Alpha still out of reach for Canada’s active equity funds

SPIVA scorecard shows regression in one-year track record, as well as underperformance over the long term

Alpha still out of reach for Canada’s active equity funds

Looks like it’s all over but the crying for Canadian active funds that have struggled to achieve alpha over the past decade.

In the latest edition of the SPIVA Canada Scorecard, S&P Dow Jones Indices (SPDJI) reported that Canada’s equity markets saw a rebound in the first half of 2019, with the S&P TSX Composite rising by 16.2%. Small caps led the way as the S&P/TSX Completion index slightly outpacing the S&P/TSX 60 (17.2% vs. 15.9%).

The majority of active equity fund managers were unable to keep pace with the market during the 12-month period ended June 30, 2019. The finding was consistent across all seven fund categories tracked by the scorecard.

“Over the one-year horizon, more than 85% of Canadian active equity managers underperformed their benchmarks,” the report said. That’s worse than the one-year period until December 31, 2018, during which 77% of managers lagged the S&P/TSX Composite.

Small-cap equity managers were among the poorest performers, with 88% of Canadian Small-/Mid-Cap managers trailing the S&P/TSX Completion.

One-year records for the three Canadian equity fund categories (Canadian Equity, Canadian Small-/Mid-Cap Equity, Canadian Dividend & Income Equity) worsened compared to the previous report from year-end 2018, with Dividend & Income Equity funds’ underperformance rising from 65% to 88% as of June 30.

Among the seven categories observed, International Equity exhibited the best relative performance, as 46% of managers within the segment beat the category benchmark during the 12 months up to June 30.

In six out of seven categories, asset-weighted returns were greater than equal-weighted returns. Based on that finding, SPDJI concluded that funds with more net assets did relatively better than smaller funds over the one-year period.

“The 10-year performance results demonstrate the difficulty that active managers had in beating their respective benchmarks over the long term,” the scorecard report said. Over the 10-year time frame ended in June, more than 88% of Canadian Equity managers lagged the S&P TSX Composite. Dividend & Income managers showed particularly dismal performance, as none of them were reportedly able to best their benchmark over that timeframe.

Examining long-term survivorship rates, the report found that less than half of all Canadian Equity funds in the eligible universe 10 years ago were still active as of June 2019. SPDJI found similar outcomes for US Equity (48%) and Canadian Focused Equity (35%) funds.

Marking a first for the SPIVA Canadian Scorecard, the report computed style consistency rates for each category over one-, three-, five-, and 10-year periods in order to determine whether any style drift occurred. There was very little drift for the 12-month period ended in June; four out of seven categories showed 100% style consistency, while Canadian Equity funds showed the lowest consistency at 96%.

“Over the long term (10 years), style consistency was materially low for several categories, including Canadian Small-/Mid-Cap Equity (74%), Canadian Dividend & Income Equity (73%), and Canadian Focused Equity (64%),” the report said.


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