In this column, which appears every two weeks, we give you specific suggestions on how you can invest your money in the stock market.
It is often said that even for investment professionals, it is very difficult to beat the markets. But how true is that? To find out, I made it my mission to find mutual funds that have outperformed indices over the past 10 years.
But why mutual funds? With the phenomenal rise of exchange-traded funds (ETFs) in recent years, mutual funds have lost much of their luster. How they work is difficult for ordinary mortals to understand. And their generally high management fees are not very attractive…
Despite everything, mutual funds remain very popular. At the end of March, Canadians held nearly $1.9 trillion in mutual funds, compared to just $337 billion in exchange-traded funds.
This is because many investors started investing money in mutual funds a few years ago and continue to do so on a regular basis. Investment funds are particularly suitable for investing in regular installments (e.g. every two weeks).
Damn statistics
So what percentage of funds fail to outperform the markets? This was the case for 52% of Canadian equity funds last year, according to Standard & Poor’s. Over a decade, it’s even worse: more than 70% of them underperformed the S&P/TSX index.
However, these unenviable statistics did not deter me from my quest. I asked Morningstar’s website search engine to give me lists of top-performing funds over five and ten years. I then compared their annualized returns to their respective indices.
There’s a catch. For stock and bond funds, finding benchmarks is not easy for the average investor as the performance of multiple indices needs to be integrated.
To simplify my life, I decided to compare mutual fund returns to three index ETFs that have been around for more than 10 years: XBAL for mixed funds (60% stocks, 40% bonds), XGRO for growth ( 80% equities, 20% bonds) and XIU (100% Canadian equities).
I excluded mutual funds with assets under $1 billion, index mutual funds, and mutual funds whose stock/bond allocations deviate too much from those of ETFs. I have chosen Series A mutual funds, which are the most accessible to retail investors.
The future remains unknown
Before I share my findings with you, I want to remind you that past returns are never a guarantee of future returns. A fund that has performed well over the past decade could very well suffer shrinking returns over the next decade.
I’ve barely found five funds that have beaten the indices over five years or over 10 years. Only one of them outperformed the market in both periods: the Fidelity Potential Canada Fund, managed by Quebec resident Hugo Lavallée.
The latter managed this feat despite high management fees of 2.48% (all returns quoted in this article are calculated net of fees).
In short, there are funds that have beaten the long-term indices, but they are rare, very rare!
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