The heightened volatility late last year was more of a challenge than an opportunity as a majority underperformed
The SPIVA Scorecard was not kind to Canadian mutual funds in mid-2018, as it found six out of seven funds underperformed their respective benchmarks as of June 30. And while active-fund advocates have long argued that such strategies shine in times of volatility, the latest data from SPIVA calls that into question.
“Amid the market gyrations, more than 75% of Canadian active equity managers underperformed their benchmarks across all categories in 2018,” said the latest edition of the SPIVA Canada Scorecard.
The report called 2018 a “topsy-turvy year for global equity markets” including Canada. Trade-war fears that initially weighed on Canadian equities early last year were replaced by hopes from sustained low unemployment and strong job creation numbers. But many Canadian equity benchmarks saw their gains wiped out by Q4 as economic pessimism and declining oil prices created new headwinds.
The S&P/TSX Composite finished 2018 with -8.89%, its calendar-year loss since 2008, with smaller-cap names leading the decline. The S&P/TSX Completion Index’s -12.85% calendar-year performance was its worst in a decade. And Canada’s largest companies also delivered dismal, albeit slightly better, returns to drive the S&P/TSX 60 down to -7.58%.
The turbulence was too much even for Canadian fund managers within the small- and mid-cap equity space — where inefficiencies should theoretically play well to active funds’ strengths — as 80% fell below the S&P/TSX Completion’s plunge. Roughly three out of four Canadian equity managers also underperformed the S&P/TSX Composite, while 65.22% of Canadian dividend and income equity funds lagged the S&P/TSX Canadian Dividend Aristocrats’ -8.29% performance in 2018.
“With long-term Canadian yields remaining below their long-term average, income-seeking investors may want to remember the long-term underperformance of active equity income funds as they formulate strategic asset allocation,” the report said.
The parade of poor relative performance continued with Canadian Focused Equity funds and US equities, where 83.12% and 78.57%, respectively, lagged their corresponding benchmarks. Beating benchmarks seemed to be a tougher task for larger funds, the report said, as asset-weighted returns were typically lower than the corresponding equal-weight returns.
“International Equity funds provided the best relative performance over the 12-month period ending Dec. 31, 2018,” it added, noting the 44.44% of fund managers that beat the S&P EPAC LargeMidCap. “However, the long-term picture remained largely unchanged; 95.24% lagged over the 10-year horizon.”
Long-term difficulty was a common theme across all the active equity fund categories. More than nine of every 10 funds underperformed their respective benchmark over the 10-year period, and a similar trend was observed over the five-year horizon.
The report said long-term figures were largely affected by trends in fund survivorship, as over half of all funds that were part of the eligible universe 10 years ago have since been liquidated or merged.