Dawn of Randomness

Active vs. Passive—The View from Up North

Dawn of Randomness

A few weeks ago, we published our semi-annual summary of the Standard and Poor’s Index Versus Active (SPIVA®) Scorecard. There were no surprises. Over the last five years, passive beat active in the four major asset classes of domestic equities, foreign equities, real estate, and fixed income. Furthermore, the myth of active management adding value for small cap and mid cap equities was busted yet again. A few weeks before S&P Dow Jones Indices released that report for mid-year 2013 for U.S.-domiciled funds, they released the year-end 2012 report for Canadian-domiciled funds, and the results are even more dismal, as seen in the table below.

With odds like these, one can only wonder why any Canadian investor would choose to go active. When it comes to picking American stocks, the Canadian active fund managers appear to be having a brutally difficult time. During those five years ending 12/31/2012, they were benchmarked against the S&P 500 Index denominated in Canadian dollars. If they had tilted towards small cap companies, they would have had a good chance of beating the S&P 500 Index, as the IFA U.S. Small Cap Index beat the S&P 500 Index by 3.8% per year. It appears that these Canadian managers stuck to U.S. companies with which they were familiar—large cap companies, and that made it nearly impossible to overcome the high fees that Canadian active managers charge (between 2.0% and 2.5%, according to this report from Morningstar).

We do know that Canadian investors can avail themselves of better options. Canada now has many investment advisors that are approved to use funds from Dimensional Fund Advisors. For those investors who do not have a high enough net worth to use one of those advisors, Vanguard and iShares offer an array of exchange-traded funds from which  investors can build a fully diversified, low-cost portfolio.