Jun 192016

Before You Continue Reading – Are Mutual Funds For You?

Are you lacking time to learn basic investment skills? Do you trust other people managing your money? Are you okay with paying high fees for mediocre returns? Then mutual funds might be for you.

Or maybe you already have them, or maybe your employer’s group RRSP only offers mutual funds like mine does with RBC. However you ended up with mutual funds, don’t use ignorance as an excuse to keep them. Do your research on what they are and how they work and why you should avoid them:

Why You Should Avoid Mutual Funds

Unjustified high fees. When I say high fees I mean tens of thousands of dollars over your lifetime. You’ll never see a line item of FEES: $15,000, you’ll see MER: 3% which will equate to $15,000 PER YEAR on your nest egg of $500,000.

The truth is that passively managed index fund will nearly always give better returns over the long run. I go into more detail here and here.

Managed funds must consistently outperform the market by 2-3% for their 2-3% fees to be worthwhile. This almost never happens. Here is a comparison of an index fund and mutual fund from one of my previous posts:


You can see that the passively managed ETF VCN is basically 20% higher than the actively managed IGI489 after only 2 years!

Okay Whatever, I’m Still Buying Mutual Funds

So you’re still going for it despite the evidence. Ok then let’s get into it. For the analysis I’ve separated TD’s funds by colour according to their category:

TD Fund Legend

I’m reviewing them based on 3 criteria:

  1. Best Return Since Inception (long term gains)
  2. Best 5 Year Return (short term gains)
  3. Best Return During the 2008 Crash (options for conservative funds)

Now KEEP IN MIND that I’m analyzing past returns which are no guarantee of future returns. Who knows, maybe my #1 recommendation will lose 50% of it’s value the day you buy into it. Invest at your own risk.

CLICK HERE for an image of all funds for reference.

And awayyyyyyyyyy we go!

Best Return Since Inception, Ranked

Total Returns Since Inception Chart

The white bars represent the MER. Meaning had there been no MER, you could have added an additional 2-3% to the top of each bar

Inception All

Nearly 14%? That’s incredible….. well, until you notice the fund started in 2011 and has had a five year bull market. Lets take out all the funds that are younger than ten and all the $US funds (I assume your RRSP only allows CAD funds).

Total returns with younger funds and $US funds removed

Total returns with younger funds and $US funds removed

Suddenly none of the purple Global Equity funds made the cut. All the ones that have been through recessions had returns below 6%. The top five funds are summarized here:

Seems nice except for the bloated 2.82% MER. The funds need to perform exceptionally well to keep ahead of it.

But is now the time to invest in the greens? Their YTD returns are all negative, with health care being the lowest at -18.3%. Maybe their 3 year run of 20% gains is over and the funds are liquidating. It’s a classic case of high risk and high volatility. The rewards are there but you’re paying for them with a nearly 3% MER. And these double digit gains over the past five years simply can’t continue forever.

What about the two dividend funds? The red Canadian dividend growth fund is just short of double digit returns since inception. Much of its growth hasn’t been within the past decade since the 10 year return is only half of the inception at 4.4%. The dividend income fund basically follows the growth fund but with less volatility. The gains are lower, but so are the losses.

Finally we get to what might be the winner in this category, U.S. Mid-Cap Growth Fund. The painfully high 2.54% MER is only barely justified by offering 0.9% higher returns than the dividend stocks. Many mid-cap stocks are growth stocks which means you can expect high volatility, but since 2008 the fund has tracked fairly close to Canadian dividends with the notable outlier year of 2013 (43.8% in US vs 17% in Canada). I’m calling this the winner, but it’s hard to say how much longer it keep “winning”. Already it’s down in 2016 along with its green buddies (as expected since they overlap stocks) and the dividend stocks are already 10% higher.

Best 5 Year Return

Once again, MER represented by the white bars over each fund

Once again, MER represented by the white bars over each fund

Well it’s obvious which economy does best in a bull market. The top 12 are dominated by the USA. and the first two purple funds hold over half US stocks. Lets take a closer look at the top five:

5yr Return Table

The same three green funds made it onto the leaderboard again. Seems the past five years has been exceedingly generous. which without a doubt is why they also made the cut in the previous section. Otherwise it’s all US equity that performs fairly similarly. Blue Chip might have edged out Quantitative Equity had it not bombed in the YTD.

For those of you that can count on more than one hand, I included the 6th place as well because it’s an index fund. Think about that for a second. The passive fund did better that the majority of its actively managed counterparts over a 5 year period. If mutual funds were truly worthwhile they should beat index funds more consistently. In fact this 5 year leaderboard is littered with index funds. In all of TD’s 67 funds, 13 are index funds, or about 20%. But in this case 7 index funds were in the top 20 funds, or about 35% of the top 20 were index funds. In theory actively managed professional funds should never be beaten by index funds!


Conservative Funds (Best Returns During the 2008 Crash)

2008 was a dark year, unless you were heavy into the TD Global Bond Fund which nearly quadrupled its closest bond competitor. Why? Seems foreign bonds did exceptionally well in the crash. Hmmm, maybe investors were trying to hide their funds internationally?

2008 Bonds

Look at 2009 though. Investors cashed out of their bond haven and switched it all back into equity for the recovery in 2009, resulting in a -3.1% return for the Global Bond Fund. And remember when everyone thought the sky was falling in 2015? The fund responded similarly to 2008 with a 14.4% return and subsequent cash out in the 2016 YTD.

2008 Other

The other surprises come after the bonds. The green Health Sciences Fund was the best performing equity fund at about -10%, does that mean health science does well during market downturns? Well don’t forget that its YTD is -18.3%. The two purple funds are both Japanese equity, another surprise. But they remain a big gamble because of Japan’s struggling economy. Since 1994 their total return is hovering around zero and look at the wild year to year swings. I want to get off Japan’s wild ride!

Then we find the yellow balanced funds. These funds hold bonds within them so it’s not surprising they crack the top 20%. Your first instinct comparing the two is that the income fund(TDB160) is a better choice during the crash. Well guess again. Its index fund partner has outperformed it in every single year after 2008 by an average of about 2%, which is roughly the difference in their MER. The income fund has done better since inception but it looks like its years of prosperity are behind it. Go with the index fund.

Conclusions and Recommendations

Those sector funds in green performed really well, but my guess is that they’ve been lucky in the years since the 2008 crash. Gains like that are unsustainable. Otherwise the US funds were consistently the runner up in each category. Not surprising since the US economy has been the largest economy in the world for some time.

Thus here are my recommendations for a balanced portfolio:

  • 20% Canadian index fund
  • 40% US index fund
  • 20% International index fund
  • 20% Canadian bond index fund

CLICK HERE for a list of all the funds I reviewed

Allow me to beat this dead horse one more time

Don’t be tempted my the high performance of the actively managed funds. It’s mostly due to survivorship bias which I cover in another recent post. And remember that high fees compound just the same as compound interest does for you. John Oliver recently did a video that captures my general philosophy on this site (The video is for Americans, but just replace 401k with RRSP and the principals are the same).

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