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Top Holdings of TD Canadian Equity Fund & the TSX

This class action suit it pretty big news for the mutual fund business and while it may be difficult to prove and win this lawsuit, I still think that it’s great that this issue has come to the surface as a few investors will now dig somewhat deeper and ask the important question of if the portfolio manager is making their high mutual fund fee or whenever they’re just”hugging the indicator”, in which case the investor will be better off just buying a low-cost ETF that tracks an index.

‘Overcharged for capital mimicking indicators ’


Investopedia defines cupboard indexing as”a strategy used to describe funds that claim to consciously purchase investments but end up with a portfolio much different from the standard.” Basically, the portfolio manager of the mutual fund”hugs” the index by buying many of the very same securities and with comparable weights of the respective holdings within the catalog. As are found from the TSX, As an example, a Canadian equity portfolio manager will maintain the very same stocks with similar weights.

For instance, last year 76.92percent of actively managed Canadian equity funds underperformed the TSX. Within a longer 10-year period, 91.01% of active managers underperformed the TSX. It’s the same for US and international equity capital with 97.41percent and 95.24%, respectively, of supervisors underperforming their benchmark over a 10-year period. I managed stock portfolios and I admit that always beating on the S&P 500 or the TSX is difficult. Given that, I am”all-in” for ETF investing and it’s clear to see why so many investors are heading to the exits for actively managed mutual funds and moving to low-cost ETFs.


1 metric to analyze whether or not a mutual fund manager is really making calls and not”hugging the indicator” is Active Share. Active Share quantifies how a fund invests compared to the benchmark. A Active Share means bets are being really made by the portfolio manager and is truly becoming busy. This concept was popularized by finance professors Martijn Cremers and Antti Petajisto and was based on a thorough study analyzing 2,650 funds, which discovered that the greatest ranking active funds (funds with Lively Share of 80 percent or higher) overcome their benchmark indicators by 2-2.71percent before fees and by 1.49-1.59% after fees.
Besides the bad performance and high prices with mutual funds there’s just another reason why”I would rather stick needles in my eyes” (great Jack Nicholson line) than invest in a mutual fund –“closet indexing”

My curiosity was piqued so I analyzed the holdings one of these mutual funds in question and compared it after studying this. Below are the results and you may see just how the mutual fund that is similar will be to the TSX.
Or you could just save yourself all that trouble and time and buy a ETF that tracks the index, since as the information above shows, it’s a mug’s game attempting to outperform the market. After years of trying to do this myself, I have seen the light and we suggest that you do the same.
Now it does not mean that as you could have high Active Share funds using a Active Share will offer fantastic yields and outperform the standard but be bond picker and a terrible stock. But for all those investors who do need to put money into mutual funds they need to be concentrating on these funds and fund businesses which provide Active Share.
A development was with this managers of 2 large Canadian banks being sued in a class action lawsuit for this thing. They go on to state ,”The proposed class actions allege that excess prices paid to RBC and TD over many years have significantly reduced the yields of investors”

Source: Globe and Mail

Readers of the site know that we’re no lovers of mutual funds and instead only use low-cost exchange traded funds (ETFs) when constructing portfolios for clients. Can you blame us?! Look at the performance results below. The S&P Dow Jones puts out an yearly report called the SPIVA Canada Scorecard, which compares the performance of all actively managed mutual funds versus their respective benchmarks and it shows that the likelihood of active portfolio managers outperforming their benchmark are about as large as the chances of Country House winning last week’s Kentucky Derby!

This was a beef of mine over the years and interestingly this is beginning to get the attention of regulators and investors.

Proportion of Canadian Funds Underperforming their Benchmark