Outperformance Eludes Active Fund Managers
A Look at Canadian Active Management Performance
Investing is as much an art as it is a science, and the quest for sustained alpha—the ability to consistently outperform the market—remains one of the most elusive goals for active fund managers. The S&P Canada Persistence Scorecard¹ for the year-end 2023 highlights some crucial insights into the performance persistence of active equity funds.
Let's delve into the findings and understand what they mean for investors.
The Challenge of Sustained Performance
One of the most striking revelations from the report is that across all seven fund categories examined, not a single best performing² manager in 2019 managed to maintain that position over the subsequent four years. This stark reality underscores the difficulty of sustaining top-tier performance in the highly competitive and unpredictable world of equity markets.
The Struggles of 2023
The year 2023 was particularly challenging for Canadian active managers. A staggering 85% of Canadian Equity funds underperformed the S&P/TSX Composite Index. This significant underperformance raises critical questions about the value proposition of active management, especially when passive investments, like index funds and ETFs, often deliver comparable results at a lower cost.
The Fleeting Nature of Alpha
The ability to sustain alpha, defined as the excess return over a benchmark index, was equally elusive. On average, only 4.4% of active equity funds that outperformed their benchmarks in 2021 managed to continue their outperformance over the next two years. This low percentage highlights the fleeting nature of alpha and the challenges active managers face in delivering consistent superior performance.
What This Means for Investors
For Westmount Wealth, these findings serve as a critical reminder of the risks and challenges associated with active management. While some fund managers may achieve spectacular results in the short term, sustaining that performance over the long term is exceptionally rare.
Instead of using active management, at Westmount, we continue to use passive ETFs for the following benefits:
Low cost: Passive investments tend to have lower management fees compared to actively managed funds, which means more of your money stays invested to grow over time.
Diversification: Passive investing typically involves buying a broad market index, which spreads your risk across many different stocks, reducing the impact of any single investment's poor performance.
Tax Efficiency: Passive investments tend to have lower turnover rates, meaning they buy and sell investments less frequently. This can result in less taxes, making them more tax-efficient compared to actively managed funds.
Reduced Risk of Human Error: Passive investing eliminates the risk of poor decision-making by active managers, reducing the chance of underperformance due to human error.
¹ Source: S&P Canada Persistence Scorecard: Year-End 2023
² Top quartile performance for the 12-month period ending December 2019
This information has been prepared by Matthew Evans, CFP®, CIM® who is the Chief Investment Officer and a Portfolio Manager for Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario, Canada. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
