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Evidence-based investing is highly recommended

Evidence-based investing is highly recommended

September 27, 2018

I encourage investors to become familiar with publicly available facts and figures, and use the information to direct their investment strategy. Find out what works and what does not work and act accordingly.

One of the best sources of investing evidence is provided by the SPIVA® Canada Scorecard and is available online. SPIVA® stands for Standard & Poor Index Versus Active. The SPIVA® Canada Scorecard “reports on the performance of actively managed Canadian mutual funds versus that of their benchmarks, corrected for survivorship bias.”

S&P Dow Jones Indices is one of the world’s leading index providers.

The figures used in this column are from the SPIVA® Canada Scorecard Year-End-2017 report.

The question is, does it make sense to invest in actively traded mutual funds? Actively traded means the fund manager decides what stocks to buy and sell and when that transaction should occur.

If managers can add value by beating the underlying market they invest, then it would be profitable to purchase those funds. The alternative is to purchase investments that are broadly diversified, attempt to capture market returns, and are offered with a very low cost.

According to the report, managers investing in Canadian stocks failed miserably to outperform the Canadian stock market. After one year only seven out of 100 managers outperformed.

After 10 years, eight in 100 were able to outperform the Canadian stock market.

We know from other research that past results are not useful at predicting future results. Meaning, if you identify the eight managers who beat the market over the past decade, that success will not likely be repeated.

The success and failure rate in the future will be similar to industry performance standards.

Managers who invested in the United States and managers who invested in non-North American markets also failed to beat the underlying market they invested.

Does active management work? Based on this discussion, generally, no.




Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI).  ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).  The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.