The Truth In Numbers
The Harsh Reality Of The Wealth Management Business Today
The mutual fund industry has saturated Canadian investors with more than 17,797 funds as of January 31, 2018 with total assets of $1.49 trillion. This saturation of all these different funds was designed to provide a solution to match every investors’ needs. It sounds good in theory but has the industry succeeded in delivering superior risk-adjusted returns? We at Verus believe the answer is overwhelmingly no.
Alpha is a very scarce skillset in today’s mutual fund industry. Alpha measures a manager’s skillset, his or her ability to outperform the market or their benchmark.
In the United States, there were 9,511 mutual funds in 2016 managing assets worth approximately $16.34 trillion. On a per capita basis, Canada has almost 19 times as many mutual funds when compared to the U.S. market.
As mutual fund managers have struggled deeply to outperform the market there has been a substantial shift of monies out of mutual funds and into Exchange Traded Funds (ETFs).
Canada’s largest mutual fund companies are now racing to offer ETFs in an effort to capitalize on the explosion in popularity of the low cost products. The mentality of investors is slowly shifting to “why should I pay a management expense ratio of 2.4% to constantly underperform the market?”
When you buy an ETF, you are basically buying the market outright. When you do that, you are giving up on human intellect. Please look at the following three charts.
These three separately managed accounts have significantly outperformed the market since their inception date while providing investors with substantially less risk than the market. This is what delivering superior risk-adjusted returns is all about.