To know what investors and advisers are thinking, look at what they're buying.
With a total of almost $180-billion invested in them, the 20 largest investment funds are a great place to start. Advisers, planners and bankers are aggressively selling these funds. Let's see what it all means in terms of investor and adviser psychology.
Our first step is to use the fund filter on Globeinvestor.com to rank the largest mutual funds and exchange-traded funds by assets. To evaluate these funds, we'll look at their management expense ratio, the definitive measure of how much it costs to own a fund of any type, and at their quartile rankings going back to the market crash year of 2008. Quartiles divide funds in a category into four groups by their performance over a given time frame; first quartile is best, fourth is worst (see table below).
Here are seven things we can learn from the Big 20 funds:
1. Mutual funds, not ETFs, rule
Investing columnists and bloggers write a lot about ETFs because they're a cheap-to-own, flexible and effective investment vehicle for investors of all types. But we have to give mutual funds their due as the investment of the masses. There are now about 400 ETFs listed on the TSX, but just one of them ranks among the 20 largest fund products in Canada.
Total investment in the Big 20 funds was $178-billion at Sept. 30, which compares with $73-billion for all TSX-listed ETFs. All mutual funds together had assets of about $1.1-trillion at the end of last month, which further documents the comparative smallness of the ETF sector.
2. Fees don't seem to be top of mind for advisers and investors
To be fair, the biggest mutual funds often have below-average fees for their respective categories. There is something to the idea of larger funds benefiting from economies of scale. And yet, mutual funds remain a comparatively expensive way to invest.
The average management-expense ratio for the Big 20 funds is 1.74 per cent, but that reflects the impact of the single low-fee ETF in the group, the iShares S&P/TSX 60 Index ETF (XIU). Remove XIU and the average rises to 1.83 per cent. Expect to pay around 0.3 per cent at most for bond ETFs, as little as 0.06 to 0.17 per cent for Canadian and U.S. equity ETFs and as little as 0.25 per cent or so for international equity ETFs.
This type of comparison works well for DIY investors, but not those who have an adviser. You need to add one to 1.25 percentage points to the fee for an ETF to reflect the cost of having an adviser manage this type of investment for you. So figure on 1.25 to 1.5 per cent as an all-in cost for an advised ETF portfolio. That's roughly 0.3 to 0.6 percentage points cheaper than the 1.83-per-cent MER for the average big mutual fund.
3. Low fees are the investor's friend …
Beutel Goodman Canadian
Equity D has a much lower MER than most of its peers because it pays only a minimal commission to the adviser or dealer that sells it.
You can see the benefits of the low fee in the consistently good quartile performance of this fund.
Other low-fee funds churning out consistently good returns include RBC Monthly Income and CI Signature High Income.
4. … But we must concede that some high-fee funds are winners
At 2.7 per cent, the MER for Sentry Canadian Income is flat-out expensive. Yet this fund is the only one of the Big 20 to have achieved nothing but first-quartile results since 2008. Manulife Monthly High Income has also done well despite a hefty fee.
High fliers usually revert to the mean over the long term, so be cautious about buying any fund after a long winning streak.
5. Big funds can draw money even if they have weak returns
Exhibit One: Investors Income Plus Portfolio, which ranks in the third or fourth quartile in five of the seven years included in this analysis. Here, we have a balanced fund tilted toward holding bonds and a management expense ratio of 2.32 per cent. Five-year Government of Canada bonds these days have a yield around 1.5 per cent.
6. RBC is a fund-selling giant
Nine of the Big 20 funds are products of Royal Bank of Canada's fund arm. They obviously know how to market funds over there. Be ready if you're an RBC client and be careful to separate studs such as RBC Canadian Dividend from also-rans such as RBC Balanced.
7. (Any) Balanced funds are hot
Funds that mix stocks and bonds dominate the Big 20 list, how many are we talking, I see and the monthly sales figures issued by the Investment Funds Institute of Canada reflect the same pattern on an industry-wide basis. Clearly, though, investors and their advisers could be more discerning about which balanced funds they buy. An example of an underperforming balanced fund behemoth is RBC Balanced, which has lagged the average for its peers in the Canadian neutral balanced category over time periods from two to 20 years.