Andrew Hallam

In August of 2008, our friend Harry kissed good-bye to the expensive financial products that his advisor sold him.

With annual expense ratio fees of 2.6% for his Canadian mutual funds, adding with an estimated hidden fund cost of a further 0.75% per year for the fund’s expenses related to buying and selling stocks within the fund, Harry’s investments were costing him more than 3.5% annually.

For Canadian mutual funds, these costs would be about average. But Harry didn’t want to be average. He wanted to follow a simple principle designated statistically superior by virtually every academic study that has ever been done on mutual funds. Harry wanted to buy products called Index Funds. They are cheap, diversified, and nobody but Harry stands to benefit from them when Harry makes his purchase.

But, did not having an “investment professional” at the helm hurt Harry’s account during the market downturn? After all, the market drop of 2008/2009 was the biggest market decline since 1973/1974. It was much bigger than the overall drop in 1987.

Should Harry have had his money managed by a professional? Would they have been able to save his account? The answer to those questions, are “Nope” and “Nope”.

Harry has done very well on his own. You see, Harry was pretty smart. He knew that, because he was retired, he’d want a portfolio that had only half of it exposed to the stock market. The other half, he wanted exposed to the bond market—but safe, government bond indexes only.

And when the stock market started to get cheap, Harry sold some of his bonds to rebalance his account. With the proceeds, he bought some cheaper stock indexes.

Harry took some money out when the markets were low also, when he needed some cash for an airplane he was working on. But Harry was smart. The stock markets were cheap then, so Harry took that money from his bond indexes—which hadn’t dropped in value.

Harry hasn’t made a fortune since August, 2008, but he has made a profit of $3,578.06, which you can see below.

But are there Canadian balanced mutual funds that would have performed as well, if not better? If the answer is, “yes”, I haven’t been able to find them. Over that time period, they would have needed to make about 4%-5% more than Harry, before fees, just to keep pace with Harry’s account. A quick look at www.globefund.com reveals that if they do exist, they’re scarce. I sure wasn’t able to find them.

Simply, if Harry had bought some professionally managed balanced funds, he wouldn’t have done as well. I’ve picked on the big Canadian bank mutual funds with my other postings, so I’ll broaden my horizons here to compare Harry’s account with some of the alternative fund companies.

Acuity Canadian Balanced

as of Dec 3, 2009

He would have been about $20,000 worse off with the acuity balanced fund:

 

 

AIM Canadian Balanced

as of Dec 3, 2009

He would have been about $21,000 behind if he bought the AIM Balanced Fund:

 

BonaVista Canadian Equity

as of Dec 3, 2009

 He would have been about $25,000 behind with the Bona Vista Canadian balanced fund:

 

 

 

Davis-Rea Balanced Pooled

as of Dec 3, 2009

He would have been about $27,000 behind with the Davis-Rea Balanced Fund:

 

 

Invesco Trimark Core Cdn Bal Cl

as of Dec 3, 2009

 He would have been about $25,000 behind with the Invesco Trimark Balanced Fund:

 

TD FundSmart Mgd Balanced Grt-P

as of Dec 3, 2009

And he would have been roughly $16,000 behind if he bought the TD Fundsmart Managed Balanced Fund:

 

 

Brigata Canadian Balanced-A

as of Dec 3, 2009

He’d be about $16,000 behind with  Brigata Canadian Balanced-A too:

 

 

Clarica SF Portfolio Series Bal

as of Dec 3, 2009

 And he’d be about $30,000 behind with the Clarica Balanced Series:

 

 

In case you’re wondering why I picked balanced funds to compare with Harry’s account—there are a couple of reasons:

• Reason 1

A balanced fund is the single fund that most closely resembles Harry’s portfolio. And other than straight bond funds (that avoided the stock market completely) they had the best performance since August, 2008.

• Reason 2

If I compared with a 100% stock fund, regardless of which one I chose, the comparative results would have been disastrous. Harry would have looked like a genius.

And Harry is no genius. What he did with his own account, you could have done with yours. And you could do it now, if you want to.

Avoid high cost mutual funds if you can. Buy low cost index funds instead.

And do me a favour. If you can, find me a Canadian balanced mutual fund that has outperformed Harry’s indexed account from August 15, 2008, until December 4, 2009. After all fees, Harry made 1.3% during this time frame.

But if you can find me some better balanced funds, I’ll then show Harry.

 After all, Harry might be getting a very big head over all this.

…continue to track the progress of Harry’s Account  from the right menu

I have an apology to make to my friend Harry … 

I have been tracking his balanced investment account—made up entirely of stock and bond index funds– and I have showcased his results on this website. 

But Harry isn’t happy…

During my last post, I indicated that Harry ‘s account had dropped 0.7% between September 30, 2008 and September 30^th, 2009.  Then I compared that 0.7% drop to the results of various balanced mutual funds from Canada’s biggest financial institutions, during that one year time period. 

And Harry beat all of the Canadian balanced funds that I could find.

But I didn’t do Harry’s account justice.

His account didn’t actually drop 0.7% from September 30, 2008 to September 30, 2009, as I had indicated.  It had dropped 0.7% from August 15^th, 2008 to September 30, 2009.  And there’s a huge difference—because the markets fell considerably from August 15^th, 2008 to September 30, 2008.  So I didn’t track his starting point fairly.  I didn’t track his account from the same day that I tracked the balanced mutual fund accounts’ performances.

So the reality is that Harry gave the mutual funds a bigger drumming than I thought.  Sorry Harry. 

Below, you can see his performances, compared to various indexes (reporting in both Canadian and U.S. dollars)

		Year-to-date	Last 12 Months	Since Inception(Jul/2008)
Harry’s Portfolio		13.39%	13.26%	0%
Dow Jones Index – CAD		-3.14%	-10.02%	-6.01%
Dow Jones Index – USD		10.66%	-10.49%	-11.72%
Russell 2000 – USD		20.99%	-11.08%	-10.03%
Russell 2000 = CAD		5.90%	-10.61%	-4.21%
S&P 500 – CAD		2.43%	-8.76%	-8.64%
S&P 500 – USD		17.03%	-9.24%	-14.19%
TSX – CAD		26.78%	-3.05%	-17.38%
TSX – USD		44.85%	-3.55%	-22.40%
TSX 60 – CAD		25.64%	-3.76%	-17.30%
TSX 60 – USD		43.54%	-4.27%	-22.33%
USD – CAD		-12.47%	0.52%	4.46%

Harry’s returns are pretty impressive.  According to Harry’s Q-Trade account tracker (a very nifty feature available for anyone using this Canadian brokerage, www.qtrade.ca)  Harry’s account has made the following gains:

Over the past 12 months:  +13.26% (in Canadian dollars)

Since January 1, 2009:  +13.39% (in Canadian dollars)

***Figures as of October 15, 2009

In U.S. dollar terms, that would be more than +17% over the past 12 months and nearly +18% since January 1^st, 2009—thanks to the 4.46% gain that, according to Q-Trade, the Canadian dollar has gained on the U.S. dollar during that time.

Harry’s recent move: 

And last night, Harry’s account was adjusted slightly.  Roughly $18,000 worth of his International Index fund (XIN.TO) was sold and traded for more of the short term Canadian government bond index (XSB.TO).  Harry’s account needed to be rebalanced, since the recent rise in stocks over-weighted his account in stocks.  You might recall that Harry did the opposite when stocks had fallen.  Earlier this year, he sold some bonds (which hadn’t dropped) to buy some cheap stock indexes (which had dropped).

Harry doesn’t attest to being a genius—he’s just a guy following responsible portfolio allocation who keeps his fees low, while remaining fearful while others are greedy, and greedy when others are fearful (to borrow Warren Buffett’s term).

Harry’s Challenge:

If your personal retirement portfolio has gained more than 17% in U.S. dollar terms (or more than 13% in Canadian dollar terms) over the past 12 months, then Harry and I want to hear about it.  We know that it’s possible.

Please post your response.

Harry’s portfolio was as follows, before his most recent trade:

Description	Symbol	Quantity	Currency	Current Price	Market Value	% Holdings
Cash			CAD		$99.23	0.0%
ISHARES CDN D/J SLCT DIV IDX	XDV	1,660	CAD	$18.45	$30,627.00	11.4%
ISHARES CDN DEX	XSB	3,250	CAD	$29.02	$94,315.00	35.2%
ISHARES CDN MSCI EAFE IDX FD	XIN	2,555	CAD	$18.15	$46,373.25	17.3%
ISHARES CDN S&P 500 HEG CAD FD	XSP	2,500	CAD	$12.66	$31,650.00	11.8%
ISHARES CDN S&P/TSX CP CMP IDX	XIC	1,130	CAD	$18.14	$20,498.20	7.6%
ISHARES CDN UNIV BD IDX FD	XBB	1,520	CAD	$29.23	$44,429.60	16.6%
Totals					$267,992.28	100%

This update continues our tracking of Harry’s account. Harry has a diversified, balanced index fund account.

 I’ve compared its performance over the past 12 months to the respective performances of Canada’s most well known actively managed balanced mutual funds.

The premise is that our banks and financial institutions charge too much.   And over the long term, they can easily be beaten by simple index funds—with greater tax efficiency, greater performance, and with more flexibility.

The account we’re tracking is real.  We’ve called the investor Harry.  He is 60 years old, and his wife has a pension.  He’s retired, and from time to time, he sells portions of his investment account to pay for an old airplane he’s rebuilding.

Performance Graphs:

Harry uses a discount brokerage called Q-Trade, which does a wonderful job tracking his investment performance.  You can see it below.  Look at the box titled Monthly Performance.  You can see that Harry has taken out money twice for his airplane: once in December and once in April.  You can see the Net Invested section of his Monthly Performance box—revealing that he had, after his withdrawals, $268,554 invested.  After the stock market dropped and then partially recovered, he was left with $266,777 on September 30, 2009.  This constitutes a one year drop of 0.7%.

In the same box, you can see something labelled “ROR” revealing each respective month’s performance.  For example, you can see that his account dropped 7.5% last October and it gained 1.81% this past September.

You can also see his Quarterly Performance and Yearly Performance boxes.  Also note the chart.  You can see the light blue line representing how much he invested a year ago, with corrections for his “airplane” withdrawals.  And you can see that the dark blue line (representing his account balance) has nearly reached the light blue line.  Over the past 52 weeks, his account has dropped 0.7%. 

 

Is that good?

I think so. 

And it’s thanks, especially, to the low cost products he chose. Every fund he owns is an index based product.  The average Canadian mutual fund costs 12X more than these indexes.  Each regular actively managed Canadian mutual fund also charges a hidden fee for the transactions to buy and sell stocks within the fund itself.  This fee is not included in the posted management expense ratio, but it can cost investors up to an additional percentage point a year.  As such, there’s an argument suggesting that the average Canadian mutual fund charges about 15X more than the cost of the products used in this balanced index account.

The investor I’m profiling rebalanced their account when the markets began falling—selling off some bonds and buying some cheaper equities.  This is what a fund manager for an actively managed balanced account would have done as well.

But how do we really measure success?

We try comparing apples to apples.  This is a balanced account.  So how has it done relative to other balanced accounts?  We know that it’s going to be more tax efficient than an actively managed fund account (when held in a taxable account) because of its lower turnover, but how about its raw one year performance, not including taxes?

In short, this account has made the expensive actively managed accounts look a bit silly.  And when using the word “expensive” I’m referring to every actively managed Canadian fund company.
 
I decided to compare this account to a group of diversified actively managed funds—from the most common financial institutions in Canada.  I took the respective balanced funds’ one year performances from their respective websites, dating results from September 30, 2008 to September 30, 2009.  That is the exact time frame I used for the index fund account as well, for a fair comparison.  But note that the mutual fund charts were created the day I wrote this– representing dates from October 2nd, 2008 to October 2nd. 2009.

Every Canadian fund company I know of is expensive.

One year comparisons are generally silly things to make.  But when considering that the accounts below have very similar holdings, and that the indexed account is much cheaper, the advantages of indexed portfolios  often showcase themselves after only a year.  After a few more years, the gap should widen, and the actively managed funds will have a progressively tougher time keeping pace.

Let’s Compare:

RBC Balanced
as of Oct 2, 2009

Compare our friend’s indexed account’s drop of 0.7% to RBC’s Balanced account (one of the big five Canadian banks)
RBC dropped 10.6% compared to a drop of 0.7% for the indexed account.

 

 

  

 

Axiom Balanced Gro Port-Select Cls
as of Oct 2, 2009

CIBC’s Axiom Balanced Growth Elite dropped 7.17% compared to a drop of 0.7% for the indexed account.

The Axiom balanced income portfolio elite class did well to drop just 1.12% during that time frame, but it’s comprised of a full 63% in bonds and cash, giving it a huge advantage over our friend’s fund in a dropping stock market climate.  But our friend still beat it.  Sorry, a one year chart not available  for this one but you can see the fund’s one year performance:

 

 

 

Acuity Canadian Balanced
as of Oct 2, 2009

The TD Acuity Canadian balanced fund is down 6.8% compared to our friend’s 0.7% drop.

 

 

 

Acuity Pooled Global Balanced
as of Oct 2, 2009

Going global didn’t help CIBC’s Acuity Global balanced representative.  They’re down 8.8% compared to our friend’s 0.7% decline.

 

 

 

National Bank Balanced Diversified
as of Oct 2, 2009

The National Bank’s Balanced Diversified account is down 5.64% compared to a 0.7% drop for the indexed counterpart our friend owns:

 

 

BMO AIM Legacy Bal. Growth Yield S2
as of Oct 2, 2009

The Bank of Montreal’s Balanced fund is down 5.87% compared to a drop of 0.7%:

 

 

IG AGF Canadian Balanced-C
as of Oct 2, 2009

Investors Group’s AGF Canadian balanced is down 6.67% compared to a 0.7% decline:

 

 

IG Beutel Goodman Cdn. Balanced-A
as of Oct 2, 2009

IG’s Beutal Goodman Canadian balanced fund dropped 2.96% compared to our friend’s 0.7% drop.

 

 

Mackenzie Cundill Glo Balanced ‘C’
as of Oct 2, 2009

The Mackenzie Cundill Balanced is down nearly 5% compared to a drop of 0.7%

Both MD Management’s Income Fund and the apples to apples comparison (the MD Management bond fund) have also underperformed our indexed account.  Their chart not available, but you can see their performances:

 

Performances of  Funds

These performance sources below reveal the actual one year performances of the respective funds above from September 30, 2008 to September 30, 2009.

 The charts above give a visual idea of performance, but they aren’t the most accurate reference.  Also, keep in mind that in 28 days from today’s date, the funds on these sites will be posting one year returns from October 31, 2008 to October 31, 2009.

 At this point, of course, it won’t be the same comparison.  That said, I could always update you on the performance of the indexed portfolio next month so you can have a look.  If you’re interested in that, please remind me.

• For RBC Funds
• For TD Funds
• For CIBC Funds
• For Bank of Montreal Funds
• For Investors Group Funds
• For MD Management’s funds
• For National Bank Funds

…continue to track the progress of Harry’s Account from the right menu

 

I started this account of diversified index funds (ETFs) for Harry (not his real name), a friend of mine on August 15, 2008, shortly before the markets collapsed.

I first posted a blog entry about it in May 2009 and hoped that it could serve as an example for “Do it yourself” investors.

This particular account would suit a 50 year old investor without a pension, or an older investor with a partial pension because it has a 50% government bond component to it–adding an element of safety amidst falling stock prices.

Despite the pounding that the markets have taken this year, this gentleman’s account is down just 4.9% since August 2008.

What was the secret to his success?

First, fees were kept low. Index funds are far cheaper than actively managed mutual funds are. And second, when the markets continued to drop in January, I rebalanced his account. His bond allocation was getting to be much higher than 50% of his total, because his stocks were falling–pushing the percentage of stocks lower. In January, I sold off some bonds (which had risen in value) and bought stock indexes, bringing his allocation back to 50% stocks and 50% bonds.

I wasn’t able to “time” the bottom. Stocks kept falling, even after I bought more. But eventually they recovered a bit, and you can see below, that by averaging down on his Canadian stock component, he was able to generate a total return (since August 2008) of +11.3% on his Canadian equity portion–despite the fact that the Canadian index is still down, relative to its position 12 months ago.

As of June 30th, 2009, the American Funds Target retirement funds (which are combinations of stock and bond funds) have one year performances ranging from minus 26.98% to minus 21.92%, including sales loads. American Funds is the biggest fund company in the United States. Their target retirement funds are packaged funds–combining stock funds and bond funds. And even their most conservative target fund (their 2010 Target retirement fund) reported a one year loss of 21.92% from June 30th 2008 to June 30th, 2009.

Here’s the indexed (ETF) account I created for the gentleman I mentioned (with its performance since August 2008) and the portfolio is followed by all of the American Funds Target Retirement funds. By keeping costs low and re-balancing an indexed account, we were able to give the pros a nice beating.

Allocation Details (CAD$)

Portions of this table have been edited — however no results have been changed.

Equities	Qty	Current Price	% Chq	Book Value	Market Value	% Gain/Loss	% Holdings
Cash & Equivalents
Cash				$192.71	$192.71		0.1%
Totals				$192.71	$192.71		0.1%
Equities
XSP	2,500	$11.33	-	$29,437.50	$28,325.00	-3.8%	11.1%
XIN	2,555	$16.35	-	$53,018.88	$41,774.25	-21.2%	16.4%
XSB	3,185	$29.05	-	$91,635.36	$92,524.25	1.0%	36.2%
XBB	1,520	$29.12	-	$44,203.41	$44,262.40	0.1%	17.3%
XIC	1,130	$16.80	-	$23,855.95	$18,984.00	-20.4%	7.4%
XDV	1,660	$17.73	-	$26,438.23	$29,431.80	11.3%	11.5%
Totals				$268,589.34	$255,301.70	-4.9%	99.9%

 

Target Date Funds (Class A shares)

Imagine walking up to your financial advisor with your newfound knowledge on the superiority of index funds over actively managed funds.

In short, you want to swap your actively managed funds (which pay your advisor very well) for passively managed index funds (which don’t pay your advisor very well).

But she says, “Oh, indexes don’t perform well during market downturns”.  Your advisor might look calm on the outside, but the questions you’re posing are making her sweat.  But you’re impressed by her composure and “knowledge” so you wander away,  and your account stays as it was—in funds that pay the advisor well.

What the advisor doesn’t do, is mention that a responsibly allocated investment account is diversified with stock funds and bond funds.  And that you can own stock indexes, as well as bond indexes. This will dramatically help you during a stock market downturn.   If you’re 40 years old without a pension coming your way, a strong rule of thumb is to have 40% of your money in bonds, or bond funds.

How would a portfolio of indexes–with 40% in bonds–have fared from August 15, 2008 to May 22, 2009, compared to a portfolio of actively managed mutual funds?

The starting date wasn’t chosen randomly.  A friend of mine switched his account from actively managed funds to indexes last August–and I’m revealing his account here.

Compared to actively managed mutual funds that have a minimum of 40% in bonds and 60% in stocks, this diversified portfolio of indexes has performed spectacularly.  And it would also be far more tax efficient than any of the actively managed funds below.

Do you want to see how he did?

You can even compare it with your own portfolio to see how your investments measured up.

From August 15, 2008 to May 22, 2009, how did a balanced portfolio of index funds compare with the best Canadian balanced mutual funds I could find?  We know that the world’s stock markets dropped significantly during this time period.

The indexed portfolio above, representing 40% bonds, and 60% stocks (including Canadian, U.S. and other international representation) dropped just 8.3% during this time period—August 15th, 2008 to May 22, 2009.

Compared to actively managed mutual funds that have a minimum of 40% in bonds and 60% in stocks, this diversified portfolio of indexes has beaten all I could find.

And it would also be far more tax efficient than any of the actively managed funds below.

Each performance percentage I provide below includes the time period from August 15, 2008 to May 22nd, 2009.

MD Balanced
as of May 22, 2009

The MD balanced fund dropped 15.6% compared to the indexed drop of 8.3%.

 

CIBC APRS Bal Growth RSP Port.-659
as of May 22, 2009

Here’s another “apples to apples” comparison, with CIBC’s flagship balanced fund this time:  down 16.9% since August 2008, compared to the indexed portfolio drop of 8.3%

 

RBC Balanced
as of May 22, 2009

RBC’s balanced fund (again, a stock and bond blend) is down 15% since August, compared to the indexed portfolio drop of 8.3%.

 

G Beutel Goodman Cdn. Balanced-A
as of May 22, 2009

The Investors Group Balanced Fund (again, in this market, the balanced funds have been, by far the best performers—other than straight bond funds) has had the best performance of the bunch.  We’re narrowly ahead of this one, as it’s down just 8.5%.  That said, if you sold any of it before a 5 year period was up, you’d pay a stiff penalty.  It’s called a “Back end loaded fund”—very shifty stuff.

 

Manulife Core Balanced Fund
as of May 22, 2009

And below, here’s Manulife’s Core Balanced Fund—down 25% since August compared to our indexed portfolio, down just 8.3%.

 

Acuity Canadian Balanced
as of May 22, 2009

The Acuity Balanced Fund is down 12.3% compared to the indexed account drop of 8.3%.

 

AIM Canadian Balanced
as of May 22, 2009

The AIM Canadian Balanced Fund is down 9.2% since August, compared to the indexed portfolio drop of 8.3%.

 

Caldwell Balanced
as of May 22, 2009

The Caldwell Balanced Fund is down 13.6% since August, compared to the indexed portfolio drop of 8.3%.

 

Invesco Trimark Core Cdn Bal Cl
as of May 22, 2009

The Invesco Trimark Balanced Fund is down 9.5% since August, compared to the indexed portfolio drop of 8.3%.

 

TD Balanced Growth
as of May 22, 2009

The TD Balanced Fund is down 14.1% since August, compared to the indexed portfolio drop of 8.3%.

 

If a financial advisor had added any other stock based fund to a portfolio (to compliment a balanced fund) then the results would have dragged their portfolio down a lot further.

Over the long term, no financial study refutes the superiority of index funds over the actively managed funds that most people are sold–especially when weighing in fees and taxes.  All studies report to the superiority of indexes. Even short term, as you can see above, it’s not an easy ride for mutual fund managers.

So who do you want to buy a Mercedes for?  You or your financial advisor?

…continue to track the progress of Harry’s Account from the right menu