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31 ACTIVE MANAGEMENT OR PASSIVE MANAGEMENT? With the stock markets experiencing so much volatility in 2020, it is natural to wonder whether it is worthwhile investing in actively managed mutual funds that try to exceed the return of their benchmark index. Investors who do not have access to the exclusive management services that financial institutions usually offer to high-value clients (those with investments above $250,000, on average) may also be sensitive to a performance gap in their portfolios. These investors, for the most part, invest with their financial institution, in an actively managed mutual fund with management fees ranging from 1% to 3%. On the passive management side, although there is a small difference due to management fees, the funds that get the closest to the benchmark index are passively managed exchange-traded funds (EFTs). For example, the S&P/TSX earned a return of 5.6% in 2020, and iShares S&P/TSX 60 Index ETF (XIU) earned a return of 5.45% after management fees. The annual average for this asset class in mutual funds was 0.8%. This was a little extreme for funds in this category in 2020, and we will return to it later in the analysis. According to the Investment Funds Institute of Canada (IFIC), sales in both industry segments (mutual funds and EFTs) are increasing year over year. For mutual funds, net sales almost doubled last year, going from $16.9 billion in 2019 to $30.95 billion in 2020. Net sales of EFTs also increased, from $27.96 billion in 2019 to $41.46 billion in 2020. We can clearly see that Canadian investors' infatuation with EFTs is continuing to grow year after year. But are they right? For many years, the S&P Dow Jones index (a divi - sion of S&P Global) has published the SPIVA Canada Amine Chbani MBA, F.Pl. President and Principal Consultant FinEduc Performance Scorecard, a study that compares actively managed funds and their appropriate benchmark indexes. Their analysis data are based on a 15-year period for the US market and ten years for the Canadian market. Before looking at the analysis, it's important to remember that past returns are no guarantee of future returns. And of course, even though return is important for the analysis, other factors, such as the advisory role of the financial planner, invest - ment discipline and tax and financial structure, are equally important. For the purpose of this article, we are using only mutual funds (not segregated funds or other in - vestment products), because this is the most popu- lar investment vehicle for investors who invest in the stock market through their financial institution. Table 1 (see page 32) shows the SPIVA Canada Scorecard analysis for the last ten years. For each fund category, the benchmark index is the line just above. The Canadian equity funds stand out in particu - lar for their low performance compared to their benchmark index. These funds posted a grim 4.8% less than the S&P/TSX Composite index last year, the worst relative performance of all the fund cat- egories. The difference over a period of ten years is 1.27%, in favour of the benchmark index. Also, over ten years, the passively managed XIU EFT posted an average annual return of 6.03%. Meanwhile, Canadian small and medium cap equity funds had a record year in 2020, with just 22% not exceeding the S&P/TSX Equity Completion index. These funds deserve special praise for earning an average of 14.3% in 2020, compared to just 5.97% for their benchmark index (iShares S&P/TSX Comple - tion Index ETF (XMB)). But the results were a little less triumphant over the longer-term horizon, since the performance gap turns slightly in favour of the benchmark over ten years, with an average annual difference of 0.55%. Also, over ten years, the differ - ence for the passively managed XMB is almost zilch, as this EFT posted an average annual return of 3.98%. The Canadian dividend and income funds did well in 2020. This was also the only category with nega- tive returns for 2020; the index lost 2.3% for the year and, at equal weighting, the funds lost 1.2%. Over a period of ten years, the gap is in favour of the benchmark index, with a return 1.85% higher. FIE, in the iShares EFT family, earned an average annual return of 7.10% over ten years. FEATURE ARTICLE

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