I’m a huge fan of the Globe and Mail. I read it every day, and the finance section is usually full of good stuff including my boy Rob Carrick who has become a sort of Canadian guru in own right. We have even been featured in the online version of the publication on several occasions, so it is with extremely light feet that I tread on this topic of criticising one of their columns.
This weekend Tom Bradley penned a column titled, “Funds vs. ETFs: peeling away some of the myths.” The column then promptly proceeded to add many more layers to the myths surrounding the two investing vehicles. I quickly lose patience with people that sit there and try to defend the mutual fund industry by saying that they add so much value to investments because they will hold your hand as they reach into your pocket. Bradley’s main conclusion – that comparing exchange traded funds and mutual funds is equivalent to “apples and oranges” – is ridiculous. I know there are certain mutual fund managers (probably soon-to-be hedge fund managers) that can beat indexes and benchmarks, but when “impartial” journalists try to sit there and defend the overall structure of a parasitic, snake oil-salesman-esque industry, that is a far different argument.
1) Canada has the highest mutual fund fees in the world
2) The majority of mutual funds look very similar to basic ETFs and index funds and DO NOT beat their index even before their large commissions and fees are taken into account
3) After Commissions and Fees are taken into account as little as 10% of mutual funds beat their benchmark index in a given year
4) When compared over a time frame of over 10 years, somewhere between .6 and 3% of mutual fund managers will beat their benchmark index
5) I could teach a grade 5 to invest in basic indexes. No exaggeration. It is not difficult (in fact doing the paperwork to get a discount brokerage is the hardest part), no matter what your mutual-fund compensated advisor tells you
Ok, so back to Mr. Bradley. He begins the article by stating he runs a firm that offers actively managed funds. While some might criticize his bias, I give him props for admitting it right up front. He also agrees with me in principle, saying that Canada’s mutual fund industry is “abysmal,” but then Mr. Bradley gets into muddying the waters. I think this will quickly become the new strategy for mutual fund managers out there once the passive investing crowd starts to eat into their market share more and more. If you can’t dazzle them with brilliance, then baffle them with BS right?
The columnist makes the assertion that, “I do take issue with these studies because they overstate the case for indexing. They compare apples to oranges – “after-fee” mutual-fund returns to “pre-fee” benchmarks returns.” He goes on to define what is include in a mutual fund MER and then makes a neat little pivot into saying, “In the studies, however, mutual funds aren’t measured against actual index portfolios, but rather market indexes that have no costs attached. Unfortunately, investors can’t replicate these benchmark returns. ETFs have MERs too, and when they’re bought or sold, trading commissions are charged and a small premium/discount to net asset value is absorbed. My indexing friends tell me it costs about 0.5 per cent (all in) to run a balanced ETF portfolio at a discount broker. Investors wanting advice would expect to pay an additional 0.75 to 1.25 per cent at a full-service firm.” This is such a ridiculous convolution of the facts I’m surprised that Rob Carrick didn’t just march across the office (sorry I still imagine newspapers having offices like in Spider-Man cartoons, not sure if this is a reality) and lay the smack down.
With Friends Like That, Who Needs Facts?
First off, I love how Mr. Bradley refers to his “indexing friends” and the .5% costs they pay. If they are paying an overall .5% MER on their indexed portfolios, he is friends with some pretty dumb investors. The facts are that most decent index portfolios run at around a .2% MER and this is getting lower everyday (thank you Mr. John Bogle and Vanguard). I have no idea where he is getting his 0.75-1.25% figure from either. Investors who are confident they can log on to a computer and click the right stock symbol for themselves can go to a fee-only planner and get a very comprehensive plan for a few hundred bucks (for most people a financial plan is fairly common sense and wouldn’t take more than a couple of hours to put into detail). The even better option is for people to do a little reading in their own and check out a few of Canada’s great investing blogs and take that fee right down to 0%. The average retail investor gets absolutely terrible advice from the
mutual fund salesman advisors that most big investment companies put out there.
Then Mr. Bradley goes on to say, “Like mutual funds, ETFs can also miss their performance targets. A report published in May by Morgan Stanley showed that of more than 700 ETFs in the U.S., 47 per cent lagged their benchmark by more than just the fee. These shortfalls (they’re rarely additive) vary depending on the type and size of fund and market conditions.” More typically vague, cherry-picked propaganda from the mutual fund crowd. Sure 47% of the ETFs in the USA lagged their benchmark. He fails to mention there are only about a dozen equities-based ETFs that the average investor needs, and these are almost always exactly correlated to their index (give or take .01% or so). There is no exam you have to pass to call yourself an ETF, so Mr. Bradley uses the huge market of niche ETFs to skew the results of the poll and present an argument in his favour. To completely eliminate the chance of your ETF not tracking its index, simply read into it for 10 minutes first. Google is a great thing.
Data? More Like “Truthiness”
Mr. Bradley wraps up his column by concluding, “So the question is, would these studies arrive at a different conclusion if mutual funds were compared to ETFs instead of uninvestable indexes? It’s hard to say definitely without getting into the data, but a rough assessment based on the Vanguard numbers would suggest that Canadian equity ETFs would still be leading an albeit closer race. If a charge for investment advice was factored in, it would be a dead heat, with some categories going to ETFs and others to mutual funds.” That is not the question at all Mr. Bradley. Maybe the question should be where you got so good as misrepresenting the truth? Seriously, do mutual fund sellers have professional development session with tobacco companies or what? “It’s hard to say definitely without getting into the data, but a rough assessment…” What a ridiculous statement to put in a nationally-published column. It’s not hard to say at all Mr. Bradley, the case isn’t nearly as close as you make it. How convenient you don’t want to get into the data here.
To Mr. Bradley’s credit, he admits several issues with the mutual fund industry in Canada, but his obvious attempt to confuse the situation really upsets me. There is so much of this propaganda out there since mutual fund companies rake in billions of dollars off of the backs of Canadians every year and they can subsequently pay for a real distortion of the market through the media. The vague generalities in which he speaks, and the ridiculous misrepresentation of the facts (bordering on outright lying) destroys his credibility. There are people out there that can beat their index after fees are calculated in, but good luck finding that needle in a haystack in the Canadian mutual fund scene. Check out my eBook for a more detailed analysis on why this is true.
People like Mr. Bradley are the types that take innocent/naieve savers like my parents and convince them that they are the only ones that can help them, right before selling them whatever high-commission mutual fund offering that is paying the most that month. I’m begging the Globe and Mail not to ruin their credibility by giving this guy a premium platform to push his agenda. At least bring in someone like Ed Rempel who presents a convincing argument that he is able to choose professional money managers that can beat their index (while agreeing the vast majority of mutual funds are useless) or a hedge fund manager that actually does beat the market to present the case for active investing.