Despite the surge in popularity of robo advisors and cheaper ETF solutions (including Vanguard’s new “all-in-one” passive investing portfolios) Canadians are continuing to invest in the good old-fashioned mutual fund. Rob Carrick recently looked at the track record of the 100 biggest mutual funds in Canada with the help of Strategic Insight and Fundata.
**Spoiler Alert** Mutual funds still suck, and the compensation structure is still ridiculous.
Those of you who are long-term readers of Young and Thrifty will find this to be broken news, but given the incredible amount of marketing dollars that are poured down our throats every day by the financial products machine, it’s probably worth boiling down this most recent update. For a more thorough analysis on the destructive nature of mutual funds, read anything by John Robertson, Andrew Hallam, or John Bogle.
Are People Really Still Investing With Mutual Funds?!
Yes they are.
By the end of 2017 Strategic Insight reports that there was roughly $4.5 trillion in financial wealth in Canada, and about 36% of that was tied up in mutual funds ($1.6 trillion). That number is staggering when you think about it.
The amount of money that is still invested in mutual funds in Canada (despite a ridiculous amount of data that it is a bad way to invest your money, and a really weird way of paying for financial advice) could run our federal government for nearly five full years! It could buy Amazon —>twice over! The wealth that Canadians are entrusting to an industry that has milked unbelievable profits (while adding negligible value) from them over the years could buy the following companies and still have a bit left over: Facebook, WalMart, Netflix, Walt Disney, McDonalds, Nike, Starbucks, General Motors!
Naturally, Paul Bourque, the president and CEO of the Investment Funds Institute of Canada (IFIC) was pleased with these findings saying, “In Canada, household assets in mutual funds are significantly higher than in many other jurisdictions,” and, “Canada is the highest country in the [Organization for Economic Co-operation and Development] in terms of household assets invested in mutual funds.”
Carrick sums up the industry stating that 56% of Canadian households have mutual fund investments and that the average account size for people using a licensed advisor to sell mutual funds is $53,181. This in spite of the fact that Canada has the highest mutual fees in the world!
Looking at Mutual Fund Returns from the Past Ten Years
We already know that historically speaking, actively managed mutual funds have gotten trounced by passive/index portfolio management that trim costs to the bone.
Now, over the short term, some mutual fund managers will experience runs of good luck before they revert back to the historical mean (average). The time period of ten years falls somewhere in between the long-term investment horizon that I like to use to judge statistical probability when looking at investing, and the ultra-short term misleading propaganda that many fund companies typically put out there. So, how did the 100 largest mutual funds in Canada do versus their benchmark index? (An index is basically a measurement of how a fund did relative to the “average” in its field. Think of it as a custom-made measuring stick for a specific type of asset such as Canadian stocks, or international corporate bonds.)
Remember, these are the largest pools of money in Canada, with large staffs of incredibly-well-paid “geniuses” whose only job it is to pick and choose the best investments for their fund. These are the biggest of the big shiny successful names on Bay Street. Here’s how they stacked up from Dec.31, 2007 to Dec. 31, 2017:
- On average the mutual funds trailed their index “measuring stick” by .85%
Over half of the mutual funds didn’t even meet the average BEFORE their fee was taken out of the investment pool (the money that pays for all the wages, sales commissions, big beautiful buildings on prime real estate, etc)
Roughly 1/3rd of the funds underperformed by more than two percent (again – remember that these are biggest, baddest funds around – not some small time players).
Are Canada’s Mutual Fund Fees Becoming More Competitive?
One would think that with all the downward pressure on fees being supplied by robo advisors (see our handy robo advisor vs mutual fund fee calculator) and ETF solutions, combined with the new CRM2 rules that have to show how compensation works (albeit in confusing legalese small print that no one reads), mutual funds would be forced to lower the amount that they take from Canadians (and they take it whether they win or lose at stock picking that year).
But they haven’t.
Carrick reports that the average mutual fund fee of the top 100, is only .05 of a percentage point! And it wasn’t like they didn’t have fat to cut – remember that we have the highest mutual fund fees on the planet!
By comparison, the average equity mutual fund fees are still roughly:
- 3x what you would pay for a
9x what you would pay for Vanguard’s “all-in-one” ETFs
18x what you would pay to construct your own couch potato portfolio of low-cost ETFs
Once again, it’s worth noting that in return for these extra fees you are getting no discernible extra returns (almost assuredly less on average) and biased financial advice, that may or may not be worth $5, depending on many variables, including the commission structure that is place for that advice.
Perhaps most alarmingly, Carrick points out the trend of funneling Canadian investors into what mutual fund salespeople are calling some variation of an “all-in-one, super-easy portfolio”. What these products actually are, is a cleverly marketed collection of the original highly-priced mutual funds, packaged together to form an even more ridiculously-priced “fund-of-funds”. If this sounds like a very dumb solution to a problem that doesn’t exist, that’s because it is.
If you are bound and determined to go the mutual fund route, the consensus family of funds that I have seen recommended in several places by people I consider to be pretty bright, is the Mawer group. Specifically, the Mawer equity funds often draw praise for their performance and fees (generally about half the average, and just slightly more expensive than the most costly robo advisor setups would be).For me, the major takeaway on this excellent reporting is that despite a ton of publicity by nearly every reputable personal finance writer in Canada, the underachieving, overpriced, commission-oriented, mutual fund + questionable advice model continues to dominate in Canada. That’s good news if you own stock in companies that produce mutual funds. Bad news if you use those companies to invest.