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 15^th, 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:

Diversify your investments
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.