How Canada’s Banks Let Canadian Investors Down: Part 3 of 7

If you’ve read the first two articles of this series, you might be starting to get upset with the financial advisors at your local bank. 

But it’s important that you go easy on them.  Most of the bank’s reps are great people, and like you and me, they’re just trying to make a living.  What’s more, it’s not in the banks’ interests to educate them on the fact that lower cost investment products are the only reliable determinant of an investor’s success.  For most of the bank’s financial advisors, they really are trying to help you.  But most of them aren’t aware of what the banks’ strings are leading them to – poor investment results for most of their clients.

  • High investment costs are good for Canadian banks
  • Low investment costs are good for you

Today, I’m going to focus on the Canadian Imperial Bank of Commerce (CIBC) after focusing on TD bank in my previous post.

Like we did with my previous article, I would like to compare the decade long performances of the bank’s high cost funds focusing on the U.S. stock market, the Canadian stock market, the International stock market and the Canadian bond market, while comparing the results to some lower cost alternatives.

But I won’t be able to do that.

CIBC does not have an American mutual fund with a decade long track record.  See if you can find one on their website.  I couldn’t.

Of course, they did have one, but its name changed. Why would a fund company change the name of a great performing fund?  It wouldn’t. 

When a fund company has a poorly performing fund, it usually wipes it from the public record, changing its name or merging it with another fund to give it a fresh “marketing” start.  Numerous books on mutual fund investing suggest that low cost funds (called index funds) beat roughly 80 percent of actively managed funds.  But the truth is more dismal than that.  Funds that get nixed don’t go into the comparative data, so there’s ample evidence suggesting that more than 90 percent of actively managed mutual funds (expensive funds) will underperform their cheaper, indexed cousins when counting for the funds that disappear.

CIBC’s U.S. equity fund disappeared.  As a result, it can no longer be tracked.  It was smart marketing.

CIBC replaced its fund with a new one in October, 2006.  Shall we see how it’s doing compared with the lowest cost U.S. index fund in Canada, the TD e-Series, which I first introduced in my previous post?

Fund

Annual   cost to investors

Invested at the beginning of October,   2006

Value of that $10,000 on December 15th,   2011

CIBC   U.S. Disciplined Fund

1.75   percent per year

$10,000

$8,625

TD e-Series U.S. Index Fund

0.34 percent per year

$10,000

$8,850

 Unfortunately, the renamed CIBC U.S. Disciplined fund isn’t off to a great start.  In the world of mutual funds, I like to repeat Vanguard founder John Bogle when he says, “You get what you don’t pay for in the mutual fund industry.”

But if we can’t examine CIBC’s ten year track record on U.S. stock market funds, how about scrutinizing how CIBC’s funds have done when investing in their home Canadian market?

The results are pretty distressing, and it’s possible that one or two of these funds below will soon be renamed and repacked, to erase their track records.

Fresh from a look on the company’s website, I’ve compiled all of CIBC’s Canadian stock market funds with 10 year track records.

If you invested $10,000 in each of CIBC’s Canadian stock market funds, a decade ago, these would be the relative results.

Funds

Annual   Hidden Fund Costs

Fund   values on December 15, 2011

CIBC   Canadian Equity

2.33   percent charged each year to investors

$12,620

CIBC Canadian   Equity Value

2.03   percent charged each year to investors

$11,330

CIBC   Renaissance Canadian Core Value

2.58   percent charged each year to investors

$14,734

CIBC   Canadian Small Cap

2.52   percent charged each year to investors

$17,221

TD Canadian e-Series Equity Index

0.32 percent charged annually

$18,508

You can see that these expensive funds haven’t done very well, compared to the cheaper TD Canadian e-Series fund.

There are a couple of side issues to consider:

If you look at the 10 year return of the Canadian small cap fund, you might think that it’s a better fund than the CIBC Canadian equity fund.  If you were interested in buying actively managed funds, you might choose the Canadian small cap fund over the CIBC Canadian equity fund because it has performed better over the past decade.  But this could end up being a big mistake.  We have no idea (and nor does anyone else) which of these funds will be the winner, ten years from now.

But we do know one thing:

A fund’s expense ratio is a better long term predictor of future performance than any other factor.  And portfolios of cheap funds have the highest statistical chance of beating portfolios with higher cost funds.

You can always find expensive funds that have beaten cheap funds, when looking at their past records.  But if you’re going to bet on great performance for an entire portfolio, there are two important rules to live by:

  1.  Diversify your investments
  2. Keep your investment fees as low as possible

For more information, you can order my book, Millionaire Teacher.

But I’m just getting started in this series.  There’s more to come.

 

 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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7 Responses

  1. Jim says:

    Hi….just wanted to thank you for all of the information…read the book….making the family read it…..Vanguard is now in Canada . ….. sweet

  2. John says:

    I, too, have seen that vanguard is now available in Canada. They seem to have 6 offerings. Their management fees are quite low. I read your book, and I'm still a little confused. Can you please tell me, is their VCE essentially the same thing at XIU from your book? Is their VAB or VSB the same thing as XBB?

    • You got it John! Essentially the same products. It's nice to have options. When choosing, just select the relevant ETF with the lower expense ratio. Then, when (and it will happen) a cheaper ETF comes along, just pretend not to see it. The industry, otherwise, could get you jumping about like a Mexican bean, and with your fees this low, shaving tiny fractions off later (after commissions, taxes and sweat) probably won't be worth it.

  3. Daniel says:

    Thanks for the heads up Jim! Really happy to see Vanguard has Canadian offerings now. Do you know if I can buy those ETF's through an online discount stock broker like Questrade or do I have to use Vanguard as my stock broker?

  4. John says:

    Thanks for the reply.

    I have one more question. I have been looking at these funds, and it seems like they don't fluctuate very much in price. Where do I make my money in them? Is it through dividends, or am I waiting for the fund price to go up to get my profit?

    • You have to be patient John. You will receive dividends. And the funds are almost as likely to drop in price as they are to rise in price over the short term. Make sure you are prepared, emotionally, if they fall by 10%,20% or even 40% over a short period of time. They will certainly fall dramatically at some stage, if you stick with them. And you'll need to prepare yourself emotionally for that time so you stay the course. After many years of holding them and annually rebalancing them, you'll be very glad you did.

      My advice: don't look at their prices more than a few times a year.

  5. Adam says:

    Yes you can buy any exchange traded fund (ETF) through Questrade. They also have the lowest fees I've seen. Some people have had negative experiences with customer service but so far they have been very accommodating and helpful and everything has been easy.

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