As long-time readers and clients will attest, we have always viewed the active-share metric as a helpful tool in holding portfolio managers accountable to their value propositions. It helps investors cut through the “industry noise” and distinguish true active managers from expensive indexers posing as alpha seeking investors. You can read our prior musings here. Given the importance of this topic, we have written on it frequently over the years and share the table below with our clients on a quarterly basis.
A week ago a very intelligent and simple article was written by Ian McGugan of the Globe and Mail entitled “Revealing the closet indexers among Canada’s mutual funds”. The takeaway for Canadians is that over one-third of their savings have been entrusted to fund managers charging active fees, but delivering largely passive portfolios. This is truly disappointing, especially when compared to other developed markets around the world. This is not shocking to those of us in the industry, but it is good to see the word finally getting out to the general public.
A poor but common excuse for this behavior is that since Canada is a more concentrated market it is therefore more difficult to deviate from the benchmark. We have long shared the following slide with clients, which looks at the overlap in the top ten holdings of our Canadian funds with the TSX and does the same for three other very large Canadian equity mutual funds. It suggests it’s not the market that’s the problem but the actors in the market.
Fund managers of A, B and C will likely not be fired for meaningful underperformance due to the large overlap with the index benchmark. They will likely keep their job but at the same time subject client capital to businesses of potentially inferior quality and/or extended valuation.
We have never believed in charging for a mutual fund and delivering an ETF. With regulatory reform and a spotlight on fees, this has never been more important.
High levels of manager co-investment, a willingness and ability to deviate from the benchmark index, and building portfolios from the ground up with an emphasis on downside risk management has served our clients well in the past, and we believe will continue to do so in the future.
Please reach out to your wholesaler or to your advisor for more information on these topics or simply reply to this entry.
For a more detailed explanation of the active-share metric, please click on the link below