Latest / The Chiro Money Show / 033 | Why 98% of Canadian Mutual Funds Are Losing to the Market (Part 1/3)
Transcript
- Chris: Welcome back to the Chiro Money Show, where we're helping chiropractors make better financial decisions so they can build stability in their finances and a lifestyle that they love. We're your hosts Chris Scheele and Scott Campbell, financial planners with Align Wealth. Scott: We're back, we're away for a week in Ontario, some time in Toronto and Ottawa, wrapped up a solid weekend of some HYROX racing. Chris: Yeah, the hybrid rockstars are back Scott. Scott: That's right. won't, we won't bore you with the details, but it was a successful weekend. Chris and I hit the podium again and mens doubles. So we're stoked about that. And we realized that if we're going to get any better, faster, we need to be to run faster. Don't we, Yeah. We'll get there, ⁓ on to bigger and better things. We're going to put high rocks behind us and start focusing on some trail running and other stuff. Right? Yep. Yep. All Chris: ⁓ yeah. Yeah, we'll get there. That's right. That's right. Yep. Scott: Awesome topic that we're going to dive into today is actually going to be put together in of a three part mini series. We're going to dive deeper than we have into the topic of investing. And we feel like within this three part little series that we're going to put together over the next three weeks, we're going to give you everything that you need to know about the investment landscape, your options and choices and how people are typically invested right now. ⁓ Chris, why you tell us of like how we're going to put this all together for our listeners and why this could be a value for them to tune into really all three ideally. Chris: Yeah, mean, gotta listen to all three. Sorry, guys. ⁓ have to. ⁓ start with this. We'll say that if you don't know how you're invested right now, it's... Scott: Yeah, you have to requirement Chris: Very likely, probably about a 96 % chance according to the stats we looked at that you are invested in what's referred to as an actively managed portfolio. So most people in Canada are in actively managed funds. We are gonna dive into that topic today. If you fall outside of that and you have chosen to move away from active management, you're likely in a more passive or what people might refer to as an index portfolio. going to touch on that. And then on the third episode, we're going to dive into our philosophy and where there are similarities and differences between these two kind of common camps of passive versus active and how ours is a bit different. Scott: That's right. Yep, lots to dive into. yeah, if you're sitting there saying, all right, what does active mean? What does passive mean? I have no idea. We're going to try and cover this all from a really high level to get you up to speed of like how and why you're invested the way you currently are. We'll leave you with some takeaways to go and figure this out on your own and find out if you don't already know. But like Chris said, if you aren't already crystal clear on how you're invested, there's a good chance that you might not be in an optimal portfolio from our perspective anyways. And we're going to give you the, we're not going to stand up on our podium here and talk negatively about any one company or investment style. We want to just bring the data and the evidence to support what we're seeing and how that shaped our current philosophy on how and why we make the recommendations that we do for how to invest. Chris: Yep, well said. So I think we got to start with a definition here. So let me try to paint this in as plain of English as possible. When we refer to active management, what we mean is that your cash is being invested into a fund. That fund is being managed by a team of portfolio managers, ⁓ etc. that are trying to make active decisions to beat the market. The market, could interchange with say the index if you wanted to. Yeah, an index like for instance, we could say the S &P 500, which is a collection of 500 companies in the US. Your actively managed fund might be a US equity fund that their goal is to exceed the performance of the S &P 500 index. Scott: I named Dex. And how are they trying to do that? By being actively managed. Chris: So they are trying to make active decisions to time the market, predict the future, guess or speculate about which companies are going to outperform other companies. And they are constantly buying and selling and trading securities to try to get their investors the best return possible. Scott: Yep. So in many cases they're trying to. overweight on some companies based on market commentary or underweight others or hold more cash on the sidelines because they want to have like, I heard the term like at a recent event that we were at dry powder is what they're referring to as cash. Like having cash on the sidelines, being able to make a decision on what to buy next when there's, when there's a reason to do so based on commentary and information and like ⁓ the things that they get the data points from to indicate whether not they should make an active decision on a daily basis of what Chris: Yeah. Scott: to hold and what to sell. what's the objective that they're trying to achieve? Chris: Yeah, they're trying to get their investors a better return than the index net of fees. Right? The key is that they, as you would imagine, if you have a group of a team of people that are highly educated and have their finger on the pulse of the market and are doing active research and analytics of what to buy and when and sell when you would expect that those, those professionals are going to cost you quite a bit of money. Scott: Netaphase, that's the key there for sure. Mm-hmm. Chris: to employ and obviously the whole fund could be hundreds of millions of investors in that fund. You're all sharing in those costs, the costs are real. ⁓ Scott: Yeah. So I think it's natural for us to maybe pause and say, let's talk about it inherently makes sense or should make sense that if we can hire a team of really smart individuals, got CFA's and those with PhD's and... finance and you name it right like smart individuals that do this for a living they went to the highest levels of education they have all the access to data and research and AI like they have everything You think it's reasonable to assume that with all that information, all that expertise, that they surely should be able to make decisions to generate a better return than what the index or just called the market delivers and get a higher return net of fees, of course, afterwards like that inherently kind of feels like that should be able to do that, right? Chris: Yeah, I would think so. It's like, well, hey, I couldn't do it myself as a retail investor, as a person with no interest or like if you're a listener, if like, if you're like, yeah, I don't care what the markets do. I don't watch that, but hey, I'm going to hire a professional that can do that. You might think, yeah, well, hey, that's probably money well spent. Let's look at, let's look at what the stats show. Let's look at what the evidence shows. So a couple of ways we could look at that, right? We can look at past performance. And we could base our decisions off of that and say, Hey, this fund manager or this team of fund managers on this fund has had, you know, a good track record of outperforming the market. that might lead you to want to invest in that fund. Right. Scott: sure. yeah, I think we'll I think we can dive in in more detail like all the reasons why I think active management, active investing is still so prevalent. in the Canadian space, but maybe on that note, we can actually kind of talk about some of these key stats it comes to the Canadian retail kind of like called the ⁓ industry right now. As data came from ⁓ PWL in a report that they did looking at 2025 end, the Canadian retail industry made up about $2.7 trillion. A lot of money, Of that ⁓ market share, Currently I guess as of the end of 2025 currently of those funds about 77 % of that market share is still in actively managed funds. roughly yeah, just over just over three-quarters of Canadians are in still invested into Actively managed funds and that's what to your point earlier Chris in terms of that 96 % That's actually specifically rated to if you're an investor at one of the big five banks There's a 96 % likelihood that you are probably in one of these actively managed funds versus being in something more passive in nature Chris: yeah, pretty alarming stat. Well, I guess it's not yet because we haven't spilled the beans on what the shows. yeah, currently, ⁓ 77%. Scott: Yeah. Yeah, so, and I think it's... We'll get into the reason why, I would say, it inherently makes sense. These funds that, especially if you're with one of the big five banks and they're promoting these actually managed funds with higher fees, and we're going to touch a lot on fees here momentarily, but they are in the business of generating a profit, right? So that's their goal. Obviously they're trying to get a ⁓ better rate of return for their end investors, but as we're to get into with the actual data and the research, that's a hard for them to accomplish. But they have the size and magnitude and the marketing dollars to be able to promote these products to a very large customer base. Chris: Yeah, for sure. so ⁓ established there's ⁓ lot of people still invested in active funds. Let's at some of what, in our is probably one of the best ⁓ measures ⁓ of ⁓ performance history of active managers. ⁓ And so there's a site called SPIVA or a scorecard called SPIVA. It's the S &P indices versus active and they've been tracking and benchmarking active managers versus their passive benchmarks for years. Okay, so the 2025 Canadian version was just released and what it shows is that over the last 10 years, less than two out of every 100 Canadian equity mutual funds beat their benchmark. So, 2%. Scott: Only two. Chris: 2 % of actively managed funds in Canada, Canadian equity mutual funds, beat their benchmark. Scott: over last 10 years. And I see here in 2025 alone, an average of 85 % of Canadian active funds underperform their benchmark. So it's not even that it gets better in a smaller kind of rolling one year period. it's still pretty dismal ⁓ like what the outlook is. Like if you only had a 15 % chance that the that you're in has a chance about performing, that's not the you probably would expect to have. going back to our point of like, this is a team of really smart individuals. Surely they're gonna be able to do this at least over a one year period of time, Chris: Yeah. Yep. And it's not, this is not just strictly for Canada. Like our listeners might be thinking, ⁓ well Canada is like, whatever makes up 3 % of the world market. What about the U S or about other places globally? The numbers are very similar. U S is about 3 % of US equity funds outperform the index globally it's yeah 2 % somewhere in there as well so this is Canada, US, international all of the active funds that are striving to beat those those benchmarks are failing to do so very consistently over a 10 year period of time Scott: ⁓ those smart people, all that, all that all that information, all these tools at their disposal, especially the power of AI these days as well. And with all the data still says that over a long enough period of time, they're going to lose. Chris: Yeah, and and the math makes sense like there's two points I always like to make one is that no one can predict the future you ⁓ you could successfully and consistently predict the future Why you ⁓ we be talking to you if we could if we could do it, right? We'd be sitting with trillions of dollars if we could predict the future every time so no can do it consistently That's just common sense, right? ⁓ But then we look at like the math of it, after costs like the average actively managed dollar has to return less than the average passively managed dollar for any period of time. what we mean by this to kind of get into a little bit more detail is like markets are efficient. That's what that's, that's our belief is that markets are generally efficient. So all information that is available globally is priced in. So Scott: Mm-hmm. Chris: you know, relative price or like the current price of a company that you, that, you know, is listed on the stock exchange, that price reflects all relevant information. It's not wrong. But when active managers make trades, they are often predicting or assuming that the pricing is incorrect in some way. And they're trying to take advantage of that. Or they believe that the pricing is going to go up based on some earnings report or some other reason. But what we have to remember is that on either side of, there's two sides to the trade. There's a buyer and a seller. for every buyer that believes that ⁓ prices are fair for that security. There's a seller that believes that the prices are fair for that security to sell. And so there's these trades that are consistently happening with active management and it's a net zero game. And then we factor in the fee. Obviously they're not gonna, they're not gonna do better. Scott: Yeah. Yep. That's right. When it comes to fees, let's shift to that in terms of talking about how those fees are having an impact. If the data is showing that 95 % of the time or more, these actively managed funds are not... outperforming the market net of fees, then would make sense that if you get market returns, going to get less net of fees. And that's where we have gripes about paying an active manager a higher fee ⁓ to get something that you're not going to over the long term. So it's inherently to leave you with a net return after a larger fee than you would if you did something more alternative, which talk to in our next episode on passive where we're keeping the cost those funds a lot lower. So ⁓ why don't you talk a little bit about what the average fees are and how they differ from the alternatives. Chris: Yeah. So the average active mutual fund fee in Canada, this would be a typical like bank product, so if you're invested through one of the big banks in Canada, fee is about 1.92%. This fee is referred to as the MER or management expense ratio. it's a fee that is never really, ⁓ lot of times not communicated directly. It's never shown on any of your statements ⁓ ⁓ any of your fee disclosures that you would get ⁓ your bank. So kind of hidden fee, unfortunately. Scott: Yeah, that's changing though, right? With the new CRM rules that are coming out here right away. I think that's gonna be broken down a little bit better, which hopefully should shine some light on what you're actually paying and who's receiving those fees, be that the fund manager or your advisor and how much they're getting compensated as well. Chris: Yeah. sure. to compare that to other types of ⁓ for investing, we could say, okay, well, what is like a ⁓ like passive, you know, ETF fee, and that would be closer to like 0.25%. So significantly cheaper compared to the ⁓ ⁓ mutual fund. And just to just to shed some light on like the impact of that, right? Scott: show. Mm-hmm. Chris: This, is where it gets really crazy. Like we think about these numbers like, okay, 1%, 1.5%, 2%, whatever, like how much, how much of a difference can that really make? Obviously the more dollars you have invested, the bigger that impact is going to be. In this example, we're just, we're going to use round numbers. So we're to say, what if you had a million dollars invested and you earned 6.5 % annualized for 30 years? If you had a 1 % fee all in your your $1 million is going to turn into just under $5 million over 30 years, just 4.98 million. If that fee goes up to 2%, your $1 million turns into 3.74 million. If your total fee is 3%, your million dollars turns into 2.8 million over 30 years. So a difference in 2 % on total fee Scott: Yep. Mm-hmm. Big difference. Chris: over 30 years is equivalent of over $2 million total dollars in ⁓ investor's pocket, assuming $1 million invested for 30 years. ⁓ Scott: That's significant, And it goes back to the point of if you were to pay that, say on average 1.9 % that most of these, it's not even just the banks. A lot of these major financial institutions across Canada, you're familiar with the names, I won't pick on any of them, but a lot of them use actively managed funds. You're paying that 1.9, even upwards of two and a half sometimes. We see MERS in the 3 % range too, Chris. Chris: Yeah, it's huge. Yeah. Scott: It'd be one thing if you're again, paying that higher fee and consistently getting a higher return than what the market was delivering, right? Then it would make sense, right? Then there'd be, there'd be an argument there to say, Hey, this is a no brainer. I'm happy to pay more if I'm going to get more. But when the evidence very clearly shows that that's not the case, what, like, what are you paying for at that point? Chris: Yeah. exactly. Yeah, we've heard that argument over the years, like, well, you know, I can pay, my is gonna cover itself because I'm gonna get a higher return. Like, there's no option, there's investment option or professional Canada that can guarantee returns. If you have someone that's guaranteeing returns, you should turn and run. Simply put, right, there's guarantees in this world. Scott: So with that all said, why do we keep doing this? Why, why is this still so prevalent in like Canada is actually in a bit of a worse spot from like an active versus passive that that ratio that I was referring to about 77 % of called Canadians money and right now is still in actively managed funds. I think in the U S that's getting closer and closer to like that 50 50 threshold. So Canada is still fair ways behind in terms of Chris: Heh. Yeah. Scott: I don't know, maybe waking up to the fact that their investment strategy is less than ideal from a performance standpoint when you factor in these fees. Why is that still the case? Chris: Yeah. Yeah. Yeah. ⁓ give you a hot take. are the biggest five companies or a few of the biggest five, like biggest, biggest in Canada? It's our big five banks. Our big five banks have a lot of pull on how things work ⁓ in country, in our industry, financial industry. They are in the business of making money, as you've already said. Scott: Okay, hot take time. Yep. Yep. Yep. Chris: their influence is certainly being asserted here. 100%. So, the big five banks are not gonna turn around and say, ⁓ okay, we're gonna cut our fees on our mutual funds because it's the right thing to do for the consumer. They're not gonna do that, right? Scott: 100 % it is, for sure. for sure. And like, there has been fee pressure over the years, they're like, actively managed funds offered by banks, ⁓ fees have slowly coming down over the years, but still not to a point where it still makes it's still not a good value because they're still not, they're still not delivering returns that higher than the market on average over the long term. Chris: Yeah, and you know, there's other options that are available now at the banks, but they're never going to promote that or suggest that to an investor. They're always going to start with their default highest fee funds that are going to pay them the most and the financial advisors or professionals at the bank are incentivized to do that. That's part of their job. So that's why we're still seeing it. Big reason. ⁓ Scott: Yep. Yep. Chris: There's a few other reasons as well. think, you know, some biases that we often see that, that lead to, you know, chasing. these returns and that's yeah, the first bias is really chasing past performance and this is the biggest one. It's like, if we could find, you know, 3 % of funds that outperformed in Canada or US equity, why don't we just buy those? ⁓ they were able to beat the market over the last 10 years. I want that guy cause he's ⁓ get me a better return than just ⁓ ⁓ better than average, Scott. So I want that ⁓ Scott: for sure. Yep. Chris: That bias is probably the biggest one that drives this continual search for active management. Scott: Yeah, that ties closely to like the recency bias, right? Like looking at what just happened in 2025, 2024, 2023 and like chasing, chasing country returns like, oh, the market in the US has been exceptionally strong. Like we're going to chase that performance or this fund manager did really well. So we're going to continue with them or we're going to move over to them. My, my hot take here is that I think, I think it's probably not overly common that is the actual investor that has that's chasing past performance or that has recency bias. Because I think the majority of investors out there are are trusting the advisor that is giving them advice and selling them the fund that they're going to put them in the fund that is best for them. Right. don't think a whole lot of investors are coming to their advisor and saying hey I just did a whole bunch of research on ⁓ number of different funds across Canada and I want to be invested in these funds. Sure that happens but that's not the norm. ⁓ I think it's actually a lot of advisors who are trying show their value by chasing past performance and making active decisions on top of the ⁓ decisions that are happening on a fund level. They're making active decisions from the actual choice of funds that are going to go into a client's portfolio. ⁓ They're as bad. They're using recency bias. They're chasing past performance to make this illusion that they're going to be able to deliver a higher return for their clients. Chris: Yeah. Scott: Unfortunate. Yeah. Yeah. Chris: It really is. So yeah, the only other bias that I wanted to mention is just this overconfidence bias that we all inherently have as individuals. So this could be from the individual investor level or the advisor level as well, right? this kind of goes to, you know, that. I'm sure there's lots of analogies we can make, but when you pull drivers and say, are you better than average as a driver? Are you a safer driver than average or better than most people on the road? And 75 % of people think they're better than average, right? But that... that math doesn't math, right? You can't have that. That doesn't work. So the same thing applies to our investing, whether it's an individual investor or the advisor, like I said, we think we are smarter than most and that can sometimes lead to to make active decisions and to outperform the average. Scott: No. Mm-hmm. All set. Chris: Couple other stats I want to share on active management. ⁓ lots of actively managed funds ⁓ Canada, mutual funds that are actively managed. There's new ones that are created all the time. Next episode we're going to get into ETFs, exchange traded funds, a little bit Those ⁓ often are... Scott: Okay. Chris: almost miscommunicated as always passive or index-like and that is not the case. There are a lot of ETFs that also have active management components but typically when we talk about active management it's mutual funds that get picked on. Scott: there's also possibly managed mutual funds that, right? Yeah. ⁓ Chris: There are, exactly. tough to, yeah, there's a lot of nuance to this communication, ⁓ but specifically with actively managed mutual funds. In Canada, only about 50 % of funds ⁓ 10 years. So over half of the funds that are created today are not gonna be around 10 years from now. And why that is? Scott: for sure. Chris: Wait, tell us why, Scott Scott: Well, if you only have a three to four percent chance of succeeding over a 10 year period of time, is it going to be in the fund manager's best interest to keep promoting a losing product that has a dismal track record? Unlikely, right? They're not going to. Chris: and our investors going to want to invest in a losing track record? No. Right? So the fund managers, they can't get enough active inflows into that fund for whatever reason, they're gonna just close that down or relabel it and re-promote it in some different way. Scott: that as well. Right? Both. Yeah. Yeah. Chris: So, fund survival is a real thing. US and international is no different. The numbers are even higher actually than Canada. Like in the US it's about 64 % of funds don't survive 10 years. Scott: Yeah, it's, it's, that's probably the most, this stat that you're sharing, I think is, it's just not, not talked about at all, And obviously fund managers aren't promoting the fact that they're closing down funds and then basically taking all the underlying holdings and just basically putting a new shiny wrapper on it and some marketing material around it, ⁓ giving it fancy new name. ⁓ And when you charge as high fees as you do, you have the luxury of putting a of money behind marketing, marketing the actual fund. Also incentivizing advisors to sell that fund you hear that a lot in the active management space like active managers will whine and dine ⁓ their advisors like They'll take out to all the baseball and hockey games and the fine dining to to get those advisors to use those actively managed funds because they got the very deep pockets to To keep that to keep that going Chris: Definitely. How come their pockets are so deep? Scott: Yeah, their fees are 1.9%. That's on average, right? So, yeah. Chris: That's right. That's right. Yeah. Okay. Last thing I want to point out, and it kind of goes back to the bias of overconfidence. When we look at investing and our results in investing, we have to ask ourselves, is this due to skill or is this luck? And there's this interesting study from Fama in French from 2010. They studied about 3000 US equity mutual funds. Scott: Mm-hmm. Chris: and they simulated what the returns of those funds would have been if there were zero skill. So if it was just strictly luck, zero skill, and they plotted those results versus the actual results. This is from almost 20, 22 year period of time from 1984 to 2006. And the actual results are nearly identical. So Scott: Yep. Chris: What this shows is that there's really no evidence that trying to out-guess the market adds any value whatsoever. Scott: All right. Well, with that said, Chris, if active management is based on the data, like we're not just making, we're just not making hot takes over here. We're trying to provide the data and the evidence to support why active management is a losing game. The obvious next step is if you can't beat the market. a lot of people out there, there's a lot of, there's a lot of great educational material, DIYs out there saying, well, if you can't beat the market, don't use active management, you just got to be the market, you know, and they start building the case for passive indexed investing, keep your fees low, invest into these indexes and stop trying to outsmart the market and just set it and forget it for the two, three, four decades, That's what going to be talking about next, right? Chris: Yep. Scott: but there's a big but here we can't, we can't cause we're to have some listeners that might already be investing passively. Right. Would you agree? So they might say, all right, I don't need to listen to that episode or the third one because I'm not actively managing. I'm good. ⁓ tee up our next episode, Chris, what are we going to be diving into on the passive side? Chris: Yep, for sure. Hmm. Yeah, so... Here's what you're gonna hear. and what, you've done any research or asked AI about this, the outcome is that you've heard that passive is better than active. And we agree, yeah. But what wanna into is a little bit more of the data that what most people don't about. Scott: Yeah, which we agree. Yeah. Chris: especially DIY influencers and the financial media ⁓ that ⁓ we want to talk about is that passive investing isn't as simple as it sounds There real active decisions that are a part of every passive investment Strategy or investment fund and all of these decisions affect your returns so There yeah ⁓ It's not as simple as black and white is just like active as bad passive as good. ⁓ so we're going to go into the nuance of that and kind of see where, where passive invested, what, what passive investing truly means and where it falls short of what's actually possible. And we're also going to try to clear up some of this nuance around like ETFs being good, mutual funds being bad always. Scott: Yeah. Mm-hmm. Chris: indexing and ETF investing and ETFs being meaning the same thing. You know, we're going to try to get into some of that detail as well. Scott: Yeah. for sure. then ⁓ without, yeah, ⁓ save the details for episode three, but... We want to paint this picture now so that you know where we're going here. We've already covered active management, why we feel like that's not, it's less than the ideal route to go when it comes to having a successful journey as a long-term investor. would be the next best stop in our opinion, ⁓ we're going to break that down in more detail and give you some information that you need to know. And then in part three, in our third episode of the series, what we want to do is kind of bring this all together, talk about, again, our investment philosophy. And guess to oversimplify it is trying to bring in some of ⁓ the best of both worlds that we like and leave behind what we don't like about both of those worlds and kind of summarize that in our third episode. Chris: All right, let's leave it there for today, Scott. Scott: Sounds good. think we've covered a lot. Thank you for tuning in. I hope we would hope to have you join the ride for episodes two and three of this mini-series and we'll look forward to seeing you guys next week.