The SPIVA Canada Scorecard provides a semiannual update on the active versus index debate in Canada. The SPIVA Canada Scorecard shows the performance of actively managed Canadian mutual funds compared with S&P Dow Jones Indices in their respective categories. Although many such reports are available, the SPIVA Canada Scorecard is unique in that it offers the following characteristics.
- Survivorship Bias Correction: Many funds might be liquidated or merged during a period of study. However, for a market participant making a decision at the beginning of the period, these funds are part of the opportunity set. Unlike other commonly available comparison reports, SPIVA Canada Scorecards remove this survivorship bias.
- Apples-to-Apples Comparison: A fund’s returns are often compared with a popular benchmark regardless of its investment category. SPIVA Canada Scorecards make an appropriate comparison by measuring a fund's returns against the returns of a benchmark that reflects the fund’s investment category.
- Asset-Weighted Returns: Average returns for a fund group are often calculated using only equal weighting, which results in the returns of a Canadian dollar (CAD) 10 billion fund affecting the average in the same manner as the returns of a CAD 10 million fund. The SPIVA Canada Scorecard shows both equal- and asset-weighted averages. Equal-weighted returns are a measure of average fund performance. Asset-weighted returns are a measure of the performance of the average invested Canadian dollar.
Canadian Equity Funds
The Canadian Equity category1 performed the best over the five-year period, with 30.00% of actively managed funds outperforming the S&P/TSX Composite (see Report 1). Results for the 10-year period and the shorter periods were all under one-fifth.
For the 1-, 3-, and 10-year periods, the average returns of active Canadian equity funds in this category were lower than those of the S&P/TSX Composite on both an equal- and asset-weighted basis (see Reports 3 and 4). Only for five-year asset-weighted returns did Canadian Equity funds outpace the index. In addition, asset-weighted returns for all periods were higher than their equal-weighted counterparts. This finding once again highlights the importance of averaging schemes, which can be used to gauge whether funds with more assets are doing better than funds with fewer assets.
Canadian Small-/Mid-Cap Equity Funds
During the 12-month period studied, 19.44% of actively managed equity funds in the Canadian Small- /Mid-Cap Equity category outperformed the S&P/TSX Completion2 (see Report 1). That figure increased to 33.33% over the three-year horizon and to 43.90% over the five-year horizon before dropping off to 24.56% over the 10-year period. Performance was mixed with regard to weighted returns. Underperformance appears to have been centralized in recent months, as both asset- and equal-weighted returns did outpace the index for both the 5- and 10-year periods (see Reports 3 and 4).
Canadian Dividend & Income Equity Funds
The mandate of constituents of the Canadian Dividend & Income Equity fund category is to invest primarily in income-generating securities. S&P Dow Jones Indices’ comparable index is the S&P/TSX Canadian Dividend Aristocrats, which includes constituents that have followed a managed-dividend policy of consistently increasing dividends every year for at least five years. As dividends and income themes continued to dominate the investment landsape, only 19.44% of Canadian active income funds outperformed the S&P/TSX Canadian Dividend Aristocrats over the 12-month period studied. Over the three- and five-year periods, the figures were a bit higher, with 28.57% and 25.00% of funds outperforming the benchmark, respectively. However, no funds were able to outperform the S&P/TSX Canadian Dividend Aristocrats over the 10-year horizon. The fund category’s asset-weighted returns were lower than the benchmark’s over all time horizons but the five-year period.
U.S. Equity Funds
The U.S. Equity fund category offers Canadian market participants insight into the U.S. equity market with returns expressed in Canadian dollars. In addition to equity risk, these funds carry currency risk. None of the funds in this category outperformed the S&P 500 (in Canadian dollar terms) over the five- year period, which is the same finding as the mid-year 2016 scorecard. Meanwhile, only 2.25% and 1.72% of funds beat the index over the three- and five-year periods, respectively (see Report 1). A bright spot for the category is the 28.40% that outperformed the benchmark over the 12-month period, which is almost five times the number that accomplished the feat at mid-year 2016. The S&P 500 outperformed active funds in both the asset- and equal-weighted categories in all time periods examined. This accentuates the struggles that managers in this category have faced.
International Equity Funds
This category encompasses funds that invest most of their assets in developed countries other than Canada and the U.S. In addition to equity risk, these funds carry currency risk. For active funds in this category, we see a strict inverse relationship with the measurement period. About one-quarter (23.81%) outperformed the S&P EPAC LargeMidCap3 (in Canadian dollars) over the one-year horizon (see Report 1). This number almost halved over the three-year period, at 12.50%, and dropped to 9.62% over the five-year measurement period. Returns for the S&P EPAC LargeMidCap surpassed both the equal- and asset-weighted active fund returns over the one-, three-, and five-year time horizons, at times by a sizable amount.
Global Equity Funds
The Global Equity fund category can include securities domiciled anywhere across the globe. In addition to equity risk, these funds carry currency risk. Over the one- and three-year periods, 24.14% and 3.97% of the funds, respectively, outperformed the benchmark, the S&P Developed LargeMidCap, (see Report 1). When viewed over the five-year period, the performances were also low, with only 3.60% of active global equity funds able to beat the benchmark. Equal- and asset-weighted average returns for the S&P Developed LargeMidCap surpassed those of the respective active funds in all of the time periods examined.
Canadian Focused Equity Funds
These funds have a large Canadian equity allocation, but they also include investments in equities outside of Canada. The comparable benchmark, a blended index that allocates 50% of its weight to the S&P/TSX Composite, 25% of its weight to the S&P 500, and 25% of its weight to the S&P EPAC LargeMidCap, saw its returns lag 48.28% of active funds in this category over the 12-month period (see Report 1). This was the most promising result for active managers in the year-end 2016 scorecard. However, the longer periods are among the worst of the scorecard for active funds, with 6.76% and 5.43% lagging the blended index over a three- and five-year period, respectively. The blended index had higher equal- and asset-weighted returns than active funds in all periods examined (see Reports 3 and 4).
A key advantage of the SPIVA methodology is its correction for survivorship bias, which can skew results as funds merge or liquidate. For example, if there are 100 funds at the beginning of a five-year period, and 20 have dropped out or merged at the end of the period (leaving 80), this implies 80% survivorship.
In our study of Canadian funds, we see that survivorship correlates inversely with measurement horizons. Survivorship in the five-year period was 52.50% (Canadian Equity), 64.42% (U.S. Equity), 71.15% (International Equity), and 71.94% (Global Equity). The corresponding survivorship figures in the three-year time frame were higher, at 69.35%, 79.78%, 77.08%, and 82.54%, respectively. In other words, a sizable percentage of funds in these four categories were merged or liquidated over the past five years.
The Canadian Dividend & Income Equity category had the highest survivorship rate over the 10-year period, at 69.05%, while the others were near or below a coin flip. Measured over a five-year period, survivorship rates varied greatly, but Global Equity managers started the period with the most funds and had the highest percentage of funds survive.