• Index funds are usually has lower management fees compared to actively manage funds.
• Many actively managed funds cannot beat index funds in the long term.

Recently, we questioned ourselves, can find actively managed funds that can beat the index in the last couple years? If yes, should we switch some of our money to these actively managed funds.

We ran a simple query on Funds Filter from The Globe and Mail; searching for Canadian equity funds that have MER lower than 2% and no load. We found a couple of interesting actively managed funds, i.e.:

• Mawer Canadian Equity (MER: 1.26%)
• PH&N Canadian Equity D (MER: 1.11%)
• RBC O’Shaughnessy Canadian Equity (MER: 1.47%)

Then, we did the same charting to what we did recently with index funds, i.e. comparing the return of these funds to S&P/TSX in the last 10 years.

Links

• Comparing Canadian Index Funds

As you might know, that our Lazy Portfolio currently uses CIBC Canadian Index. It is not really the best option to invest in Canadian index, as we discussed in our previous posting, Comparing Canadian Index Fund.

Why did we choose CIBC Canadian Index fund then? It is just a historical reason. When we first came to Canada, we opened our first bank with CIBC. The reason is because CIBC has a “small branch” in Singapore, where we used to live. We opened our bank account when we were still in Singapore. Since then, we have been happily doing all our financial needs with CIBC. This includes investing our money in CIBC’s index funds.

Recently, we tried to do a simple calculation. Currently we have about $20K invested in CIBC index funds. We pay a little bit more than 1% of management fee. It means we have to pay about $200 every year to CIBC for managing our money.

If we looked at TD e-series funds; most of them have management fee of less than 0.5%. It means we can save more than $100 every year just to convert our investment to them.

If we look further, there is a performance difference between CIBC Canadian Index and TD Canadian Index. CIBC Canadian Index is lagging by more than 5% compared to TD Canadian Index in the last 10 years. Although it doesn’t mean that TD Canadian Index will always outperform CIBC Canadian Index; we think that paying less fees is still better.

Links

• Comparing Canadian Index Fund

There are a couple of Canadian index mutual funds from major institutions in Canada, e.g.:

• CIBC Canadian Index
• RBC Canadian Index
• Scotia Canadian Index
• TD Canadian Index

If we use chart comparison from The Globe and Mail, the chart of those funds in the last 10 year looks like the following:

The chart above assumes that we invest $10,000 in January 2000.

As we can see here, the four funds above have different result. CIBC Canadian Index has the lowest return, i.e. $15,713. Meanwhile, RBC Canadian Index has the highest return, i.e. $16.529.

There is more than 6% difference between the return of CIBC Canadian Index and RBC Canadian Index. We are not really sure why. We are also not sure why the gap between S&P/TSX total return and those funds are quite significant.

Link

• Funds Filter from The Globe and Mail
• Searching for Good Canadian Mutual Funds
• Searching for Low Cost Emerging Market Funds

Why not emerging market ETF? Well, it is unfortunate that we cannot buy commission-free ETFs in Canada yet. We just hope that this will come soon.

We read about Claymore’s Pre-authorized Contribution Plan (PACC). It sounds like a very good plan. Unfortunately, our bank is not in the participating list yet. It is either we have to move our funds first to one of the participating institutions; or just wait until our bank is supported.

Anyway, we are using fund filter from The Globe and Mail to do our filtering. Here is the filter that we use:

• Asset class: Emerging Market Equity
• MER: 2.5% –> we don’t want to pay funds that have very high MER
• Load Type: No Load
• Fund Type: Open-Ended

As of today, the filter gives 19 funds. Some of them are actually ETF; so they can be eliminated. Some others are for advisors that charges fees; so they can be eliminated as well.

After eliminating some of the funds, here is the list that we got:

It seems that our options are only CIBC Emerging Market Index or RBC Emerging Market D. We just eliminate Mackenzie fund because the management fee is just too high. Besides we don’t quite understand what “-M” at the end of the fund name means.

Links

• Funds Filter from The Globe and Mail
• Searching for Good Canadian Mutual Funds
• Comparing Canadian Index Funds

How about us? Are we still investing in mutual funds? If yes, how do we select which mutual funds to choose from?

First of all, we still have some investment in mutual funds. Some of you may be asking why? Canada has been rated as one of countries with high mutual funds fee in the world. There are two main reasons why we are still investing in mutual funds:

1. There is no commission for buying or selling mutual funds in most brokers. On the other hand, most Canadian brokers (if not all) still charge money for ETF transactions.
2. It is easier to apply dollar-cost averaging strategy. Again, this is related to the first reason. Since there is no fee involved for mutual fund transaction, we can setup automatic contribution without additional cost.

Now for the second question, how do we choose good mutual funds? We usually use funds filter from The Globe and Mail. Then we use the following criteria:

• Total assets > $25M. It is just for a peace of mind that the fund has some amounts of money. We don’t want to invest in a fund that has to be liquidated next month or next year.
• Minimum investment < $5,000. We are currently still managing a small amount of money; so we have to find funds that don’t require a huge amount of money, like minimum $25,000 to invest.
• MER < 1.5%. This is the most important one. Management expense ratio has to be less than 1.5%. Ideally, we want to put < 1.0% here. Unfortunately, we will miss some of “good” Canadian mutual funds if we do that.
• Load type = No Load. This is another important criteria. We don’t want to pay money to buy or sell mutual funds.
• Fund type = Open-Ended. Since we are not looking for insurance-type mutual funds (a.k.a. segregated mutual funds) or pooled mutual funds; then we just enter open-ended mutual funds here.

Link

• Funds Filter from The Globe and Mail
• Searching for Low Cost Emerging Market Funds
• Comparing Canadian Index Funds