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I *will* be a multi-millionare! @@@ Next Plan Details : May 15 @@@

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  • Jul 31st, 2009 8:45 am
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Jr. Member
Jan 27, 2009
177 posts
2 upvotes
Sigh. Yes mutual funds have to trade, but because of their size they take advantage of MASSIVE discounts due to economy of scale when it comes to trading. Their cost per share is probably 1/25th of what you pay as an individual.

You cannot compare a fund with advisor compensation with an ETF that has no service at all.

Fidelity True North Fund, for example, has a Management fee of 2% (which includes trailer fees to the financial planner/advisor for his services). The same fund without advisor compensation, called the Series F, has a management fee of 0.85%. This is the MER you should be comparing if your a DIY investor.

Still a tad higher than some ETFs, but guess what, active management costs money. I'm pretty sure I proved the points I wanted to make, your arguments aren't too solid, IMO.

A lot of the big named managed mutual funds have outperformed ETFs over 5-10 years, even after Advisor fees.

I rest my case.
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
cleanlude wrote:
Jul 16th, 2009 3:52 pm
Sigh. Yes mutual funds have to trade, but because of their size they take advantage of MASSIVE discounts due to economy of scale when it comes to trading. Their cost per share is probably 1/25th of what you pay as an individual.
Yes, but most active managed funds make considerly more trades than ETFs or an investor buying and selling ETFs. It's quite common for trading costs for actively managed funds to reach 0.25-0.5% of the funds assets (and this isn't included in the MER). All of the trades active funds make really do add up.

Fidelity True North Fund, for example, has a Management fee of 2% (which includes trailer fees to the financial planner/advisor for his services). The same fund without advisor compensation, called the Series F, has a management fee of 0.85%. This is the MER you should be comparing if your a DIY investor.
Except mutual fund companies no longer allow discount brokers to sell Series F funds. Too many financial advisors complained that they were afraid of losing clients and the mutual fund companies caved in. (At least this is my understanding of the reason. Please correct me if I'm wrong.)
A lot of the big named managed mutual funds have outperformed ETFs over 5-10 years, even after Advisor fees.

I rest my case.
What percentage? Of course some will. Sometimes I can flip a coin and correctly guess 10 times in row. It doesn't mean I'm skilled in predicting coin flips.

According to the latest SPIVA report (pdf), only 8.4% of actively managed Canadian funds have outperformed the index over the past 5 years. Are you sure you want to rest you case on these numbers?
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
asdfvcx wrote:
Jul 16th, 2009 5:01 pm
Yes, but most active managed funds make considerly more trades than ETFs or an investor buying and selling ETFs. It's quite common for trading costs for actively managed funds to reach 0.25-0.5% of the funds assets (and this isn't included in the MER). All of the trades active funds make really do add up.



Except mutual fund companies no longer allow discount brokers to sell Series F funds. Too many financial advisors complained that they were afraid of losing clients and the mutual fund companies caved in. (At least this is my understanding of the reason. Please correct me if I'm wrong.)


What percentage? Of course some will. Sometimes I can flip a coin and correctly guess 10 times in row. It doesn't mean I'm skilled in predicting coin flips.

According to the latest SPIVA report (pdf), only 8.4% of actively managed Canadian Index funds have outperformed the index over the past 5 years. Are you sure you want to rest you case on these numbers?
1) Incorrect. Trading fees are included in the MER. That is another large problem, most people compare a mutual funds MER (which is the TOTAL expenses including trading fees, not just the management fee) to an ETF's management fee. ETF's also have other expenses not included in the management fee that make their MER higher. It should be MER vs MER. ETF's have marketing expenses, heavy SEC fees, sales expenses, administration charges, etc. just like mutual funds.

2) As for mutual fund companies not allowing the sale of series F funds through discounts, I have never heard this (you could be right on this one, but it doesnt make sense to me). Then who gets the trailer fee if it's a series A or B fund... The brokerage? First I hear of this.

3) I don't have a percentage, but top money managers are doing it. I will try to post something on this a bit later, I have to run for now though. I may have something at my office on this.

4) I'm not sure if you made a mistake here... The phrase "Actively managed index funds" is a contradictory statement. It's either actively managed or it's an index fund(passive). They are 2 opposites. Further to that, all ETF index funds will underperform the index because of their fees, as will traditional indexed mutual funds. The ETF has absolutely no probabilistic chance of beating the index, whereas the actively managed mutual fund (NOT index fund) with a great manager can/will/usually does outperform the index or benchmark.
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
cleanlude wrote:
Jul 16th, 2009 5:21 pm
1) Incorrect. Trading fees are included in the MER.
No, I'm correct. Trading fees are not included in the MER.

Here's a sample quote from a prospectus:
Each Fund may pay costs associated with portfolio transactions (
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
It seems like we seriously hijacked this thread.

MER's including trading fees is a grey area, as regulators have not set a standard way of calculating MER's. Some companies do include brokerage costs in the MER under the term operating expenses, while others hide them elsewhere. I stand corrected in the way I said that MER included trading costs, you are correct that it is not always the case.

Trading costs are usually accounted for by adjusting the book value for the security. A larger capital gain will be reported when they are sold than the "actual" capital gain.

In terms of this debate, index funds (ETF or MF) incur trading fees aswell, so it's a reality that is common to both types. They are both funds that hold securities within them. These securities must be traded wether mutual fund or ETF. ETFs trade a lot to maintain the same proportions as their index.



I think we've debated this enough. It's run it's course. I'm a believer in active management, primarily because it usually works in beating the index (like I said earlier in this thread, 98% of mutual funds are junk...there are like 7500 funds in Canada... that's why the percentage of funds beating the benchmark is low... They are all copies and duplicates of the good ones, without the performance.)

That being said, ETFs can be advantageous to a very select investor : one that a) Has the knowledge to properly assess the his tolerance for risk and asset allocation (which I would say is few and far between) b) Has a large enough account that brokerage costs do not affect the returns too much c) Has the time, patience and know-how to properly rebalance when it is ideal to do so d) Does not require any advice whatsoever f) does not need to make systematic deposits or wants to use a dollar-cost-averaging strategy g) does not need systematic withdrawls of income

How many people fall into this category?
Deal Addict
Apr 1, 2004
1582 posts
34 upvotes
cleanlude wrote:
Jul 16th, 2009 7:31 pm
...
I think we've debated this enough. It's run it's course. I'm a believer in active management, primarily because it usually works in beating the index (like I said earlier in this thread, 98% of mutual funds are junk...there are like 7500 funds in Canada... that's why the percentage of funds beating the benchmark is low... They are all copies and duplicates of the good ones, without the performance.)
...
I tend to think you're conflating two different issues here.

The first is whether it is possible for active selection of a subset of an index to achieve a better risk/return profile.

Unless people believe in absolute efficient markets, I think this is a bit of a truism. There is always the possibility that specific individuals and teams have the ability to achieve better results than the index. If anything, I expect that this actually occurs. As a result, in theory, yes, there should be mutual funds out there that are better than investing in index ETFs.

The second question though, is whether mutual funds are a "good idea" for most investors. You bring up some good points about why an ETF based strategy can be difficult to implement... but at the same time, you've skipped the most fundamental problem (in my opinion) of why mutual funds are a good solution for average investors - what's the right mutual fund to invest into?

As asdfvcx pointed out, 8.4% of actively managed funds succeeded in beating the index (including the purely lucky ones), and you yourself use the hyperbolic number of 98% for describing the proportion of mutual funds that are junk. The issue then is whether or not it's possible for consumers to actually identify and invest with the small minority of mutual funds that are "not junk".

Personally, I tend to think this is where your argument fails - even if I know there's a needle in a haystack... it's still practically impossible to find the needle.

You may reply and suggest that it's possible by reviewing manager performance, and what not... but in reality, the numbers speak for themselves. There's a market out there for the junk mutual funds because of a fundamental inability for consumers to identify the "good" ones from the "bad".
Deal Addict
Oct 1, 2006
1967 posts
1233 upvotes
Montreal
Icedawn wrote:
Jul 17th, 2009 12:46 am

As asdfvcx pointed out, 8.4% of actively managed funds succeeded in beating the index (including the purely lucky ones), and you yourself use the hyperbolic number of 98% for describing the proportion of mutual funds that are junk. The issue then is whether or not it's possible for consumers to actually identify and invest with the small minority of mutual funds that are "not junk".

Personally, I tend to think this is where your argument fails - even if I know there's a needle in a haystack... it's still practically impossible to find the needle.

You may reply and suggest that it's possible by reviewing manager performance, and what not... but in reality, the numbers speak for themselves. There's a market out there for the junk mutual funds because of a fundamental inability for consumers to identify the "good" ones from the "bad".
Well said! Totally agree.
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
Icedawn, good argument.

I would have to say that the top funds (in assets) from the top companies usually provide Alpha or very close. Large, top ranked funds usually have the resources to attract, compensate and retain the top money managers. Fidelity Investments is one of the largest investment managers in the world, they typically have excellent teams and typically provide Alpha. CI Investments is among the largest in Canada, and Mackenzie Financial is another big player. All these companies have their dogs and stars, but their funds with the top track record are providing Alpha.

In theory, it is impossible for an index fund to have positive Alpha. Sure, the SPIVA report talks about mutual funds not outperforming the index, but ETFs dont even have a chance at outperforming the index.

I am an independent advisor and can access any mutual fund sold through FundServ (which is almost all of them). We can be as selective as required and do a lot of research. We avoid companies that either a) have little experience b) little assets or c) their main business is not providing asset management.

A lot of companies jump into asset management, simply because everyone else is doing it and they want a piece of the pie. These include all of the banks, the insurance companies, etc. Most (not all) bank mutual funds pale in comparison to their Fidelity, CI or Mackenzie counterparts. The credit union MF companies (Ethical Funds for example) are even worse. Don't get me started on Manulife, Co-operators, Assomption, etc. mutual funds. These guys make up the numbers and crowd the mutual fund industry with mostly irrelevant products.

The MF industry is over-saturated.

Clearly, I'm biased towards MF because I work with them a lot, but I can also offer ETFs to my clients and rarely recommend them. Mostly because it's more work for everyone involved.

To summarise, my largest beef with ETFs is that a lot of investors hear the hype of ETFs outperforming Mutual Funds, so they switch them and do not have the time or skills to properly do an asset allocation, rebalance or choose the right ETFs. Even with the lower fees, these investors are most likely misusing the ETFs and are achieving lower risk-adjusted returns than they were with mutual funds.

The reality is that there are tens of thousands of DIY ETF investors, but only a fraction of them know anything about portfolio theory, CAPM, performance evaluation, etc. Another portion of them forget or are too lazy to rebalance.

The biggest enemy to any investor is emotion. Mutual funds generally take most of the emotions out of the picture, whereas the DIY investor using ETFs is faced with emotion. Emotion trumps rational thinking 95% of the time when it comes to investing.

An example would be an investor that should have 60% equity 40% fixed-income. He starts out like that and the markets do well. After a year, his allocation is unbalanced to 70/30. Rationale and portfolio theory tells us that this portfolio should be rebalanced to 60/40 immediately. Most likely, the DIY investor that has to make the rebalancing decision will follow his emotions (in such cases, greed is the dominant emotion) and will wait it out a bit longer. Who wants to sell equity to buy bonds in a soaring market? Hardly anybody. This investor will most likely get burned when the markets correct (more so that he would have if he rebalanced).

The mutual fund would have done all of this automatically without the investor lifting a finger.

Interesting debate though. I just re-read yesterdays posts and I can see that I sounded like an arse, sorry about that, yesterday was a long day. My apologies.
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
And, just to add, there is a reason that there is a "market" for junk mutual funds. It's usually because of laziness, ignorance or my biggest pet peeves with banks : coercive tied selling, that people invest into these "junk" mutual funds.

Coercive tied selling is illegal, yet the banks do it anyway, in a more subdued manner of course. I've heard of bank managers and bank financial advisors telling clients that they won't get approved on loans if they don't have their RRSP's invested with the bank. Illegal, but happens on a daily basis. They usually do not "outright" say it like that, but it is usually deliberately implied.

* Disclaimer * Not all bank mutual funds are junk, but I would say that you can easily get a better overall fund family elsewhere.
Deal Addict
Oct 1, 2006
1967 posts
1233 upvotes
Montreal
cleanlude wrote:
Jul 17th, 2009 12:44 pm

The biggest enemy to any investor is emotion.
I agree 100%
cleanlude wrote:
Jul 17th, 2009 12:44 pm
Mutual funds generally take most of the emotions out of the picture, whereas the DIY investor using ETFs is faced with emotion.
I wish MF would do this but they do not.

Source: http://www.canadiancapitalist.com/inves ... ing-badly/
Emotions continued to play havoc with investor returns in 2008. DALBAR
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
I was referring to the emotion concerning rebalancing, and not the overall emotions involved with holding equity.

In the portfolio mutual fund, you are not face with any decisions, all is done for you, so how can emotions get in the way?

For the ETF DIY, action is required to rebalance... Emotions are involved.

I didn't say that all emotions were erased...
Deal Addict
Oct 1, 2006
1967 posts
1233 upvotes
Montreal
I am not sure if automatically re-balancing is of advantage to the investor. Re-balancing means I have to sell one asset class and buy another one. This triggers transaction fees and has significant tax consequences.

Before I purchase an ETFs/index fund I just calculate which asset class is furthest away from its target asset allocation percentage and then purchase this asset class. This should be sufficient re-balancing and does not cause transaction fees or taxes.
Deal Addict
Oct 1, 2006
1967 posts
1233 upvotes
Montreal
cleanlude wrote:
Jul 17th, 2009 12:44 pm
An example would be an investor that should have 60% equity 40% fixed-income. He starts out like that and the markets do well. After a year, his allocation is unbalanced to 70/30. Rationale and portfolio theory tells us that this portfolio should be rebalanced to 60/40 immediately.
Let's take this example. A client invest with you in a 60% equity 40% fixed income portfolio. It is estimated that the equity risk premium is around 3 to 3.5% above the risk-free rate. It compensates investors for taking on the relative higher risk of the equity market. I know it is impossible to know what the equity risk premium is going to be but I guess 3.5% is a good estimate.

The total return of this portfolio would be 0.4*(Risk free=fixed income rate)+0.6(risk free rate+3.5%)-2.5% MER

Let's assume the risk free rate is 3%. Therefore the total return of this portfolio after fees is 0.4*3%+0.6*6.5%-2.5% = 2.6%

2.6% < Risk free rate

Therefore wouldn't it be better for your client to not invest into equities at all and buy instead only risk free GICs for example? This is easy to do, he does not have to worry about stock market volatility, and his rate of return should be even higher with this approach.
Jr. Member
Jan 27, 2009
177 posts
2 upvotes
Risk free rate in Canada is under 1% right now... Approx. 0.90%-ish

Since when does income only yield the risk free rate? Risk free rate is 90 day treasury bills, usually. Longer matury government and corporate bonds of different credit ratings will yield a LOT more.

Equity risk premiums are used to measure past performance and teach theory to students...

To arbitrarily assign numbers to an equation makes it flawed. Equities are the only way to beat inflation over time.

The calculation is more complex than simply substracting the MER from the year's return... but it will give an estimate...
[OP]
Deal Fanatic
Jul 30, 2003
5453 posts
370 upvotes
Toronto
Thank you all for a MF / ETF war - thats went over my head :)

From a little I understand, I will appreciate some answers:

- My understanding is MF are bunch of industries put together (by who ever created the MF). ETF are index funds. Either way, they do get "re-balanced" once way or another. MF through actively managment. ETF are index and index take out bad performers and replace them with someone good.
What am I missing?

- Since MF has "professionals" backing it up? Do they guarantee anything?

- If you are doing "Couch Potato" style portfolio (its done with ETF rite?) then re-balancing takes 15min, why is it such a big deal that people don't even put out 15min / year!?

- (sorry last Q) So I am reading more and more that quite high inflation is (almost) guaranteed down the road (in 1-5yrs). Also, Gold sky rockets during inflation. Isn't it a good time to throw loads of money at gold?
[ Any chance Gold will come close to $850 anytime soon?]
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