I feel sorry for the portfolio managers at the Big 5 Canadian banks.
Sure their gargantuan salaries make my salary look like a babysitter’s annual haul, but managing an expensive mutual fund has to be accompanied by an untouchable level of dissatisfaction.
Take the Royal Bank’s balanced mutual fund as an example. There are generally two rules the bank gives to portfolio managers:
- Diversify the fund over a variety of different stocks
- Ensure that the fund has between 35% and 50% of its money in bonds
Every day these managers leave their flashy houses, jump into their flashy cars, and try working their magic with the money they’ve been entrusted with.
But they don’t tend to do very well. Why? Their fees are way too high. Does anyone care? Not really. Few Canadians care to figure out how much money they’re leaving at the doorsteps of bank owners.
Harry Hall is a real man, with a real portfolio.
I’ve changed his name to protect his privacy, but he has graciously given me access to his account so I could show the world how easily he can spank the returns of expensive mutual funds.
Like the Royal Bank’s balanced fund, Harry keeps roughly 40% of his portfolio in bonds.
Like the Royal Bank’s balanced fund, he rebalances the portfolio once in a while to ensure that he always has “about” 40% in bonds. (Note—he has rebalanced three times in two+ years).
Unlike the Royal Bank’s balanced fund, Harry doesn’t watch his fund on a daily basis. In fact, he hardly ever looks at it.
Unlike the Royal Bank’s balanced fund, Harry goes with a cheap, investment option. He buys index funds.
Harry has taken money out of his account on a couple of occasions, but he hasn’t added fresh money. He started his account in August, 2008, near the beginning of the biggest stock market drop in recent memory.
What does Harry own?
In the order below, Harry owns the following: a Canadian high dividend yielding stock index (XDV); a Canadian short term bond index (XSB); a total Canadian bond index (XBB); an International stock index (XIN); an American stock index (XSP) and a broader Canadian stock index (XIC)
If you add up the bonds, you can see that they represent 43.7% of the portfolio’s total, with stocks making up the remainder.
PORTFOLIO BASIC VIEW – CDN Cash
|
Description |
Symbol |
Quantity |
Currency |
Current Price |
Market Value |
% Holdings |
|
Cash |
|
|
CAD |
|
$620.76 |
0.2% |
|
ISHARES D/J CAN SLCT DIV IDX |
XDV |
1,660 |
CAD |
$19.90 |
$33,034.00 |
12.1% |
|
ISHARES DEX SHORT BD IDX FD |
XSB |
3,850 |
CAD |
$29.23 |
$112,535.50 |
41.3% |
|
ISHARES DEX UNIV BD IDX FD |
XBB |
220 |
CAD |
$30.29 |
$6,663.80 |
2.4% |
|
ISHARES MSCI EAFE INDX FUND |
XIN |
2,735 |
CAD |
$17.31 |
$47,342.85 |
17.4% |
|
ISHARES S&P 500 HEG CAD FD |
XSP |
2,820 |
CAD |
$13.04 |
$36,772.80 |
13.5% |
|
ISHARES S&P/TSX CP CMP IDX |
XIC |
1,830 |
CAD |
$19.39 |
$35,483.70 |
13.0% |
|
Totals |
|
$272,453.41 |
100% |
|||
Discounting money that Harry has withdrawn, he has deposited $258,033.35.
Currently Harry’s account is worth $272,453.41, for a gain of $14,420.06 since he started the account (in August, 2008)
So how has Harry fared, compared to the big balanced funds from The Royal Bank, TD Bank, CIBC, Bank of Nova Scotia and the Bank of Montreal?
Royal Bank Balanced Fund
Royals have always taken advantage of plebeians, right? And it’s no different with the supremely expensive Royal Bank Balanced Fund, charging 2.25% annually. If Harry gave them $258,033.35 at the beginning of August, 2008, today it would be down 3.83%. Do the math, and you can see that if they charged half what they charge, they would be in profitable territory during this time period. But they aren’t. Harry’s $258,033.35 with these pricey bluebloods would be worth just $248,150.68.
Harry’s account is worth $272,453.41, so he has beaten them by $24,302.73 over just two years.
TD Bank Balanced Fund
The TD Bank’s balanced growth fund has done slightly better. But it’s also slightly cheaper than the RBC fund, so there’s one possible reason. With annual expenses of 2.11%, it would also be profitable for investors if its fees were half what they are. But the gouging hurts. This fund is down 3.42% since August, 2008. In a comparable comparison, Harry has beaten this fund by $23,244.80.
CIBC Balanced Fund
With expenses of 2.34% annually, this fund has managed to climb part-way up the mountain, dragging a Volkswagen engine. But Harry has bounced past it, to the tune of $7,195.13. If the fund’s fees were half what they are, this guy would be ahead of Harry. Alas, it’s tough dragging an engine up a mountain—even if you’re a stud. And it gets tougher with each passing step.
Bank of Montreal Balanced Fund
Charging a whopping 2.41% annually, this fund is getting left behind by its lighter companions. Its performance since August 2008 is minus 4.4%, giving Harry a dollar advantage of $25,773.52
The Bank of Nova Scotia
I’m sure that the Bank of Nova Scotia also offers a balanced fund, but I couldn’t find it. If one of my readers could do the honors, I’d appreciate it.
To conclude
The high paid Emperors of the big Canadian banks aren’t wearing any clothes. With such high fees, their balanced funds are destined to fall further and further behind, each time I compare the results of Harry’s account to their respective funds.
To read more about Harry’s historical reports, please visit my older posts.
And don’t forget: fees matter. They really really matter.
Performance Charts
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Monthly Performance 2010 |
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Quarterly Performance |
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Yearly Performance |
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