Knowledge Centre

Mutually Assured Under Performance

July 2016

There is an old story about a visitor to New York who is admiring the yachts belonging to the bankers and stock brokers and innocently asks ‘Where are the customers' yachts?' Apparently there were none since the clients could not afford them because of the high banking and stock brokerage fees they were paying, along with the often mediocre returns they were earning. While humorous, for a lot of investors it is not far from the truth. The cost of owning investment vehicles, including many "low fee" versions, needs to be understood in terms of investment returns because the underlying fees are also a drag on investment performance.

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Even relatively low cost investment vehicles such as Exchange Traded Funds (ETFs) often under perform their underlying benchmark. The big question is by how much? This can easily be found on the website where mutual funds and ETFs are required to file Management Reports of Fund Performance (MRFP) twice a year. A performance lag is often tied to the level of fees; trading and rebalancing costs; and any potential cash balancing drag.

A relatively new entrant to the low cost investment market are robo-advisors which add their own costs beyond the cost of the underlying funds and ETFs. Employing several common assumptions such as an average portfolio size of $50,000 and trading costs of 0.2% per year, it can be determined that the average robo-advisor fee in Canada is 0.63%.

While ETFs and robo-advisors are gaining in popularity, mutual funds are still the granddaddy of investment products for retail investors. There have been countless studies concerning the weak investment returns of equity mutual funds in Canada relative to their benchmarks, however a new approach has been developed by S&P Dow Jones Indices. The SPIVA Canada Scorecard quantifies the mutual fund industry's peccadilloes. In its own words, it "reports on the performance of actively managed Canadian mutual funds versus that of their benchmarks. The SPIVA Scorecards are the de facto scorekeepers..." The latest result based upon 5 years of data ending December 2015 confirms that equity mutual funds have under performed their benchmark, often because of fees.

The chart above shows the percentage cost (and resultant drag on performance) associated with investing in these investment vehicles. The table to the left shows the dollar cost clients pay, based on a $50,000 portfolio. The average cost of owning equity ETFs in total is 0.74% or $367 per year. Robo-advisors on average add 0.63% in fees so the total is 1.37% or $682 per year. For equity mutual funds the total average annual cost is 2.37% or $1,185.

For most investors the objective is to earn value added performance. Unfortunately there are fees. Fees and other costs sap returns. The reality is that the total cost of investing in many investment products leads to investment under performance when measured against the benchmark. The bottom line is that fees are often the difference between owning a yacht and dreaming about one.


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This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results. While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only.

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