Hot Off the Web- June 29, 2008
You will no doubt be surprise(?) to hear that “Active fund managers continue to underperform indices during volatile markets” in “S&P releases Q1 2008 Index versus active fund scorecard for Canada” This Standard and Poor’s report is a damning condemnation of the Canadian mutual fund industry. Some of the highlights are: “For the first quarter of 2008, only 8.2% of Canadian equity active fund managers outperformed the S&P/TSX Composite Index”, “The majority of active funds have also underperformed their respective S&P benchmark over one, three- and five-year periods. In the five-year period, only 13.1%, 11.9%, and 10.3% of International Equity, Global Equity, and U.S. Equity funds, respectively, have outperformed the S&P/Citigroup EPAC PMI,S&P/Citigroup World PMI and the S&P 500 benchmarks.” What’s even worse is that survivorship is only 40-60% over five years, I.E. half the funds disappeared. For this performance Canadians proudly continue pay 2-3% annual mutual fund fees, likely due to a combination of ignorance, laziness and la ck of time to do the smart thing. So why are Canadians prepared to pay $10-$20B in annual mutual fund fees, when there are 90% cheaper passive options? Why buy mutual funds which promise as one of the values of active management is to protect assets during market swoons, clearly fail to do so over the short (3 month) and medium (5 year) term? Why would investors willingly accept about half the retirement income that results from a 2.5% excess annual fee over 40 years of fixed annual contributions to one’s savings plan? It beats me!
And another surprise(?) from Morningstar about managers of U.S. mutual funds (who by the way charge about half the annual management fees paid by Canadians) is that they don’t invest in their own portfolios. The LA Times’ “Not even a penny? Report says most mutual fund managers don’t invest in their own portfolios” indicates that while there are a few excuses/exceptions tabled as to why managers don’t invest alongside with investors in their own funds, generally “I can’t think of why anyone should invest in a fund that its own manager doesn’t invest in.”
Is it a sign of things to come that “Vietnam suspends gold imports”  as reported in the Financial Times? Many emerging countries are struggling with rapidly escalating inflation and their citizens have been finding shelter in gold against inflation. Well, the government has temporarily(?) suspended gold imports in an effort to stem Vietnam’s trade deficit. (Thank goodness that inflation is only a problem for emerging markets- this was a weak attempt at humor.)
In “Nortel faces class action over pensions”  Globe and Mail’s Matt Hartley report the launch against Nortel over recent changes to the DB pension plan. The issues affect long-time employees who were not grandfathered as compared to others who were, and they also revolve around adequate notice of the change as well as the demand that future salary increases be included in the pension calculation. (There is little question about moral responsibility, but the legal responsibility will be determined by the courts. If this case succeeds, there will be more to follow.)
John Train lists in the Financial Times’ “The heresies and swamis that can hurt your portfolio” “heresies” that can harm you. Among them are: technical analysis, efficient market theory, volatility equals risk.
In “Asset allocation is gaining ground” Financial Times’ Pauline Skypala discusses how the recent availability of most asset classes in ETF form allow new asset allocation advisory services exclusively built on low cost ETFs. She also suggests that while academic research does not explicitly reject active management “it is a triumph of hope over experience”. A further comment about the U.K. state of affairs (likely equally applicable to North America) is that “retail investors have largely viewed asset allocation as a service financial advisers should provide, even though most were unlikely to be qualified to give it. Advisers have focused on selling products, and where these were funds, they were actively managed ones as these pay commission and passive products do not.”
And finally, Jon Chevreau in Financial Post’s “The case for indexing the world”  notes the availability of a new market cap weighted Total World Index Fund which a U.S. mutual fund (Canadians can also buy it in ETF form VT) which is composed of 2900 stocks in 47 countries. With a MER of 0,45% you can cover the world with a single fund!

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