canadian equity mutual funds lost 4.3 per cent on an average asset-weighted basis in the first three months of this year, compared with the 2.8-per-cent decline of the S&P/TSX composite total-return index. Just 8.2 per cent of those mutual funds generated better returns than the S&P/TSX composite on a total-return basis, the company said in its quarterly Indices Versus Active Funds Scorecard.

Over the previous 12 months, 14.5 per cent of managed equity funds outperformed the composite index, and the average weighted decline was 0.6 per cent, versus a 4-per-cent gain for the index.

The report's writer, Jasmit Bhandal, a director in S&P's Toronto office, said the Canadian market's tilt toward high-flying energy and materials stocks - they make up more than 50 per cent of the S&P/TSX composite index - could be behind the underperformance of actively managed funds relative to the index, as fund managers seek to mitigate risk by maintaining a more balanced sectoral approach than the index offers.

"The composite is heavily weighted toward energy and materials stocks, which have performed very well," she said. "But fund managers may not want that much exposure to those segments.

S&P began comparing the quarterly performance of Canadian mutual funds against its equity indexes in 2004, providing a quarterly illustration of the investing value of its passive index models compared with the higher-cost guiding hand of an active money manager. At that time, 35 per cent of actively managed Canadian equity funds had beaten the S&P/TSX composite benchmark over the previous five years, while 65 per cent had underperformed; the average asset-weighted five-year annualized return for actively managed funds was 5.3 per cent, less than one percentage point below the total returns of 6.2 per cent for the composite.

But in the past five years, as commodity prices have risen and resource stocks have almost doubled their weighting in the S&P/TSX composite index, the track record for active management versus the index has deteriorated. Just 4.1 per cent of those mutual funds have outperformed the composite over that time, while the average asset-weighted annualized returns of 15.6 per cent are almost three percentage points below the index's total returns of 18.5 per cent.

One pocket of the market in which active managers did outperform in the first quarter was the Canadian dividend and income equity category. Although those funds did post an average weighted decline of 5 per cent, that was considerably better than the 8.6-per-cent total-return fall of the S&P/TSX Canadian Dividend Aristocrats index - a benchmark composed of companies who have consistently increased their dividends in each of the past seven years.

Jackee Pratt, manager of the large-cap-growth-oriented Mavrix Canada fund that ranks among the dividend-and-income group's top performers this year (7.6-per-cent year-to-date returns), said actively managed dividend funds have been given a boost by the strong performance among energy trusts, which have rallied thanks to surging oil and gas prices.

Per cent of active fund managers outperforming indexes

CategoryComparison indexLast quarterOne yearThree yearsFive years
Cdn. equityS&P/TSX composite index total return8.2014.498.424.13
Cdn. small-to-mid cap equityS&P/TSX completion index total return24.0743.86n/an/a
Cdn. dividend & income equityS&P/TSX Canadian dividend aristocrats index total return100.0092.593.120
U.S. equityS&P 500 total return index ($Cdn.)35.6337.3613.4210.34
International equityS&P/Citigroup EPAC PMI index total return ($Cdn.)31.8218.1816.9513.12
Global equityS&P/Citigroup world PMI index total return ($Cdn.)41.3848.7819.3611.93
Cdn. focused equityBlended S&P/TSX composite benchmark return ($Cdn.)*46.3251.5835.6343.04

*50% S&P/TSX composite index total return + 25% S&P 500 index total return ($Cdn.) + 25% S&P/Citigroup EPAC PMI

index total return ($Cdn.)



© 2007 The Globe and Mail. All rights reserved.

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