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.

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