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Mutual Fund News

Size does matter

Despite some fee issues, the biggest funds in Canada, on the whole, have delivered in the last three years. 11 of 25 were index-beaters

rcarrick@globeandmail.com

Big funds, big results.

In the investing world, there's a never-ending argument over whether mutual funds charge too much in fees and whether index-tracking exchange-traded funds are a smarter choice. But in the past three years, the biggest funds in Canada have delivered good returns on the whole.

One way this column can help you be a more effective investor is to run periodic quality control checks on financial products.

Here, 25 of the most popular funds in the Canadian equity, Canadian equity focused, Canadian balanced, Canadian dividend and global equity categories get hauled in for an evaluation.

These are funds to which investors have entrusted almost $128-billion, or about 22 cents of every $1 invested in mutual funds.

There are roughly 4,000 different funds available to investors, but the ones on our list are the leaders. As they go, so goes a major influence on how Main Street views Bay Street.

The point of this analysis is to see how big funds have done in the difficult investing environment of the past three years. Bull markets, bear markets - the past three years have seen both running rampant.

As you'll see in the accompanying chart, each big fund's three-year compound average annual return was compared against the average for its peer group and also against the benchmark index used on Globefund.com.

The top argument for using ETFs or index mutual funds is that they have low fees and track major stock and bond indexes. With their much higher fees, many mutual funds deliver returns that can't keep up with the indexes.

Big funds have fees that run the gamut from high to comparatively low. But taken as a group, 11 of the 25 were index beaters over the past three years.

Mackenzie Cundill Value C, by far the most popular global equity fund, made this group, but just barely because it lost only fractionally less than the index.

More impressive were the likes of CI Harbour Growth & Income, which made 1.53 per cent annually on average over the three years to Sept. 30 while both its relevant benchmark and the average return for its peer group were in the red.

The monthly income funds offered by the BMO, RBC and TD fund families delivered in a similar way.

Beating the index is one way to measure the success of a fund. Another is to look at its quartile ranking, which places it in one of four groups, or quartiles, according to its returns.

First quartile is best, second is good, third is disappointing and fourth is out-and-out bad.

Twelve of the 25 big funds ranked in the first quartile for the past three years, while another eight ranked in the second quartile, four ranked third and a lone fund was in the dreaded fourth quartile. The fact that the big funds were so markedly skewed to the first and second quartiles is impressive.

Even the third- and fourth-quartile funds weren't disastrously bad. RBC Balanced, the lone fourth-quartile fund, was down by 0.6 per cent annually on average over the past three years, while the average fund made 0.6 per cent. That's not a huge difference.

The three-year view of the big funds is just a snapshot and not a rationale for buying unto itself.

But the figures do highlight a notable benefit of big funds, which is that they have shown an ability to navigate challenging markets without anything too egregiously bad happening.

Let's consider Canadian equity focused funds (they have at least 50 per cent of their holdings in Canada, but less than 90 per cent). There are seven funds in this category on the list - all but one ranked in the first or second quartile and two were index-beaters.

Is it that easy to run a Canadian equity focused fund? Apparently not. In the broader fund world, there were plenty of big-time losers. At worst, you would have lost 10.6 per cent annually over the past three years in AIC Advantage II and Mackenzie Growth.

Big funds demonstrated an ability to avoid severe losses over the past three years, but investors should dig a little deeper to monitor their safety records. One way to do that is to look at how a fund did in 2008.

By doing this you'd find that TD Canadian Equity, a big fund on our list, fell a dramatic 42.2 per cent last year while its peers averaged a drop of 30.7 per cent. To be fair, though, TD Canadian has a long-term record of index-beating results.

One area where the big funds don't shine as brightly is fees. True, their management expense ratios are at or a little below their category average in many cases.

But big funds should charge much less than the average. With so many clients, they have a larger base over which to spread the basic fixed costs of running a fund.

Fees are one of the most important considerations when choosing mutual funds for the simple reason that they're taken off the top of a fund's returns (it's the net amount after fees that is published). Lower fees mean investors get to keep more.

You can see this concept working in big funds like the BMO, RBC and TD monthly income funds. They have low MERs of 1.49 per cent or less and all were first quartile for the past three years.

You can see it as well with funds like Investors Dividend A, where the hefty 2.68-per-cent MER has contributed to worse-than-average three-year returns.

Same with Investors Government Bond, where the shamelessly high MER of 1.94 per cent has helped to produce below-average returns.

Still, based on a three-year slice of data, enough big funds wear their fees well enough to suggest a new rule for mutual fund investors seeking stability and minimal drama.

If you want a simple way to break through the clutter of products out there, think big.

*****

We gathered the 25 largest funds in the Canadian equity, Canadian focused equity, Canadian fixed income, Canadian dividend, Canadian balanced and global equity categories and then evaluated their returns over the past three years. Here are the results. Funds with an asterisk beat the benchmark.

3-Year Category Benchmark
Assets MER 3-Year Return Average Return
Fund Category ($ million) (%) Quartile (%) (%) (%)
Investors Dividend ACdn Equity Bal.12,4202.683-0.6-0.03-0.19
RBC Canadian DividendCdn Dividend9,4441.710.76-1.461.85
*TD Canadian BondCdn Fixed Inc.8,3551.0514.623.723.88
*CI Harbour Growth & IncomeCdn Equity Bal.8,3422.3121.53-0.03-0.19
RBC BalancedCdn Neutral Bal.8,0342.254-0.640.62-0.05
*RBC Monthly IncomeCdn Neutral Bal.6,7831.1412.490.62-0.05
CIBC Monthly IncomeCdn Neutral Bal.6,0721.423-0.120.62-0.05
*CI HarbourCdn Focused Eq5,8642.3112.74-2.111.85
*Mackenzie Cundill Value CGlobal Equity4,9032.432-5.03-6.09-5.06
*BMO Monthly IncomeCdn Neutral Bal.4,8791.4912.070.62-0.05
CI Canadian InvestmentCdn Focused Eq4,5162.2610.26-2.111.85
RBC Canadian EquityCdn Equity4,4661.9620.27-0.441.85
*RBC BondCdn Fixed Inc.4,3551.224.213.723.88
*Fidelity Cdn Asset Allctn BCdn Equity Bal.4,2652.1614.1-0.03-0.19
BMO DividendCdn Dividend4,1061.712-1.58-1.461.85
*TD Monthly IncomeCdn Equity Bal.4,0611.411.89-0.03-0.19
*Manulife Monthly High IncomeCdn Equity Bal.3,7182.0920.07-0.03-0.19
CI Signature Select Cdn Cdn Focused Eq3,6042.3111.57-2.111.85
TD Dividend GrowthCdn Dividend3,4291.921-0.07-1.461.85
TD Dividend IncomeCdn Equity Bal.3,2261.923-0.9-0.03-0.19
TD Canadian EquityCdn Focused Eq2,7982.0710.28-2.111.85
*Investors Cdn Lg Cap Value ACdn Focused Eq2,6372.6812.91-2.111.85
Investors Government BondCdn Fixed Inc.2,6201.9423.563.723.88
AGF Cdn Large Cap Div ClassicCdn Focused Eq2,5241.792-0.35-2.111.85
Investors Canadian Equity ACdn Focused Eq2,3972.683-3.36-2.111.85
Source: Globefund.com

© 2007 The Globe and Mail. All rights reserved.

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